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 ~~September~