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, 2019~~March 31, 2020

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

~~For the transition period from to~~

Commission File Number 1-4422

ROLLINS, ~~INC~~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~~Registrant’s telephone number, including area code)

__________________________

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		~~ROL~~	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, ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ~~327,486,383~~ 327,767,449shares of its $1 par value Common Stock outstanding as of ~~July 16, 2019.~~April 17, 2020.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF ~~June 30, 2019~~MARCH 31, 2020, AND DECEMBER 31, ~~2018~~2019

(in thousands except share data)

June 30, December 31,
2019 2018
(Unaudited)
ASSETS
Cash and cash equivalents $ 98,466 $ 115,485
Trade receivables, net of allowance for doubtful accounts of $13,904 and $13,285, respectively 130,696 104,016
Financed receivables, short-term, net of allowance for doubtful accounts of $1,818 and $1,845, respectively 21,598 18,454
Materials and supplies 17,579 15,788
Other current assets 51,506 32,278
Total current assets 319,845 286,021
Equipment and property, net 201,196 136,885
Goodwill 563,075 368,481
Customer contracts, net 283,309 178,075
Trademarks & tradenames, net 102,986 54,140
Other intangible assets, net 11,228 11,043
Operating lease, right-of-use assets 191,183 —
Financed receivables, long-term, net of allowance for doubtful accounts of $1,359 and $1,536 respectively 30,611 28,227
Prepaid Pension 5,274 5,274
Deferred income taxes — 6,915
Other assets 21,070 19,063
Total assets $ 1,729,777 $ 1,094,124
LIABILITIES
Accounts payable $ 37,644 $ 27,168
Accrued insurance 30,265 27,709
Accrued compensation and related liabilities 77,377 77,741
Unearned revenues 133,672 116,005
Operating lease liabilities - current 62,195 —
Current portion of long-term debt 12,500 —
Other current liabilities 60,688 50,406
Total current liabilities 414,341 299,029
Accrued insurance, less current portion 34,705 33,867
Operating lease liabilities, less current portion 129,373 —
Long-term debt 335,375 —
Long-term accrued liabilities 63,719 49,320
Total liabilities 977,513 382,216
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, without par value; 500,000 shares authorized, zero shares issued — —
Common stock, par value $1 per share; 550,000,000 and 375,000,000 shares authorized, 327,486,383 and 327,308,079 shares issued and outstanding, respectively 327,486 327,308
Paid in capital 82,960 85,386
Accumulated other comprehensive loss (68,508 ) (71,078 )
Retained earnings 410,326 370,292
Total stockholders' equity 752,264 711,908
Total liabilities and stockholders' equity $ 1,729,777 $ 1,094,124

~~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, 2019 AND 2018~~

~~(in thousands per except share data)~~

~~(unaudited)~~

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
REVENUES
Customer services $ 523,957 $ 480,461 $ 953,026 $ 889,203
COSTS AND EXPENSES
Cost of services provided 253,333 230,772 470,591 436,915
Depreciation and amortization 20,132 16,366 36,815 33,282
Sales, general and administrative 161,886 143,379 301,416 269,866
Gain on sale of assets, net (252 ) (308 ) (433 ) (364 )
Interest (income)/expense, net 1,899 75 1,625 133
INCOME BEFORE INCOME TAXES 86,959 90,177 143,012 149,371
PROVISION FOR INCOME TAXES 22,664 24,635 34,491 35,304
NET INCOME $ 64,295 $ 65,542 $ 108,521 $ 114,067
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.20 $ 0.20 $ 0.33 $ 0.35
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.09 $ 0.21 $ 0.19
Weighted average participating shares outstanding - basic and diluted 327,506 327,282 327,506 327,263

	March 31,			December 31,
	2020			2019
	(Unaudited)
ASSETS
Cash and cash equivalents	$	92,582		$	94,276
Trade receivables, net of allowance for doubtful accounts of $11,861 and $16,699, respectively		123,166			122,766
Financed receivables, short-term, net of allowance for doubtful accounts of $1,805 and $1,675, respectively		22,209			22,267
Materials and supplies		21,527			19,476
Other current assets		45,346			51,002
Total current assets		304,830			309,787
Equipment and property, net		194,854			195,533
Goodwill		596,067			572,847
Customer contracts, net		279,361			273,720
Trademarks & tradenames, net		104,863			102,539
Other intangible assets, net		10,314			10,525
Operating lease, right-of-use assets		207,975			200,727
Financed receivables, long-term, net of allowance for doubtful accounts of $1,248 and $1,284 respectively		33,952			30,792
Benefit plan assets		15,639			21,565
Deferred income taxes		1,961			2,180
Other assets		21,663			24,161
Total assets	$	1,771,479		$	1,744,376
LIABILITIES
Accounts payable	$	36,844			35,234
Accrued insurance		30,739			30,441
Accrued compensation and related liabilities		68,289			81,943
Unearned revenues		129,352			122,825
Operating lease liabilities - current		69,094			66,117
Current portion of long-term debt		12,500			12,500
Other current liabilities		71,050			60,975
Total current liabilities		417,868			410,035
Accrued insurance, less current portion		34,921			34,920
Operating lease liabilities, less current portion		140,152			135,651
Long-term debt		307,300			279,000
Deferred income tax liability		14,257			9,927
Long-term accrued liabilities		56,610			59,093
Total liabilities		971,108			928,626
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Preferred stock, without par value; 500,000 shares authorized, 0 shares issued		—			—
Common stock, par value $1 per share; 550,000,000 and 375,000,000 shares authorized, 327,767,449 and 327,430,846 shares issued and outstanding, respectively		327,767			327,431
Paid in capital		84,865			89,413
Accumulated other comprehensive loss		(38,711	)		(21,109	)
Retained earnings		426,450			420,015
Total stockholders’ equity		800,371			815,750
Total liabilities and stockholders’ equity	$	1,771,479		$	1,744,376

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE EARNINGS~~INCOME

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2020 AND 2019 ~~AND 2018~~

(in ~~thousands)~~thousands except per share data)

(unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
NET INCOME $ 64,295 $ 65,542 $ 108,521 $ 114,067
Other comprehensive (loss) earnings
Change in derivative (257 ) — (257 ) —
Foreign currency translation adjustments 485 (5,118 ) 2,827 (8,070 )
Other comprehensive (loss) earnings 228 (5,118 ) 2,570 (8,070 )
Comprehensive earnings $ 64,523 $ 60,424 $ 111,091 $ 105,997


	Three Months Ended March 31,
		2020			2019
REVENUES
Customer services	$	487,901		$	429,069
COSTS AND EXPENSES
Cost of services provided		251,152			217,258
Depreciation and amortization		21,597			16,683
Sales, general and administrative		157,862			139,530
Gain on sale of assets, net		(275	)		(181	)
Interest expense/(income), net		2,165			(274	)
INCOME BEFORE INCOME TAXES		55,400			56,053
PROVISION FOR INCOME TAXES		12,132			11,827
NET INCOME	$	43,268		$	44,226
NET INCOME PER SHARE - BASIC AND DILUTED	$	0.13		$	0.14
DIVIDENDS PAID PER SHARE	$	0.12		$	0.11
Weighted average participating shares outstanding - basic and diluted		327,682			327,506

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS' EQUITY~~COMPREHENSIVE EARNINGS

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2020 AND 2019 ~~AND 2018~~

(Inin thousands)

(unaudited)

Common Stock Paid-in-capital Accumulated
Other
Comprehensive
income/ (loss) Retained
Earnings Total
Shares Amount
Balance at March 31, 2018 327,279 $ 327,279 $ 75,079 $ (48,908 ) $ 309,313 $ 662,763
Net Income — — — — 65,542 65,542
Other comprehensive income, net of tax
Foreign currency translation adjustments — — — (5,118 ) — (5,118 )
Cash dividends — — — — (30,540 ) (30,540 )
Stock compensation 51 51 3,243 — (17 ) 3,277
Employee stock buybacks (4 ) (4 ) (110 ) — 1 (113 )
Balance at June 30, 2018 327,326 $ 327,326 $ 78,212 $ (54,026 ) $ 344,299 $ 695,811

Common Stock Paid-in-capital Accumulated
Other
Comprehensive
income/ (loss) Retained
Earnings Total
Shares Amount
Balance at December 31, 2017 326,988 $ 326,988 $ 81,405 $ (45,956 ) $ 291,487 $ 653,924
Net Income — — — — 114,067 114,067
Other comprehensive income, net of tax
Foreign currency translation adjustments — — — (8,070 ) — (8,070 )
Cash dividends — — — — (61,142 ) (61,142 )
Stock compensation 617 617 5,959 — (206 ) 6,370
Employee stock buybacks (279 ) (279 ) (9,152 ) — 93 (9,338 )
Balance at June 30, 2018 327,326 $ 327,326 $ 78,212 $ (54,026 ) $ 344,299 $ 695,811

Common Stock Paid-in-capital Accumulated
Other
Comprehensive
income/ (loss) Retained
Earnings Total
Shares Amount
Balance at March 31, 2019 327,530 $ 327,530 $ 79,932 $ (68,736 ) $ 380,398 $ 719,124
Net Income — — — — 64,295 64,295
Other comprehensive income, net of tax
Change in derivatives — — — (257 ) — (257 )
Foreign currency translation adjustments — — — 485 — 485
Cash dividends — — — — (34,367 ) (34,367 )
Stock compensation (27 ) (27 ) 3,724 — — 3,697
Employee stock buybacks (17 ) (17 ) (696 ) — — (713 )
Balance at June 30, 2019 327,486 $ 327,486 $ 82,960 $ (68,508 ) $ 410,326 $ 752,264

Common Stock Paid-in-capital Accumulated
Other
Comprehensive
income/ (loss) Retained
Earnings Total
Shares Amount
Balance at December 31, 2018 327,308 $ 327,308 $ 85,386 $ (71,078 ) $ 370,292 $ 711,908
Net Income — — — — 108,521 108,521
Impact of adoption of ASC 842 — — — — 212 212
Other comprehensive income, net of tax
Change in derivatives — — — (257 ) — (257 )
Foreign currency translation adjustments — — — 2,827 — 2,827
Cash dividends — — — — (68,699 ) (68,699 )
Stock compensation 437 437 7,149 — — 7,586
Employee stock buybacks (259 ) (259 ) (9,575 ) — — (9,834 )
Balance at June 30, 2019 327,486 $ 327,486 $ 82,960 $ (68,508 ) $ 410,326 $ 752,264


	Three Months Ended March 31,
	2020			2019
NET INCOME	$	43,268		$	44,226
Other comprehensive (loss)/earnings
Foreign currency translation adjustments		(16,868	)		2,342
Change in derivatives		(734	)		—
Other comprehensive (loss)/earnings		(17,602	)		2,342
Comprehensive earnings	$	25,666		$	46,568

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 SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(in thousands)
(unaudited)
Six Months Ended
June 30,
2019 2018
OPERATING ACTIVITIES
Net income $ 108,521 $ 114,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 36,815 33,282
Provision for deferred income taxes 4,763 4,508
Provision for bad debts 4,925 4,190
Stock - based compensation expense 7,586 6,370
Other, net (900 ) (1,535 )
Changes in operating assets and liabilities (24,767 ) (30,373 )
Net cash provided by operating activities 136,943 130,509
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired (410,067 ) (54,619 )
Purchases of equipment and property (13,436 ) (14,246 )
Proceeds from sales of franchises 486 228
Other 1,097 425
Net cash used in investing activities (421,920 ) (68,212 )
FINANCING ACTIVITIES
Cash paid for common stock purchased (9,834 ) (9,338 )
Dividends paid (68,699 ) (61,142 )
Repayments of long-term debt (20,125 ) —
Borrowings under Term Loan 250,000 —
Borrowings under Revolving Commitment 118,000 —
Net cash used in financing activities 269,342 (70,480 )
Effect of exchange rate changes on cash (1,384 ) (10,982 )
Net increase/(decrease) in cash and cash equivalents (17,019 ) (19,165 )
Cash and cash equivalents at beginning of period 115,485 107,050
Cash and cash equivalents at end of period $ 98,466 $ 87,885
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets 24,322 —

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(in thousands)

(unaudited)


	Common Stock						Paid-in-			Accumulated Other Comprehensive			Retained
	Shares			Amount			capital			income/ (loss)			Earnings			Total
Balance at December 31, 2018		327,308		$	327,308		$	85,386		$	(71,078	)	$	370,292		$	711,908
Impact of adoption of ASC 842		—			—			—			—			212			212
Net Income		—			—			—			—			44,226			44,226
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			2,342			—			2,342
Cash dividends		—			—			—			—			(34,332	)		(34,332	)
Stock compensation		464			464			3,425			—			—			3,889
Employee stock buybacks		(242	)		(242	)		(8,879	)		—			—			(9,121	)
Balance at March 31, 2019		327,530		$	327,530		$	79,932		$	(68,736	)	$	380,398		$	719,124

	Common Stock						Paid-in-			Accumulated Other Comprehensive			Retained
	Shares			Amount			capital			income/ (loss)			Earnings			Total
Balance at December 31, 2019		327,431		$	327,431		$	89,413		$	(21,109	)	$	420,015		$	815,750
Impact of adoption of ASC 326		—			—			—			—			2,484			2,484
Net Income		—			—			—			—			43,268			43,268
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			(16,868	)		—			(16,868	)
Change in derivatives		—			—			—			(734	)		—			(734	)
Cash dividends		—			—			—			—			(39,317	)		(39,317	)
Stock compensation		555			555			3,264			—			—			3,819
Employee stock buybacks		(219	)		(219	)		(7,812	)		—			—			(8,031	)
Balance at March 31, 2020		327,767		$	327,767		$	84,865		$	(38,711	)	$	426,450		$	800,371

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 THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(in thousands)

(unaudited)


	Three Months Ended
	March 31,
	2020			2019
OPERATING ACTIVITIES
Net income	$	43,268		$	44,226
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,597			16,683
Provision for deferred income taxes		2,999			3,327
Provision for bad debts		2,288			1,682
Stock-based compensation expense		3,819			3,889
Other, net		(615	)		(591	)
Changes in operating assets and liabilities		18,607			(7,794	)
Net cash provided by operating activities		91,963			61,422
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(47,586	)		(7,041	)
Purchases of equipment and property		(6,674	)		(6,481	)
Proceeds from sales of franchises		267			395
Other		941			569
Net cash used in investing activities		(53,052	)		(12,558	)
FINANCING ACTIVITIES
Payment of contingent consideration		(2,040	)		(2,807	)
Repayment of term loan		(35,700	)		—
Borrowings on revolving commitment		64,000			—
Cash paid for common stock purchased		(8,031	)		(9,121	)
Dividends paid		(39,317	)		(34,332	)
Net cash used in financing activities		(21,088	)		(46,260	)
Effect of exchange rate changes on cash		(19,517	)		(1,482	)
Net (decrease)/increase in cash and cash equivalents		(1,694	)		1,122
Cash and cash equivalents at beginning of period		94,276			115,485
Cash and cash equivalents at end of period	$	92,582		$	116,607
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets	$	27,894			6,920

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

ROLLINS, INC. AND SUBSIDIARIES

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

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. (the “Company”) for the year ended December 31, ~~2018~~2019 other than updates related to Accounting Standards Update (ASU) No. ~~2016-02, Leases~~2016-13, Financial Instruments - Credit Losses (ASC ~~842)~~326): Measurement of Credit Losses on Financial Instruments as noted below. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the ~~2018~~2019 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~~worker’s compensation, inventory adjustments, discounts and volume incentives earned, among others.

The global response to the COVID-19 pandemic has triggered an economic downturn. The pest control industry has been designated as “essential” by the Department of Homeland Security and the Company has been able to remain operational in every part of the world in which it operates. 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, and it was determined that there were some adverse impacts on the Company’s results of the first quarter ended March 31, 2020. The Company’s business, results of operations and financial condition will be impacted by future developments related to the COVID-19 pandemic, but the magnitude of such impacts cannot be determined at this time.

In the opinion of management, all adjustments necessary for a fair presentation of the ~~Company's~~Company’s financial results for the ~~interim periods~~quarter have been made. These adjustments are of a normal recurring ~~nature.~~nature, but complicated by the uncertainty surrounding the global economic impact of the COVID-19 pandemic. We began to experience this impact in mid-March 2020 and expect it to persist and be more significant in the second quarter of 2020. The results of operations for the three ~~and six month periods~~months ended ~~June 30, 2019~~March 31, 2020 are not necessarily indicative of results for the entire year.

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

The Company reclassified certain prior period amounts in the Statement of Cash Flows from Operating Activities to Financing Activities for payment of contingent consideration to conform to the current period presentation.

~~Derivative Instruments and Hedging Activities~~

~~Accounting Policy for Derivative Instruments and Hedging Activities~~

FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company's objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

~~ROLLINS, INC. AND SUBSIDIARIES~~

In accordance with the FASB's fair value measurement guidance [in ASU 2011-04], the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

~~Three-for-Two Stock Split~~

~~All share and per share data presented have been adjusted to account for the three-for-two stock split effective December 10, 2018.~~

~~NOTE 2.~~ ~~RECENT ACCOUNTING PRONOUNCEMENTS~~

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting standards

The Company adopted ASU 2016-02, Leases (ASC 842), on January 1, 2019 using the modified retrospective approach and did not restate comparative periods as permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. We have elected the transition package of practical expedients, which permitted us not to reassess our prior conclusions regarding lease identification, lease classification and initial direct cost. Upon adoption, the Company recognized operating lease right-of-use assets and liabilities of $~~195.7~~ ~~million and $195.5~~ ~~million, and a $0.2 million adjustment to beginning retained earnings.~~

The Company adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”). The Company adopted ASU 2018-02 effective January 1, 2019 and elected not to recognize a cumulative-effect adjustment.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 815), which provides new guidance intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This ASU was adopted by the Company in 2019. The adoption of this ASU did not have an impact on the Company's consolidated financial statements.

~~Recently issued accounting standards~~ ~~to be adopted in 2020~~ ~~or later~~

In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The ~~guidance is~~Company adopted ASU 2016-13 effective January1, 2020 and recognized the decrease in the allowance for ~~interim and annual periods~~doubtful accounts, net of tax, as a $2.5 million increase to beginning ~~after December 15, 2019.~~ retained earnings.

The Company is ~~currently evaluating~~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.

ROLLINS, INC. AND SUBSIDIARIES

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 ~~effect~~amount of business we conduct with higher risk customers. The credit quality of a potential obligor is evaluated at the ~~guidance will~~loan origination based on an assessment of the individual’s Beacon/credit bureau score. Rollins requires a potential obligor to have ~~on its consolidated financial statements.~~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 turndown 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 and 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. Below is a rollforward of the Company’s allowance for credit losses for the three months ended March 31, 2020.

Schedule of Roll Forward of the Company's Allowance for Credit Losses


	Allowance for Doubtful Accounts
	Trade Receivables			Financed Receivables			Total Receivables
Balance at January 1, 2020	$	16,699		$	2,959		$	19,658
Adoption of ASC 326		(3,330	)		—			(3,330	)
Adjusted balance at January 1, 2020		13,369			2,959			16,328
Provision for expected credit losses		1,553			734			2,287
Write-offs charged against the allowance		(3,779	)		(640	)		(4,419	)
Recoveries collected		908			—			908
Currency conversion		(190	)		—			(190	)
Balance at March 31, 2020	$	11,861		$	3,053		$	14,914

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment, which ~~eliminates~~eliminated the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities ~~will~~would record an impairment charge based on the excess of a reporting ~~unit's~~unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). The Company adopted ASU 2017-04 effective January 1, 2020. The Company does not expect the adoption of this standard to have a material impact on its future consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance modified the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements. The Company adopted ASU 2018-13 effective January 1, 2020 and the adoption did not materially impact its financial statement disclosures.

ROLLINS, INC. AND SUBSIDIARIES

Recently issued accounting standards to be adopted in 2021 or later

In December, 2019, the FASB issued ASU No. 2019-12 Income Taxes (topic 740): Simplifying the Accounting for Income Taxes. 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 standard in this update is effective for the ~~Company's~~Company’s financial statements issued for fiscal years beginning in ~~2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.~~2021. The adoption of this ASU is not expected to have a material impact on the ~~Company's~~Company’s consolidated financial statements.

~~ROLLINS, INC. AND SUBSIDIARIES~~

~~NOTE 3.~~ ~~REVENUE~~

~~On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.~~

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 more than 10% 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:

(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
United States $ 485,170 $ 443,782 $ 879,170 $ 819,741
Other countries 38,787 36,679 73,856 69,462
Total Revenues $ 523,957 $ 480,461 $ 953,026 $ 889,203


	(In thousands)
	Three Months Ended
	March 31,
	2020		2019
United States	$	452,346	$	394,000
Other countries		35,555		35,069
Total Revenues	$	487,901	$	429,069

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

	(In thousands)
	Three Months Ended
	March 31,
	2020		2019
Residential revenue	$	204,657	$	172,507
Commercial revenue		183,315		169,671
Termite completions, bait monitoring, & renewals		94,227		80,250
Franchise revenues		3,417		3,261
Other revenues		2,285		3,380
Total Revenues	$	487,901	$	429,069

(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
Residential revenue $ 224,682 $ 202,183 $ 397,190 $ 366,558
Commercial revenue 191,456 177,726 361,127 339,932
Termite completions, bait monitoring, & renewals 102,352 93,761 182,601 170,368
Franchise revenues 3,442 4,836 6,703 7,244
Other revenues 2,025 1,955 5,405 5,101
Total Revenues $ 523,957 $ 480,461 $ 953,026 $ 889,203

~~NOTE 4.~~ ~~EARNINGS PER SHARE~~

NOTE 4.

EARNINGS PER SHARE

The Company follows ASC 260, Earnings Per Share (ASC 260) 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 Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2019		2018		2019		2018		2020		2019
Basic and diluted earnings per share
Common stock	$	0.20	$	0.20	$	0.33	$	0.35	$	0.13	$	0.14
Restricted shares of common stock	$	0.18	$	0.20	$	0.30	$	0.37	$	0.12	$	0.12

~~NOTE 5.~~ ~~CONTINGENCIES~~

NOTE 5.

CONTINGENCIES

In the normal course of business, certain of the ~~Company's~~Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the ~~subsidiaries'~~subsidiaries’ services caused damage. In addition, the Company defends ~~employment related~~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 or litigation, either alone or in the aggregate will have a material adverse effect on the ~~Company's~~Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.

~~ROLLINS, INC. AND SUBSIDIARIES~~

~~NOTE 6.~~ ~~FAIR VALUE OF FINANCIAL INSTRUMENTS~~

NOTE 6.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The ~~Company's~~Company’s financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their respective fair values. ~~The Company entered into a new Credit Agreement with SunTrust Bank~~

At March 31, 2020 and ~~Bank of America, N.A. 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 and an unsecured variable rate $250.0~~ million Term Loan with SunTrust Bank and Bank of America, N.A. Both the Revolving Commitment and the Term Loan have five year durations commencing on April 29, 2019. In addition, the agreement has provisions to extend the duration beyond the Revolving Commitment Termination date as well optional prepayments rights to at any time and from time to time prepay any borrowing, in whole or in part, without premium or penalty. As of June 30, 2019, ~~the Revolving Commitment had outstanding borrowings of $101.0~~ ~~million and the Term Loan had outstanding borrowings of $246.9~~ ~~million. As of December 31, 2018, there were no outstanding borrowings.~~ In order to comply with applicable debt covenants, the Company will 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 through 2019. The credit agreement is included as Exhibit 10.1.~~

~~At June 30,~~ the Company had ~~a $26.9~~$51.3 million and $29.0 million of acquisition holdback and earnout ~~liability~~liabilities with the former owners of acquired companies. The ~~earnouts~~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~~Company’s books ~~using the Monte-Carlo simulation valuation model at $26.9 million of~~and are considered level 3 liabilities.

Recurring Fair Value Measurements
Quoted Prices in Active
Markets for Identical Significant Other Significant Unobservable
Assets and Liabilities Observable Inputs Inputs
at June 30, at June 30, at June 30, Total Fair Value
(Level 1) (Level 2) (Level 3) at June 30,
2019 2018 2019 2018 2019 2018 2019 2018
Liabilities
Acquisition earnouts $ — $ — $ — $ — $ 26,918 $ 21,489 $ 26,918 $ 21,489

~~Level 3 Rollforward~~ The table below presents a summary of the changes in fair value for ~~level 3 assets and~~these liabilities.

The table below presents a summary of the changes in fair value for these liabilities.


	Three Months Ended March 31,
(in thousands)	2020			2019
Beginning	$	49,131		$	30,926
New acquisitions and revaluations		4,489			1,557
Payouts		(2,040	)		(2,807	)
Interest on outstanding contingencies		583			212
Charge offset, forfeit and other		(835	)		(889	)
Ending Balance	$	51,328		$	28,999

ROLLINS, INC. AND SUBSIDIARIES

~~The table below disaggregates, by~~ ~~product type, the information for assets and liabilities~~ ~~included in the summary table above.~~

Six Months Ended
June 30, 2019
(in thousands) 2019 2018
Acquisition earnouts booked using the Monte-Carlo Simulation Model
Beginning balance $ 14,339 $ 17,959
New acquisition earnouts 12,700 3,025
Adjustments and Accrued Interest 1,355 701
Earnout payments (1,476 ) (196 )
Ending balance $ 26,918 $ 21,489

~~NOTE 7.~~ ~~UNEARNED REVENUE~~

~~Changes in unearned revenue~~ ~~were as follows:~~

For the period ended June 30, December 31 June 30,
(in thousands) 2019 2018 2018
Balance at beginning of year $ 127,075 $ 117,614 $ 117,614
Deferral of unearned revenue 100,188 166,053 95,948
Recognition of unearned revenue (80,496 ) (156,592 ) (78,290 )
Balance at end of period $ 146,767 $ 127,075 $ 135,272

~~Deferred revenue recognized in the three and six months ended June 30, 2019 and 2018 were $40.5~~ ~~million and $39.5~~ ~~million, respectively and $80.5~~ ~~million and $78.3~~ ~~million, respectively.~~

NOTE 7.

UNEARNED REVENUE

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both unearned revenue and revenue that will be invoiced and recognized in future periods. Deferred revenue recognized in the three months ended March 31, 2020 and 2019 were $42.7 million and $40.0 million, respectively. Changes in unearned revenue were as follows:

Changes in unearned revenue were as follows:


	Three Months Ended March 31,
(in thousands)	2020			2019
Balance at beginning of year	$	136,507		$	127,075
Deferral of unearned revenue		49,552			47,737
Recognition of unearned revenue		(42,707	)		(39,958	)
Balance at end of period	$	143,352		$	134,854

The Company has no material contracted, but not recognized revenue as of ~~June 30, 2019~~March 31, 2020 or December 31, ~~2018.~~2019.

At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had long-term unearned revenue of $~~13.1~~14.0 million and $~~10.2~~13.7 million, respectively. Unearned short-term revenue is recognized over the next ~~12 month~~12-month period. The majority of unearned long-term revenue is recognized over a period of five years ~~years~~ or less with immaterial amounts recognized through ~~2025.~~2029.

~~NOTE 8.~~ ~~LEASES~~

NOTE 8.

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, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, all leases were classified as operating leases. Building leases generally carry terms of 5 to 10 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 5 years depending on the class of vehicle. The exercise of renewal options is at the ~~Company's~~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 ~~nonlease~~non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.

~~ROLLINS, INC. AND SUBSIDIARIES~~

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.

(in thousands)
Lease Classification	Financial Statement Classification	Three Months Ended March 31, 2020
Short-term lease cost	Cost of services provided, Sales, general, and administrative expenses		76
Operating lease cost	Cost of services provided, Sales, general, and administrative expenses		20,717
Total lease expense			20,793

Other Information
Weighted-average remaining lease term – operating leases			3.84
Weighted-average discount rate – operating leases			3.93
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases			20,477

ROLLINS, INC. AND SUBSIDIARIES

(in thousands)
Lease Classification Financial Statement Classification Six Months Ended
June 30, 2019
Short-term lease cost Cost of services provided, Sales, general, and administrative expenses $ 71
Operating lease cost Cost of services provided, Sales, general, and administrative expenses 19,115
Total lease expense $ 19,186

Other Information
      Weighted-average remaining lease term - operating leases 4.08
      Weighted-average discount rate - operating leases 3.94
Cash paid for amounts included in the measurement of lease liabilities:
       Operating cash flows for operating leases 18,865

Lease Commitments

Future minimum lease payments, including assumed exercise of renewal optionsat ~~June 30, 2019~~March 31, 2020 were as follows:

(in thousands)	Operating Leases		Operating Leases
2019 (excluding the six months ended June 30, 2019)	$	35,805
2020		61,245
2020 (excluding the three months ended March 31, 2020)			$	58,250
2021		45,685		65,533
2022		27,575		47,137
2023		14,278		27,744
2024		9,031		11,624
2025				7,382
Thereafter		14,965		10,723
Total future minimum lease payments		208,584
Total Future Minimum Lease Payments				228,393
Less: Amount representing interest		17,016		19,147
Total future minimum lease payments, net of interest	$	191,568	$	209,246

Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $~~99.9~~96.8million for building leases and $~~108.7~~131.6million for vehicle leases. As of ~~June 30, 2019,~~March 31, 2020, the Company had no additional future obligations for leases that had not yet commenced.

~~Future commitments under operating leases~~ ~~as of December 31, 2018 are as summarized:~~

(in thousands) Operating
Leases
2019 $ 28,751
2020 18,024
2021 14,463
2022 11,142
2023 8,998
Thereafter 16,234
Total future minimum lease payments, net of interest $ 97,612

Future commitments presented in the table above exclude lease payments in renewal periods for which it is reasonably certain that the Company will exercise the renewal option.

NOTE 9.

DEBT

The Company entered into a Credit Agreement with SunTrust Bank and Bank of America, N.A. 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 and an unsecured variable rate $250.0 million Term Loan with SunTrust Bank and Bank of America, N.A. Both the Revolving Commitment and the Term Loan have five-year terms commencing on April 29, 2019. In addition, the Credit Agreement has provisions to extend each term beyond the Revolving Commitment termination date as well as optional prepayment rights at any time and from time to time to prepay any borrowing, in whole or in part, without premium or penalty. As of March 31, 2020, the Revolving Commitment had outstanding borrowings of $133.0 million and the Term Loan had outstanding borrowings of $186.8 million. As of December 31, 2019, the Revolving Commitment had outstanding borrowings of $101.5 million and the Term Loan had outstanding borrowings of $190.0 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 2020.

NOTE 10.

STOCKHOLDERS’ EQUITY

During the three months ended March 31, 2020, the Company paid $39.3 million or $0.12 per share in cash dividends compared to $34.3 million or $0.105 per share during the same period in 2019.

The Company did not repurchase shares on the open market during either of the first quarters ended March 31, 2020 or 2019.

1012

ROLLINS, INC. AND SUBSIDIARIES

~~NOTE 9.~~ ~~STOCKHOLDERS' EQUITY~~

~~During the six months ended June 30, 2019, the Company paid $68.7 million or $0.21~~ ~~per share in cash dividends compared to $61.1 million or $0.19~~ ~~per share during the same period in 2018.~~

~~During the second quarter ended June 30, 2019 and during the same period in 2018 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 $~~0.7~~8.0 million and $~~0.1~~9.1 million for the ~~quarter~~quarters ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively and $9.8~~ ~~million and $9.3~~ ~~million of common stock during the six month period ended June 30, 2019 and 2018,~~ respectively.

As more fully discussed in Note 17 of the ~~Company's~~Company’s notes to the consolidated financial statements in its ~~2018~~2019 Annual Report on Form 10-K, time-lapse restricted shares and restricted stock units have been issued to officers and other management employees under the ~~Company's~~Company’s Employee Stock Incentive Plans. The Company issues new shares from its authorized but unissued share pool. At ~~June 30, 2019,~~March 31, 2020, approximately ~~5.5~~4.9 million shares of the ~~Company's~~Company’s common stock were reserved for issuance.

Time Lapse Restricted Shares and Restricted Stock Units

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


	Three Months Ended						Six Months Ended						Three Months Ended
	June 30,						June 30,						March 31,
(in thousands)	2019			2018			2019			2018			2020			2019
Time lapse restricted stock:
Pre-tax compensation expense	$	3,697		$	3,277		$	7,586		$	6,370		$	3,819		$	3,889
Tax benefit		(963	)		(717	)		(1,784	)		(1,503	)		(837	)		(821	)
Restricted stock expense, net of tax	$	2,734		$	2,560		$	5,802		$	4,867		$	2,982		$	3,068

-The following table summarizes information on unvested restricted stock outstanding as of ~~June 30, 2019:~~March 31, 2020:

	Number of Shares			Average Grant- Date Fair Value		Number of Shares			Average Grant- Date Fair Value
Unvested Restricted Stock at December 31, 2018		2,724		$	21.08
Unvested Restricted Stock at December 31, 2019							2,310		$	25.84
Forfeited		(48	)		22.45		(16	)		24.28
Vested		(782	)		15.63		(626	)		19.76
Granted		485			38.40		572			36.73
Unvested Restricted Stock at March 31, 2019		2,379		$	25.93
Unvested Restricted Stock at March 31, 2020							2,240		$	30.42

At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had $~~49.2~~58.1 million and $~~39.2~~41.3 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 ~~4.5~~4.4 years and ~~4.3~~4.0 years, respectively.

~~ROLLINS, INC. AND SUBSIDIARIES~~

NOTE 11.

PENSION AND POST RETIREMENT BENEFIT PLAN

During September 2019, the Company settled its fully-funded pension plan. At December 31, 2019, $21.6 million of pension assets remained available to fund other employee benefits. The Company used $5.9 million to fund its 401(k)-match obligation during the quarter ended March 31, 2020, and plans to continue funding future benefit plan obligations, with a possible reversion of any remaining pension assets to the Company per ERISA regulations. As of March 31, 2020, the Company had approximately $15.6 million remaining of benefit plan assets.

ROLLINS, INC. AND SUBSIDIARIES

~~NOTE 10.~~ ~~PENSION AND POST RETIREMENT BENEFIT PLAN~~

~~The following table represents the net periodic pension benefit costs and related components in accordance with FASB ASC 715 “~~~~Compensation Retirement Benefits”:~~

Components of Net Pension Benefit Loss/(Gain)

	Three Months Ended						Six Months Ended
	June 30,						June 30,						Three Months Ended March 31,
(in thousands)	2019			2018			2018			2017			2020			2019
Interest and service cost	$	1,762		$	1,995		$	3,524		$	3,990		$	25		$	924
Expected return on plan assets		(2,640	)		(3,443	)		(5,280	)		(6,886	)		(35	)		(30	)
Amortization of net loss		878			826			1,756			1,652			25			892
Net periodic loss/(benefit)	$	—		$	(622	)	$	—		$	(1,244	)
Net periodic benefit													$	15		$	1,786

During the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020, and the same period in ~~2018~~2019, the Company made no contributions to its defined benefit retirement plans (the “Plans”). The Company made no contributions for the year ended December 31, ~~2018. The Company is adequately funded on its Plans and is not expecting to make further contributions in~~ 2019.

The Company has initiated the process to transition its Pension Plan to an insurance provider. The process should be completed by the end of September 30, 2019. The Company's Pension Plan is currently more than 100% funded.

~~NOTE 11.~~ ~~BUSINESS COMBINATIONS~~

NOTE 12.

BUSINESS COMBINATIONS

The Company made ~~fourteen~~ 7 acquisitions during the ~~six month~~three-month period ended ~~June 30, 2019,~~March 31, 2020, and 3830 acquisitions for the year ended December 31, ~~2018, respectively,~~2019, some of which have been disclosed on various press releases and related Current Reports on Form ~~8-K.~~

~~Acquisition of Clark Pest Control:~~

~~On April 30, 2019,~~8- K. For the ~~Company announced it had acquired~~ ~~Clark Pest Control of Stockton, Inc., “Clark Pest Control” located~~seven acquisitions so far in ~~Lodi, CA.~~ ~~Clark Pest Control is a leading pest management company in California and~~2020, the ~~nation's 8th largest pest management company according to PCT 100 rankings.~~

~~Clark Pest Control has a customer base of approximately~~ ~~145,000~~ ~~customers, which are served from~~ 26 ~~service locations in~~ 2 ~~states.~~ ~~Clark Pest Control recorded revenues of approximately $139.2~~ million for the fiscal year ended December 31, 2018. This acquisition will broaden Rollins' market share considerably. The Company's consolidated statements of income include the results of operations of Clark Pest Control for the period beginning April 30, 2019 through June 30, 2019.

The Company engaged an independent valuation firm to determine the allocation of the purchase price to Goodwill and identifiable Intangible assets. The preliminary valuation resulted in the allocation of $191.9 million to goodwill, $112.7 million to customer contracts, and $49.8 million to other intangible assets, principally tradenames. The Company is in the process of analyzing the estimated values of assets and liabilities acquired, evaluating third-party valuations of certain tangible and intangible assets and finalizing its operating plans and, thus, the allocation of the purchase price is subject to material revision in its future financial statements. The finite-lived intangible assets, principally customer contracts, are being amortized over periods principally ranging from 5 to 10 ~~years on a straight-lined basis.~~

~~ROLLINS, INC. AND SUBSIDIARIES~~

~~The preliminary fair values of Clark Pest Control's assets and liabilities, at the date of acquisition, were as follows:~~

at April 30
(dollars in thousands) 2019
Assets and liabilities:
Trade accounts receivables $ 6,974
Materials and supplies 900
Other current assets 5,367
Equipment and property, net 65,535
Goodwill 191,853
Customer contracts 112,700
Trademarks & tradenames 49,300
Non-compete agreements 500
Accounts payable (1,929 )
Accrued compensation and related liabilities (5,678 )
Unearned revenues (879 )
Contingent Consideration, short-term (6,777 )
Other current liabilities (5,452 )
Accrued insurance, less current portion (1,870 )
Other long-term accrued liabilities (9,352 )
Contingent Consideration, long-term (5,923 )
$ 395,269

~~The unaudited pro forma financial information presented below gives effect to the Clark Pest Control acquisition~~ as if it had occurred as of the beginning of our fiscal year 2018. The information presented below is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisition actually had occurred as of the beginning of such years or results which may be achieved in the future.

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
REVENUES
Customer services $ 535,993 $ 515,454 $ 997,829 $ 957,373
COSTS AND EXPENSES 449,706 421,442 854,953 800,692
INCOME BEFORE INCOME TAXES 86,287 94,012 142,876 156,681
PROVISION FOR INCOME TAXES 22,489 25,683 34,458 37,032
NET INCOME $ 63,798 $ 68,329 $ 108,418 $ 119,649
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.19 $ 0.21 $ 0.33 $ 0.37
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.09 $ 0.21 $ 0.19
Weighted average participating shares outstanding - basic and diluted 327,506 327,282 327,506 327,263

~~The~~ preliminary values of major classes of assets acquired and liabilities assumed recorded at the date of acquisition, as adjusted during the valuation period,, are included in the reconciliation of the total consideration ~~for all 14 acquisitions~~ as follows (in thousands):

Schedule of Assets Acquired and Liabilities assumed recorded at the date of acquisition.

	March 31, 2020
Accounts receivable, net	$	1,556
Materials and supplies		103
Equipment and property		2,850
Goodwill		26,505
Customer contracts		22,027
Other intangible assets		3,029
Current liabilities		(6,827	)
Other assets and liabilities, net		2,987
Total consideration paid	$	52,230
Less: Contingent consideration liability		(4,644	)
Total cash purchase price	$	47,586

June 30, 2019
Accounts receivable, net $ 7,496
Materials & supplies 1,213
Equipment and property 67,048
Goodwill 194,562
Customer contracts and other intangible assets 173,450
Current liabilities (13,470 )
Other assets and liabilities, net (7,532 )
Total cash purchase price $ 422,767
Less: Contingent consideration liability (12,700 )
Total cash purchase price $ 410,067

~~ROLLINS, INC. AND SUBSIDIARIES~~

Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. For the three-month period ending March 31, 2020, $26.5 million of goodwill was added related to the seven acquisitions noted above. The cumulative carrying amount of goodwill was ~~$563.1~~$596.1 million and ~~$368.5~~$572.8 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Goodwill generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. The carrying amount of goodwill in foreign countries was $~~55.2~~53.9 million at ~~June 30, 2019~~March 31, 2020 and $~~54.9~~55.8 million at December 31, ~~2018.~~

2019.

The Company completed its most recent annual impairment analysis as of September 30, ~~2018.~~2019. Based upon the results of this analysis, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.

The carrying amount of customer contracts was $~~283.3~~279.4 million and $~~178.1~~273.7 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of trademarks and tradenames was $~~103.0~~104.9 million and $~~54.1~~102.5 million at ~~June 30, 2019,~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of other intangible assets was $~~11.2~~10.3 ~~million~~ and $~~11.0~~10.5 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of customer contracts in foreign countries was $~~35.1~~32.9 million and $~~37.1~~33.5 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of trademarks and tradenames in foreign countries was $~~3.5~~$3.1 million and $~~3.7~~3.4 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of other intangible assets in foreign countries was $~~1.4~~1.0 million and $~~1.6~~1.2 million at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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 intangible assets as of ~~June 30, 2019~~March 31, 2020 (in thousands):

Intangible Asset	Carrying Value		Useful Life in Years		Carrying Value		Useful Life in Years
Customer contracts	$	283,309		3-12	$	279,361		3-12
Trademarks and tradenames		102,986		N/A-20		104,863		N/A-20
Non-compete agreements		4,881		3-20		4,505		3-20
Patents		1,743		3-15		1,461		3-15
Other assets		2,377		10		2,121		10
Internet domains		2,227		N/A		2,227		N/A
Total customer contracts and other intangible assets	$	397,523			$	394,538

~~NOTE 12.~~ ~~DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES~~

NOTE 13.

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 ~~both its~~our international business operations and global economic conditions. To manage this risk, the Company enters into derivative financial instruments from time to time. Certain of the Company's foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in terms of the Company's functional currency. The Company enters into certain derivative financial instruments ~~from time~~ to ~~time~~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's objectives in using interest rate derivatives are to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the~~ Company ~~primarily~~ uses interest rate ~~swaps as part of~~swap arrangements to manage or hedge its interest rate ~~risk management strategy. Interest~~risk. Notwithstanding the terms of the swaps, the Company is ultimately obligated for all amounts due and payable under the Revolving Commitment and the Term Loan (“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 $80.0 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 cash flows from the swap began June 30, 2019 and ends on December 31, 2021. As of December 31, 2019, $0.3 million had been recorded as an Accumulated Loss in Other Comprehensive Income (“AOCI”). An additional loss of $0.7 million was recorded in AOCI in the three months ending March 31, 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 first three months as of March 31, 2020, $0.1 million was recorded as interest income to offset the floating rate interest expense on our Credit Facility. The fair value of the Company’s interest rate swaps ~~designated~~was recorded as ~~cash flow hedges involve the receipt~~$0.8 million in Other Current Liabilities and $0.2 in Long-Term Liabilities for a combined obligation of ~~variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life~~$1.0 million at March 31, 2020. The fair value of the ~~agreements without exchange~~Company’s interest rate swaps was recorded as $0.2 million in Other Current Liabilities and $0.1 in Long-Term Liabilities for a combined obligation of $0.3 million at December 31, 2019. On a quarterly basis, management evaluates any swap agreement to determine its effectiveness or ineffectiveness and records the ~~underlying notional amount. During 2019, such derivatives were used~~change in fair value as an adjustment to ~~hedge~~AOCI. Management intends that the ~~cash flows associated with existing unsecured variable rate debt.~~swap remains effective.

1415

ROLLINS, INC. AND SUBSIDIARIES

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense/income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized currently in earnings recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company's accounting policy election. The earnings recognition of excluded components is presented in interest expense/income. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense/income as interest payments are made/received on the Company's variable-rate debt/assets. During 2019, the Company estimates that an additional $~~0.4~~ ~~million will be reclassified as a(n) increase to interest expense in the next 12 months.~~

~~As of June 30, 2019, the Company had the following~~ ~~outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk~~ ~~(dollar amounts in thousands):~~

Number of Notional
Interest Rate Derivative Instruments Amount
Interest Rate Floors 1 $ 100,000

~~The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income as of June 30, 2019 and June 30 2018.~~

~~The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income~~

Derivatives in Subtopic Amount of Gain or (Loss) Amount of Gain or (Loss)
815-20 Hedging Recognized in Reclassified from Accumulated OCI
Relationships OCI on Derivative into Income
Three Months Ended June 30, Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships 2019 2018 2019 2018
Interest Rate Products $ 257 $ — $ 257 $ —
Total $ 257 $ — $ 257 $ —

Hedges of Foreign Exchange Risk

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the ~~U.S.~~US dollar. ~~The Company uses~~We use foreign currency derivatives, specifically vanilla foreign currency ~~forwards,~~forward contracts (“FX Forwards”), to manage ~~its~~our exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. ~~Currency forward agreements~~FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The ~~currency forward agreements~~FX Forwards are typically ~~cash~~ settled in ~~U.S.~~US dollars for their fair value at or close to their settlement date.

~~The Company does~~ We do not currently designate any of these ~~foreign exchange forwards~~FX Forwards under hedge accounting, but rather ~~reflects~~reflect the changes in fair value immediately in earnings. ~~Derivatives~~We do not ~~designated as hedges are not~~use such instruments for speculative ~~and are used~~or trading purposes, but rather use them to manage ~~the Company's~~our exposure to foreign exchange rates. Changes in the fair value of ~~derivatives not designated~~FX Forwards recorded in ~~hedging relationships are recorded directly in earnings~~other income/expense and were equal to a net ~~loss~~gain of $~~0.1~~$1.1 million for the ~~quarter~~three months ended ~~June 30, 2019~~March 31, 2020 and ~~a net gain of $0.2~~ ~~million for the same quarter in the prior year and were equal to~~ a net loss of $~~0.2~~$0.1 million for the ~~first six~~three months ~~ended June 30, 2019~~ending March 31, 2019. The fair value of the Company’s FX Forwards was recorded as $0.6 million in Other Current Assets at March 31, 2020 and was a net ~~gain~~obligation of $~~0.3~~$0.2 million ~~for the same period~~ in ~~the prior year.~~ Other Current Liabilities at December 31, 2019.

As of ~~June 30, 2019,~~March 31, 2020, the Company had the following outstanding ~~derivatives that were not designated as hedges in qualifying hedging relationships~~FX Forwards (in thousands except for number of instruments):

Non-Designated Derivative Summary
FX Forward Contracts Number of
Instruments Sell
Notional Buy
Notional
Sell AUD/Buy USD Fwd Contract 1 $ 100 $ 71
Sell CAD/Buy USD Fwd Contract 3 $ 2,500 $ 1,869
Total 4 $ 1,940

~~ROLLINS, INC. AND SUBSIDIARIES~~

~~The table below presents the~~ ~~fair value of the Company's derivative financial instruments~~ ~~as well as their classification on the balance sheet as of June 30, 2019 and December 31, 2018 (in thousands):~~

Tabular Disclosure of Fair Values of Derivative Instruments
Derivatives Asset Derivative Liabilities
Fair Value as of:
Derivatives Not Designated as Hedging Instruments June 30,
2019 December 31,
2018 June 30,
2019 December 31,
2018
FX Forward Contracts
Balance Sheet Location Other
Assets Other
Assets Other
Current
Liabilities Other
Current
Liabilities
Sell AUD/Buy USD Fwd Contract $ — $ 18 $ — $ (1 )
Sell CAD/Buy USD Fwd Contract 8 121 (91 ) (4 )
Total $ 8 $ 139 $ (91 ) $ (5 )


Non-Designated Derivative Summary
FX Forward Contracts	Number of Instruments		Sell Notional		Buy Notional
Sell AUD/Buy USD Fwd Contract		4	$	600	$	416
Sell CAD/Buy USD Fwd Contract		10	$	12,000	$	9,127
Total		14			$	9,543

~~Effect of Derivative Instruments on the Income Statement~~ ~~for Derivatives Not Designated~~

~~as Hedging Instruments~~The financial statement impact related to these derivative instruments was insignificant for the ~~Three~~3 months ended March 31, 2020 and ~~Six Months Ended June 30, 2019 and 2018~~year ended December 31, 2019.

Amount of Gain or (Loss) Amount of Gain or (Loss)
Derivatives Designated Location of Gain or (Loss) Recognized in Income Recognized in Income
as Hedging Instruments Recognized in Income Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Swap Other inc/(exp) $ 1 $ — $ 1 $ —
Total $ 1 $ — $ 1 $ —

Amount of Gain or (Loss) Amount of Gain or (Loss)
Derivatives Not Designated Location of Gain or (Loss) Recognized in Income Recognized in Income
as Hedging Instruments Recognized in Income Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Sell AUD/Buy USD Fwd Contract Other inc/(exp) $ 4 $ 27 $ — $ 38
Sell CAD/Buy USD Fwd Contract Other inc/(exp) (71 ) 123 (157 ) 259
Total $ (67 ) $ 150 $ (157 ) $ 297

~~The table below presents the~~ ~~total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions~~ ~~at June 30, 2019 (in thousands):~~

Recurring Fair Value Measurements
Quoted Prices in Active
Markets for Identical Significant Other Significant Unobservable
Assets and Liabilities Observable Inputs Inputs
at June 30, at June 30, at June 30, Total Fair Value
(Level 1) (Level 2) (Level 3) at June 30,
2019 2018 2019 2018 2019 2018 2019 2018
Assets
Derivative Financial Instruments $ — $ — $ 8 $ 122 $ — $ — $ 8 $ 122
Liabilities
Derivative Financial Instruments $ — $ — $ (91 ) $ (10 ) $ — $ — $ (91 ) $ (10 )

~~ROLLINS, INC. AND SUBSIDIARIES~~

As of June 30, 2019, the fair value of derivatives in a net liability position was nine thousand dollars inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2019, it could have been required to settle its obligations under the agreements at their termination value of nine thousand dollars.

~~NOTE 13.~~ ~~DEBT~~

The Company's financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their respective fair values. The Company entered into a new Credit Agreement with SunTrust Bank and Bank of America, N.A. 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 and an unsecured variable rate $250.0 million Term Loan with SunTrust Bank and Bank of America, N.A. Both the Revolving Commitment and the Term Loan have five year durations commencing on April 29, 2019. In addition, the agreement has provisions to extend the duration beyond the Revolving Commitment Termination date as well optional prepayments rights to at any time and from time to time prepay any borrowing, in whole or in part, without premium or penalty. As of June 30, 2019, the Revolving Commitment had outstanding borrowings of $101.0 million and the Term Loan had outstanding borrowings of $246.9 million. As of December 31, 2018, there were no outstanding borrowings. In order to comply with applicable debt covenants, the Company will 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 through 2019. The credit agreement is included as Exhibit 10.1.

~~NOTE 14.~~ ~~SUBSEQUENT EVENTS~~

NOTE 14.

SUBSEQUENT EVENTS

On ~~July 23, 2019,~~April 28, 2020, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $~~0.105~~0.08 per share ~~payable September~~on June 10, ~~2019~~2020 to stockholders of record at the close of business ~~August 9, 2019.~~May 11, 2020.

ITEM 2. ~~MANAGEMENT'S~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On ~~July 23, 2019,~~April 29, 2020, the Company reported ~~second~~first quarter revenues of ~~$524.0~~$487.9 million, an increase of ~~9.1%~~13.7% over the prior ~~year's second~~year’s first quarter revenue of ~~$480.5~~$429.1 million. ~~Rollins'~~Rollins’ net income decreased ~~1.9%~~2.2% to ~~$64.3~~$43.3 million, or ~~$0.20~~$0.13 per diluted share for the ~~second~~first quarter ended ~~June 30, 2019,~~March 31, 2020, compared with ~~$65.5~~$44.2 million, or ~~$0.20~~$0.14 per diluted share for the same period in ~~2018.~~2019.

ROLLINS, INC. AND SUBSIDIARIES

Rollins revenues rose 7.2% to $953.0 million for the first six months of 2019 compared to $889.2 million for the prior year. Net income decreased 4.9% to $108.5 million or $0.33 per diluted share for the first six months of 2019 compared to $114.1 million or $0.35 per diluted share in 2018.

On April 30, 2019, the Company announced that it had completed the purchase of Clark Pest Control of Stockton, Inc. Clark is a family owned company established by Charlie Clark in 1950 and is headquartered in Lodi, CA. It is the leading pest management company in California and the nation's 8th largest pest management company according to PCT 100 rankings. Additionally included in this acquisition are real estate properties and Geotech Supply. Currently, the company operates in 26 locations and offers both residential and commercial pest control throughout California and northwestern Nevada. Clark's Robert Baker will stay on to run day to day operations in California.

Results of Operations:

THREE MONTHS ENDED ~~JUNE 30, 2019~~MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED ~~JUNE 30, 2018~~MARCH 31, 2019

COVID-19 Pandemic Impact

Our immediate concern is for the safety and welfare of our employees and customers. To keep their health protected, we have adopted numerous safety initiatives including providing personal protective equipment (PPE) for all of our technicians (masks, booties, gloves, coveralls, etc.). We have also implemented numerous initiatives to disinfect our devices, implement social distancing guidelines, and provide contact-free services.

To address ongoing cash flow and liquidity risks, we have taken certain steps to reduce or delay certain controllable expenses across our various brands, including the following, among others:

	·	Reduced salaries of select management personnel,
	·	Canceled all non-essential capital expenditures,

Deferred normally scheduled annual compensation merit increases for some locations,

Canceled all non-essential business travel, meetings and training programs,

Eliminated non-essential contractor and temporary services,

Implemented work hour reductions for select personnel, and

Furloughed some personnel while continuing benefits for up to 90 days.

Customer retention during the pandemic is less predictable, and of greater immediate concern. Our residential pest control business has remained consistent with seasonal trends, especially as temperatures rise across the U.S. and pest activity increases. Through the date of this filing, our commercial pest control business has been more adversely impacted, as it crosses multiple industries such as healthcare, food processing, logistics, grocery, retail and hospitality. Each of these industries is being impacted differently by the pandemic. Many of our commercial customers continue to operate as “essential” businesses; however, there are others that have temporarily closed and have suspended our commercial pest control services.

We expect that the impact of COVID-19 on general economic activity will negatively impact our new customer sales demand. We began to experience this impact in mid-March 2020 and expect it to persist and be more significant in the second quarter of 2020. We also expect this impact will further persist for the remainder of 2020 and possibly beyond, the degree of the impact will depend on the extent and duration of the economic contraction.

To enhance our sales demand, we continue to innovate where we see opportunity. In record time, our team developed a new disinfection service that is rapidly being deployed at Orkin called VitalClean™. The successful offering of this new service to our customers will help to ensure the long-term strength of the company.

While we have a substantial amount of intangible assets on our balance sheet, we currently anticipate the economy will rebound as the shelter-in-place and business-shuttering mandates are lifted. We currently do not anticipate any significant long-term loss in revenues or cash flows that would approach a level for impairment of intangible assets.

All of our critical supply-chain vendors have remained operational, and we have engaged additional new sources to supplement our existing suppliers, especially for critical PPE and other COVID-19-related items. Fleet suppliers and support vendors continue to serve our needs.

ROLLINS, INC. AND SUBSIDIARIES

Revenue

Revenues for the ~~second~~first quarter ended ~~June 30, 2019~~March 31, 2020 increased ~~$43.5~~$58.8 million, or ~~9.1%~~13.7%, to ~~$524.0~~$487.9 million compared to ~~$480.5~~$429.1 million for the ~~second~~first quarter ended ~~June 30, 2018.~~March 31, 2019. Growth occurred across all service lines. Approximately ~~5.5~~8.6 percentage points of the ~~9.1%~~13.7% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining ~~3.6~~5.1 percentage points.

The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the ~~second~~first quarter ended ~~June 30, 2019,~~March 31, 2020, commercial pest control revenue approximated ~~37%~~38% of the ~~Company's~~Company’s revenues, residential pest control approximated ~~43%~~42% of the ~~Company's~~Company’s revenues, and termite and ancillary service revenue approximated ~~20%~~19% of the ~~Company's~~Company’s revenues. Comparing the ~~second~~first quarter of 2020 to the first quarter 2019, ~~to second quarter 2018,~~ the ~~Company's~~Company’s commercial pest control revenue increased ~~7.7%~~8.0%, residential pest control revenue ~~grew 11.1%~~increased 18.6%, and termite and ancillary services revenue ~~grew 9.2%~~increased 17.4%. Foreign operations accounted for approximately 7% and 8% of total revenues during the ~~second~~first quarters of 2020 and 2019, ~~and 2018,~~ respectively.

~~ROLLINS, INC. AND SUBSIDIARIES~~

Revenues are impacted by the seasonal nature of the ~~Company's~~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~~Company’s revenues as evidenced by the following chart:

Consolidated Net Revenues
(in thousands)
2019 2018 2017
First Quarter $ 429,069 $ 408,742 $ 375,247
Second Quarter 523,957 480,461 433,555
Third Quarter — 487,739 450,442
Fourth Quarter — 444,623 414,713
Year ended December 31, $ 953,026 $ 1,821,565 $ 1,673,957

Consolidated Net Revenues
(in thousands)
	2020		2019		2018
First Quarter	$	487,901	$	429,069	$	408,742
Second Quarter		—		523,957		480,461
Third Quarter		—		556,467		487,739
Fourth Quarter		—		505,985		444,623
Year ended December 31,	$	487,901	$	2,015,478	$	1,821,565

Revenues are also impacted by the ~~Company's~~Company’s acquisitions. For the ~~second~~first quarters ended ~~June 30,~~March 31, 2020, 2019, ~~2018,~~ and ~~2017,~~2018, acquisitions increased revenues by ~~$26.2~~$37.0 million, ~~$23.4~~$4.5 million, and ~~$2.5~~$16.0 million, respectively. For the six months ended June 30, 2019, 2018, and 2017, acquisitions increased revenues by $30.6 million, $39.5 million, and $6.0 million, respectively. The chart above does not highlight any one acquisition.

Cost of Services Provided

Cost of Services provided for the ~~second~~first quarter ended ~~June 30, 2019~~March 31, 2020 increased ~~$22.6~~$33.9 million, or ~~9.8%~~15.6%, to ~~$253.3~~$251.2 million, compared to ~~$230.8~~$217.3 million for the first quarter of the prior ~~year quarter.~~year. Gross Margin for the first quarter of 2020 was ~~51.7%~~48.5%, down ~~0.3~~0.9 percentage points from ~~52.0% prior years' quarter.~~49.4% for the first quarter of 2019. The quarter experienced ~~increases~~higher expense percent growth in ~~most~~the following areas: higher auto, workers compensation and general liability insurance premiums and claim payments; personnel-related expenses ~~due~~from an increase in medical claim activity and from benefits accrued for furloughed service technicians ; materials and supplies expended for additional PPE for employee safety, and higher service salaries as acquired businesses are yet to ~~acquisitions as well as in administrative salaries due to amortization of~~achieve the ~~employee special restricted share grants to long-term employees from the prior year and increased salaries.~~operational efficiencies experienced within our organic base. Service salaries, materials and supplies and fleet are more variable in nature, and have increased with the production of the 13.7% additional revenue for the period.

Depreciation and Amortization

Depreciation and amortization expense for the ~~second~~first quarter ended ~~June 30, 2019~~March 31, 2020 increased ~~$3.8~~$4.9 million to ~~$20.1~~$21.6 million, an increase of ~~23.0%.~~29.5% from the same period in the prior year. Depreciation increased ~~$1.5~~$2.0 million due to acquisitions and equipment purchases while amortization of intangible assets increased ~~$2.2~~$2.9 million due to the amortization of customer contracts from several acquisitions.

~~Sales, General and Administrative~~

Sales, General and Administrative Expenses for the second quarter ended June 30, 2019 increased $18.5 million or 12.9%, to $161.9 million or 30.9% of revenues, up 1.1 percentage points from $143.4 million or 29.8% of revenues for the second quarter ended June 30, 2018. The Company experienced increases in most expenses due to acquisitions as well as increases in amortization of restricted shares from the 2018 special grant to long-tenured employees, increases in 401k expenses, acquisition expenses and maintenance and repairs contract expenses.

~~Income Taxes~~

The effective tax rate was 26.1% for the second quarter ended June 30, 2019 and 27.3% for the second quarter ended June 30, 2018. The decrease to the effective tax rate for second quarter ended June 30, 2019 was primarily due to an increase to certain beneficial tax adjustments.

~~SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO SIX MONTHS ENDED JUNE 30, 2018~~

~~Revenue~~

Revenues for the six months ended June 30, 2019 increased $63.8 million or 7.2% to $953.0 million compared to $889.2 million for the six months ended June 30, 2018. Growth occurred across all service lines. Approximately 3.5 percentage points of the 7.2% increase in revenues came from acquisitions while growth in customers and pricing made up the remaining 3.7 percentage points.

During the six months ended June 30, 2019, commercial pest control revenue approximated 38% of the Company's revenues, residential pest control approximated 42% of the Company's revenues, and termite and ancillary service revenue approximated 19% of the Company's revenues. Comparing the first six months of 2019 to first six months 2018, the Company's commercial pest control revenue increased 6.2%, residential pest control revenue grew 8.4%, and termite and ancillary services revenue grew 7.2%. Foreign operations accounted for approximately 7% and 8% of total revenues during the first six months of 2019 and 2018, respectively.

ROLLINS, INC. AND SUBSIDIARIES

~~Cost of Services Provided~~

Cost of Services provided for the six months ended June 30, 2019 increased $33.7 million or 7.7% to $470.6 million, compared to $436.9 million for the six months ended June 30, 2018. Gross Margin for the first six months of 2019 was 50.6%, down 0.3 percentage points from 50.9% prior year. The first six months of 2019 experienced increases in most expenses due to acquisitions as well as in administrative salaries due to amortization of the employee special restricted share grants to long-term employees from the prior year and increased salaries. Service salaries, materials and supplies and fleet increased with production for the period.

~~Depreciation and Amortization~~

Depreciation and Amortization expenses for the six months ended June 30, 2019 increased $3.5 million to $36.8 million, an increase of 10.6%. Depreciation increased $1.9 million due to acquisitions and equipment purchases while amortization of intangible assets increased $1.6 million due to the amortization of customer contracts from several acquisitions.

Sales, General and Administrative

Sales, General and Administrative Expenses for the first ~~six months~~quarter ended ~~June 30, 2019~~March 31, 2020 increased ~~$31.6~~$18.3 million, or ~~11.7%~~13.1%, to ~~$301.4~~$157.9 million, or ~~31.6%~~32.4% of revenues, ~~up 1.3~~down 0.1 percentage points from ~~$269.9~~$139.5 million, or ~~30.3%~~32.5% of revenues for the ~~six months~~first quarter ended ~~June 30, 2018.~~March 31, 2019. The Company experienced ~~increases~~higher expense growth in ~~most~~telecommunication expenses and additional reserves for bad debt risks. These were offset by lower expense growth in administrative salaries, fleet, advertising, and professional services.

Interest Expense, Net

Net interest expense for the first quarter ended March 31, 2020 was $2.2 million compared to net interest income of $0.3 million for the same period last year, primarily due to ~~acquisitions as well as increases~~the implementation of our Credit Facility in ~~amortization of restricted shares from the 2018 special grant~~April 2019 to ~~long-tenured employees, increases in 401k expenses,~~fund acquisition ~~expenses and maintenance and repairs contract expenses.~~

growth.

Income Taxes

The effective tax rate was ~~24.1%~~21.9% for the ~~six months~~first quarter ended ~~June 30, 2019~~March 31, 2020 and ~~23.6%~~21.1% for the ~~six months~~first quarter ended ~~June 30, 2018.~~March 31, 2019. The increase to the effective tax rate for ~~six months~~first quarter ended ~~June 30, 2019~~March 31, 2020 was primarily due to ~~an increase to~~reductions in certain ~~non-deductible expenses and inclusion of new tax provisions enacted under the Tax Cuts and Jobs Act of 2017 (the Tax Act).~~

beneficial deductions.

Liquidity and Capital Resources

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 $175.0 million revolving credit facility and $250.0 million ~~Term Loan agreement~~term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The ~~Company's~~Company’s operating activities generated net cash of ~~$136.9~~$92.0 million and ~~$130.5~~$61.4 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. ~~During the six months ended June 30, 2019 and the same period in 2018, the~~The Company made no ~~contribution~~contributions to its sole remaining defined benefit retirement ~~plans. The Company is adequately funded on its Plans~~plan during the three months ending March 2020 and ~~is not expecting to make further contributions in 2019. The Company has initiated~~2019 and had approximately $15.6 million of benefit plan assets remaining from the ~~process to transition its Pension Plan to an insurance provider. The transition should be complete by September 30, 2019. The Company's Pension Plan is currently more than 100% funded.~~2019 pension plan settlement.

The Company invested approximately ~~$13.4~~$6.7 million in capital expenditures, exclusive of expenditures for business acquisitions, during the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, compared to ~~$14.2~~$6.5 million during the same period in ~~2018, and expects~~2019. Non-essential capital expenditures for 2020 have been cancelled in response to ~~invest approximately $10.0 million for~~ the ~~remainder of 2019.~~pandemic crisis. Capital expenditures for the first ~~six~~three months consisted primarily of the purchase of operating equipment replacements and ~~technology related~~technology-related projects. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Company made expenditures for acquisitions totaling ~~$410.1~~$47.6 million, compared to ~~$54.6~~$7.0 million during the same period in ~~2018.~~2019. A total of ~~$68.7~~$39.3 million was paid in cash dividends ($~~0.21~~0.12 per share), compared to ~~$61.1~~$34.3 million or ($~~0.19~~0.105 per share) during the same period in ~~2018.~~2019. On ~~July 23, 2019,~~April 28, 2020, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of ~~$0.105~~$0.08 per share payable ~~September~~June 10, ~~2019~~2020 to stockholders of record at the close of business ~~August 9, 2019~~May 11, 2020, to be funded with existing cash ~~balances.~~balances and available credit facilities. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company did not repurchase shares of its common stock on the open market during the first ~~six~~three months of ~~2019 and~~2020 or during the same period in ~~2018.~~2019. The Company has had a buyback program in place for a number of years and has routinely purchased shares when it felt the opportunity was desirable. The Board authorized the purchase of 11.25 million additional shares of the ~~Company's~~Company’s common stock in July 2012. These authorizations enable the Company to continue the purchase of Company common stock when appropriate, which is an important benefit resulting from the ~~Company's~~Company’s strong cash flows. The stock buy-back program has no expiration date. In total, 7.6 million additional shares may be purchased under the share repurchase program. The Company repurchased ~~$9.8~~$8.0 million and ~~$9.3~~$9.1 million of common stock for the first ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, from employees for the payment of taxes on vesting restricted shares. ~~The Company borrowed $250.0 million under the Term Loan and borrowed $118.0 million under the Revolving Commitment. The Company repaid $20.1 million.~~ The acquisitions, capital expenditures, share repurchases and cash dividends were funded through existing cash balances, borrowings on our line of credit, a term loan, and operating activities.

ROLLINS, INC. AND SUBSIDIARIES

The ~~Company's~~Company’s balance sheet as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 includes short-term unearned revenues of ~~$133.7~~$129.4 million and ~~$116.0~~$122.8 million, respectively, representing approximately ~~7% and~~ 6% of our annual ~~revenue, respectively.~~revenue. This represents cash paid to the Company by its customers in advance of services that will be recognized over the next twelve months. The ~~Company's $98.5 million of~~Company’s total cash and cash equivalents of $92.6 million at ~~June 30, 2019,~~March 31, 2020 is held at various banking institutions. Approximately ~~$67.8~~$64.2 million is held in cash accounts at foreign bank institutions and the remaining balance is primarily held in non-interest-bearing accounts at various domestic banks. The ~~Company's~~Company’s international business is expanding, and we intend to continue to grow the business in foreign markets in the future through acquisitions of unrelated companies, reinvestment of foreign deposits and future earnings. Repatriation of cash from the ~~Company's~~Company’s foreign subsidiaries is not a part of the ~~Company's~~Company’s current business plan. The Company maintains a large cash position in the United States. The Company maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits.

The Company closed the acquisition of Clark Pest Control of Stockton, Inc. located in Lodi, California during the second quarter of 2019 for approximately $400 million. The Company funded the purchase price of the acquisition with a combination of cash on hand, use of its revolving credit agreement for $100 million and a term loan of $250 million tied to LIBOR. The Company plans to repay these loans within two years of the acquisition.

Litigation

In the normal course of business, certain of the ~~Company's~~Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the ~~subsidiaries'~~subsidiaries’ services caused damage. 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.

Critical Accounting Policies

There have been no changes to the ~~Company's~~Company’s critical accounting policies since the filing of its Form 10-K for the year ended December 31, ~~2018,~~2019, other than ASC ~~842.~~

326.

New Accounting Standards

See Note 2 of the Notes to Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.

ROLLINS, INC. AND SUBSIDIARIES

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, the Company’s belief that its business, results of operations, financial condition and/or liquidity may be impacted by future developments related to the COVID-19 pandemic; the Company’s expectation that the impact of COVID-19 on general economic activity will negatively impact our new customer sales demand and that this impact will further persist for the remainder of 2020 and beyond, with the degree of the impact depending upon the extent and duration of the economic contraction; the Company’s plan to keep most of its employees working to benefit its customers at this time; the Company’s ability to innovate to enhance sales demand; the Company’s anticipation that the economy will rebound as the shelter-in-place and business-shuttering mandates are lifted; the Company’s belief that it will not experience any significant long-term loss in revenues or cash flows related to the COVID-19 pandemic that would approach any level of intangible impairment; the effect of the future adoption of recent accounting pronouncements on the ~~Company's~~Company’s financial statements; the Company’s plans to suspend future services for customers with past due balances; the Company’s intention that its floating-to-fixed interest rate swap for an aggregate notional amount of $80.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility remains effective; statements regarding ~~management's~~management’s expectation regarding the effect of the ultimate resolution and guidance of pending claims, proceedings or litigation on the ~~Company's~~Company’s financial position, results of operation and liquidity; the ~~Company's~~Company’s reasonable certainty that it will exercise the renewal options on its ~~vehicle~~operating leases; the Company's expectation that it will repay the loans related to the Clark Pest Control acquisition within two years of closing; the Company's belief that the exposure of certain of its foreign operations expose it to foreign interest and exchange rate fluctuations that may impact the value of the Company's cash receipts payments in terms of the Company's functional currency; the Company'sCompany’s belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million ~~Revolving Commitment~~revolving credit facility and $250.0 million ~~Term Loan agreement~~term loan facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; the Company’s expectation that its leverage ratio will remain in compliance with its debt covenants through 2020; our expectation that the Company will continue to pay cash dividends to common stockholders, subject to earnings and financial condition of the Company; our intention 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 and that repatriation of cash from the company’s foreign subsidiaries is not a part of the ~~Company's~~Company’s current business plan; the Company’s plan to continue funding future benefit plan obligations with a possible reversion of any remaining pension assets to the Company in compliance with ERISA regulations; the Company’s expectation ~~of no defined benefit retirement plan contributions~~that it will forego non-essential capital expenditures for the remainder of ~~2019;~~2020; the Company's ability to complete the transition of the pension plan to the insurance provider, including the ability to meet the proposed timeline by September 30, 2019; the Company's expectation that it will invest $22.0 million in capital expenditure for the remainder of 2019; the Company'sCompany’s expectation to maintain compliance with debt covenants and the ~~Company's~~Company’s belief that foreign exchange rate risk will not have a material effect on the ~~Company's~~Company’s results of operations going forward; the ~~Company's~~Company’s belief that it maintains adequate liquidity and capital resources that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future without regard to its foreign deposits; ~~and~~ the ~~Company's~~Company’s estimation regarding the reclassification of accumulated other comprehensive income related to ~~derivatives.~~derivatives; and the Company’s belief that no changes in our internal control over financial reporting during the first quarter were identified that are reasonably likely to materially affect our internal control over financial reporting. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, the impact of the extent and duration of economic contraction related to COVID-19 on general economic activity for the remainder of 2020 and beyond; the impact of future developments related to the COVID-19 pandemic on the Company’s business, results of operations and financial condition; the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; actions taken by our franchisees, subcontractors or vendors that may harm our business; market risk; changes in industry practices or technologies; a breach of data security; the degree of success of the ~~Company's~~Company’s termite process and pest control selling and treatment methods; damage to our brands or reputation; our ability to protect our intellectual property and other proprietary rights; the ~~Company's~~Company’s ability to identify and successfully integrate potential acquisitions; climate and weather conditions; competitive factors and pricing practices; our ability to attract and retain skilled workers, and potential increases in labor costs; changes in various government laws and regulations, including environmental regulations; and the existence of certain anti-takeover provisions in our governance documents, which could make a tender offer, change in control or takeover attempt that is opposed by the ~~Company's~~Company’s Board of Directors more difficult or expensive. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. A more detailed discussion of potential risks facing the Company can be found herein in Item 1A and in the ~~Company's~~Company’s Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, ~~2018.~~2019. The Company does not undertake to update its forward-looking statements.

~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of ~~June 30, 2019,~~March 31, 2020, the Company maintained an investment portfolio (included in cash and cash equivalents) subject to short-term interest rate risk exposure. The Company is subject to interest rate risk exposure through borrowings on its ~~Credit Agreement with SunTrust Bank~~$133.0 million revolving credit facility and ~~Bank of America, N.A. for an unsecured Revolving Commitment of up to $175.0~~$186.8 million which includes a $75.0 million letter of credit subfacility and a $250.0 million swingline subfacility and an unsecured variable rate $250.0 million Term Loan with SunTrust Bank and Bank of America, N.A.term loan facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See Note 1213 to Part I, Item 1 for a discussion of the ~~Company's~~Company’s investments in derivative financial instruments to manage risks of fluctuations in foreign exchange rates. The Company believes that this foreign exchange rate risk will not have a material impact upon the ~~Company's~~Company’s results of operations going forward. ~~There have been no material changes to the Company's market risk exposure since the end of fiscal year 2018.~~

ROLLINS, INC. AND SUBSIDIARIES

~~ITEM 4. CONTROLS AND PROCEDURES~~

ITEM 4.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of ~~June 30, 2019~~March 31, 2020 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date to ensure that the information required to be included in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

In addition, ~~management's~~management’s quarterly evaluation identified no changes in our internal control over financial reporting during the first quarter that materially affected, or are reasonably likely to materially affect our internal control over financial reporting. As of ~~June 30, 2019,~~March 31, 2020, we did not identify any material weaknesses in our internal controls, and therefore no corrective actions were taken.

ROLLINS, INC. AND SUBSIDIARIES

PART II OTHER INFORMATION

~~Item 1. Legal Proceedings~~

Item 1.

Legal Proceedings

See Note 5 to Part I, Item 1 for discussion of certain litigation.

Item 1A.

Risk Factors

In light of recent developments relating to the COVID-19 pandemic, the Company is supplementing the risk factors previously disclosed in Part I., Item 1A. ~~Risk Factors~~

~~See the Company's risk factors disclosed in the Company's~~of its Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019, filed with the Securities and Exchange Commission on February 28, 2020, to include the following risk factor: Our business, results of operations and financial condition have been and may continue to be adversely impacted by the coronavirus pandemic, and future adverse impacts could be material and difficult to predict.

~~ROLLINS, INC. AND SUBSIDIARIES~~

The global spread of the coronavirus (“COVID-19”), which was declared a global pandemic by the World Health Organization in March 2020, has created significant volatility, uncertainty and global macroeconomic disruption. Our business, operations and financial results have been, and may continue to be, adversely impacted by the COVID-19 pandemic and by related government actions (including declared states of emergency and quarantine, “shelter in place” or similar orders), non-governmental agency recommendations and public perceptions, all of which have led to disruption in global economic and labor market conditions. These effects have had an adverse impact on our business, including reduced demand for our commercial pest control services, which have contributed to a decline in revenues and other adverse impacts on our financial results. Other potential impacts of the spread of COVID-19 include continued or expanded closures of our customers' facilities, the possibility our customers will not be able to pay for our services and solutions, or that they will attempt to defer payments owed to us, either of which could impact our liquidity, and the possibility that various government-sponsored programs to provide economic relief will be inadequate. Further, we may continue to experience adverse financial impacts if we cannot offset revenue declines with cost savings through expense-related initiatives, human capital management initiatives or otherwise. As a result of these observed and potential developments, we expect our business, operations and financial results to continue to be negatively affected. There are numerous uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the pandemic, the extent and duration of travel restrictions and business closures imposed by the governments of impacted countries, and the effects these and other factors have on underlying economic and labor market conditions. As a result, we cannot accurately predict the ultimate effects, which could be material, of the COVID-19 pandemic on our business, operations and financial results.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Shares repurchased by Rollins and affiliated purchases during the ~~second~~third quarter ended ~~June 30, 2019~~March 31, 2020 were as follows:

Total number of shares Maximum number of
Total number Weighted-Average purchased as part shares that may yet
of shares price paid of publicly announced be purchased under
Period Purchased (1) per share repurchases (2) repurchase plan
April 1 to 30, 2019 16,973 $ 41.99 — 7,610,416
May 1 to 31, 2019 — — — 7,610,416
June 1 to 30, 2019 — — — 7,610,416
Total 16,973 $ 41.99 — 7,610,416

					Total number of shares		Maximum number of
	Total number		Weighted-Average		purchased as part		shares that may yet
	of shares		price paid		of publicly announced		be purchased under
Period	Purchased (1)		per share		repurchases (2)		repurchase plan
January 1 to 31, 2020		213,732	$	36.52		—		7,610,416
February 1 to 29, 2020		1,351		39.60		—		7,610,416
March 1 to 31, 2020		4,289		40.12		—		7,610,416
Total		219,372	$	39.60		—		7,610,416

(1)

Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts: ~~April 2019: 16,973; May 2019: 0;~~January 2020: 213,732; February 2020: 1,351; and ~~June 2019: 0.~~March 2020: 4,289.

(2)

The Company has a share repurchase plan, adopted in 2012, to repurchase up to 11.25 million shares of the ~~Company's~~Company’s common stock. The plan has no expiration date.

ROLLINS, INC. AND SUBSIDIARIES

Item 5.	Exhibits.
	(a)	Exhibits

		(3) (i)	(A) Restated Certificate of Incorporation of Rollins, Inc. dated July 28, 1981, incorporated herein by reference to Exhibit (3)(i)(A) as filed with the registrant’s Form 10-Q filed August 1, 2005.

			(B) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated August 20, 1987, incorporated herein by reference to Exhibit 3(i)(B) filed with the registrant’s 10-K filed March 11, 2005.

			(C) Certificate of Change of Location of Registered Office and of Registered Agent dated March 22, 1994, incorporated herein by reference to Exhibit (3)(i)(C) filed with the registrant’s Form 10-Q filed August 1, 2005.

			(D) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April 25, 2006, incorporated herein by reference to Exhibit 3(i)(D) filed with the registrant’s 10-Q filed October 31, 2006.

			(E) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April 26, 2011, incorporated herein by reference to Exhibit 3(i)(E) filed with the Registrant’s 10-K filed February 25, 2015.

			(F) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April 28, 2015, incorporated herein by reference to Exhibit 3(i)(F) filed with the Registrant’s 10-Q filed on July 29, 2015.

			(G) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April 23, 2019, incorporated herein by reference to Exhibit 3(i)(G) filed with the Registrant’s 10-Q filed on April 26, 2019.

		(ii)	Amended and Restated By-laws of Rollins, Inc., incorporated herein by reference to exhibit 3(ii) as filed with its Form 10-Q for the quarter ended March 31, 2017.

		(4)(a)	Form of Common Stock Certificate of Rollins, Inc., incorporated herein by reference to Exhibit (4) as filed with its Form 10-K for the year ended December 31, 1998.

		~~(10.1)~~		~~Revolving Credit Agreement dated as of April 30, 2019 between Rollins, SunTrust Bank and Bank of America, N.A.~~

	(31.1)	Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	(31.2)	Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	(32.1)	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002.

	(101.INS)	Inline XBRL Instance Document

	(101.SCH)	Inline XBRL ~~Taxonomy Extension~~ Schema Document

	(101.CAL)	Inline XBRL ~~Taxonomy Extension~~ Calculation Linkbase Document

	(101.DEF)	Inline XBRL ~~Taxonomy Extension~~ Definition Linkbase Document

	(101.LAB)	Inline XBRL ~~Taxonomy Extension~~ Label Linkbase Document

	(101.PRE)	Inline XBRL ~~Taxonomy Extension~~ Presentation Linkbase Document

	104	Cover Page Interactive Data File (embedded with the Inline XBRL document)
	+	Portions of this exhibit (indicated by asterisks) have been omitted.

ROLLINS, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ROLLINS, INC.
	(Registrant)

Date: ~~July 26, 2019~~April 30, 2020	By:	/s/ Gary W. Rollins
		Gary W. Rollins
		Vice Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~July 26, 2019~~April 30, 2020	By:	/s/ Paul E. Northen
		Paul E. Northen
		Senior Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)


	Common Stock						Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
	Shares			Amount			Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
Balance at March 31, 2018		327,279		$	327,279		$	75,079		$	(48,908	)	$	309,313		$	662,763
Net Income		—			—			—			—			65,542			65,542
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			(5,118	)		—			(5,118	)
Cash dividends		—			—			—			—			(30,540	)		(30,540	)
Stock compensation		51			51			3,243			—			(17	)		3,277
Employee stock buybacks		(4	)		(4	)		(110	)		—			1			(113	)
Balance at June 30, 2018		327,326		$	327,326		$	78,212		$	(54,026	)	$	344,299		$	695,811

	Common Stock						Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
	Shares			Amount			Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
Balance at December 31, 2017		326,988		$	326,988		$	81,405		$	(45,956	)	$	291,487		$	653,924
Net Income		—			—			—			—			114,067			114,067
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			(8,070	)		—			(8,070	)
Cash dividends		—			—			—			—			(61,142	)		(61,142	)
Stock compensation		617			617			5,959			—			(206	)		6,370
Employee stock buybacks		(279	)		(279	)		(9,152	)		—			93			(9,338	)
Balance at June 30, 2018		327,326		$	327,326		$	78,212		$	(54,026	)	$	344,299		$	695,811

	Common Stock						Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
	Shares			Amount			Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
Balance at March 31, 2019		327,530		$	327,530		$	79,932		$	(68,736	)	$	380,398		$	719,124
Net Income		—			—			—			—			64,295			64,295
Other comprehensive income, net of tax
Change in derivatives		—			—			—			(257	)		—			(257	)
Foreign currency translation adjustments		—			—			—			485			—			485
Cash dividends		—			—			—			—			(34,367	)		(34,367	)
Stock compensation		(27	)		(27	)		3,724			—			—			3,697
Employee stock buybacks		(17	)		(17	)		(696	)		—			—			(713	)
Balance at June 30, 2019		327,486		$	327,486		$	82,960		$	(68,508	)	$	410,326		$	752,264

	Common Stock						Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
	Shares			Amount			Paid-in-capital			Accumulated Other Comprehensive income/ (loss)			Retained Earnings			Total
Balance at December 31, 2018		327,308		$	327,308		$	85,386		$	(71,078	)	$	370,292		$	711,908
Net Income		—			—			—			—			108,521			108,521
Impact of adoption of ASC 842		—			—			—			—			212			212
Other comprehensive income, net of tax
Change in derivatives		—			—			—			(257	)		—			(257	)
Foreign currency translation adjustments		—			—			—			2,827			—			2,827
Cash dividends		—			—			—			—			(68,699	)		(68,699	)
Stock compensation		437			437			7,149			—			—			7,586
Employee stock buybacks		(259	)		(259	)		(9,575	)		—			—			(9,834	)
Balance at June 30, 2019		327,486		$	327,486		$	82,960		$	(68,508	)	$	410,326		$	752,264

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(in thousands)
(unaudited)
	Six Months Ended
	June 30,
	2019			2018
OPERATING ACTIVITIES
Net income	$	108,521		$	114,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		36,815			33,282
Provision for deferred income taxes		4,763			4,508
Provision for bad debts		4,925			4,190
Stock - based compensation expense		7,586			6,370
Other, net		(900	)		(1,535	)
Changes in operating assets and liabilities		(24,767	)		(30,373	)
Net cash provided by operating activities		136,943			130,509
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(410,067	)		(54,619	)
Purchases of equipment and property		(13,436	)		(14,246	)
Proceeds from sales of franchises		486			228
Other		1,097			425
Net cash used in investing activities		(421,920	)		(68,212	)
FINANCING ACTIVITIES
Cash paid for common stock purchased		(9,834	)		(9,338	)
Dividends paid		(68,699	)		(61,142	)
Repayments of long-term debt		(20,125	)		—
Borrowings under Term Loan		250,000			—
Borrowings under Revolving Commitment		118,000			—
Net cash used in financing activities		269,342			(70,480	)
Effect of exchange rate changes on cash		(1,384	)		(10,982	)
Net increase/(decrease) in cash and cash equivalents		(17,019	)		(19,165	)
Cash and cash equivalents at beginning of period		115,485			107,050
Cash and cash equivalents at end of period	$	98,466		$	87,885
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets		24,322			—


	Recurring Fair Value Measurements
	Quoted Prices in Active
	Markets for Identical				Significant Other				Significant Unobservable
	Assets and Liabilities				Observable Inputs				Inputs
	at June 30,				at June 30,				at June 30,				Total Fair Value
	(Level 1)				(Level 2)				(Level 3)				at June 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Liabilities
Acquisition earnouts	$	—	$	—	$	—	$	—	$	26,918	$	21,489	$	26,918	$	21,489


	Six Months Ended
	June 30, 2019
(in thousands)	2019			2018
Acquisition earnouts booked using the Monte-Carlo Simulation Model
Beginning balance	$	14,339		$	17,959
New acquisition earnouts		12,700			3,025
Adjustments and Accrued Interest		1,355			701
Earnout payments		(1,476	)		(196	)
Ending balance	$	26,918		$	21,489

For the period ended	June 30,			December 31			June 30,
(in thousands)	2019			2018			2018
Balance at beginning of year	$	127,075		$	117,614		$	117,614
Deferral of unearned revenue		100,188			166,053			95,948
Recognition of unearned revenue		(80,496	)		(156,592	)		(78,290	)
Balance at end of period	$	146,767		$	127,075		$	135,272

	at April 30
(dollars in thousands)	2019
Assets and liabilities:
Trade accounts receivables	$	6,974
Materials and supplies		900
Other current assets		5,367
Equipment and property, net		65,535
Goodwill		191,853
Customer contracts		112,700
Trademarks & tradenames		49,300
Non-compete agreements		500
Accounts payable		(1,929	)
Accrued compensation and related liabilities		(5,678	)
Unearned revenues		(879	)
Contingent Consideration, short-term		(6,777	)
Other current liabilities		(5,452	)
Accrued insurance, less current portion		(1,870	)
Other long-term accrued liabilities		(9,352	)
Contingent Consideration, long-term		(5,923	)
	$	395,269

	June 30, 2019
Accounts receivable, net	$	7,496
Materials & supplies		1,213
Equipment and property		67,048
Goodwill		194,562
Customer contracts and other intangible assets		173,450
Current liabilities		(13,470	)
Other assets and liabilities, net		(7,532	)
Total cash purchase price	$	422,767
Less: Contingent consideration liability		(12,700	)
Total cash purchase price	$	410,067

	Number of		Notional
Interest Rate Derivative	Instruments		Amount
Interest Rate Floors		1	$	100,000

Derivatives in Subtopic	Amount of Gain or (Loss)				Amount of Gain or (Loss)
815-20 Hedging	Recognized in				Reclassified from Accumulated OCI
Relationships	OCI on Derivative				into Income
	Three Months Ended June 30,				Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2019		2018		2019		2018
Interest Rate Products	$	257	$	—	$	257	$	—
Total	$	257	$	—	$	257	$	—

	Tabular Disclosure of Fair Values of Derivative Instruments
	Derivatives Asset				Derivative Liabilities
			Fair Value as of:
Derivatives Not Designated as Hedging Instruments	June 30, 2019		December 31, 2018		June 30, 2019			December 31, 2018
FX Forward Contracts
Balance Sheet Location	Other Assets		Other Assets		Other Current Liabilities			Other Current Liabilities
Sell AUD/Buy USD Fwd Contract	$	—	$	18	$	—		$	(1	)
Sell CAD/Buy USD Fwd Contract		8		121		(91	)		(4	)
Total	$	8	$	139	$	(91	)	$	(5	)

		Amount of Gain or (Loss)					Amount of Gain or (Loss)
Derivatives Designated	Location of Gain or (Loss)	Recognized in Income					Recognized in Income
as Hedging Instruments	Recognized in Income	Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018		2019			2018
Swap	Other inc/(exp)	$	1		$	—	$	1		$	—
Total		$	1		$	—	$	1		$	—

		Amount of Gain or (Loss)					Amount of Gain or (Loss)
Derivatives Not Designated	Location of Gain or (Loss)	Recognized in Income					Recognized in Income
as Hedging Instruments	Recognized in Income	Three Months Ended June 30,					Six Months Ended June 30,
		2019			2018		2019			2018
Sell AUD/Buy USD Fwd Contract	Other inc/(exp)	$	4		$	27	$	—		$	38
Sell CAD/Buy USD Fwd Contract	Other inc/(exp)		(71	)		123		(157	)		259
Total		$	(67	)	$	150	$	(157	)	$	297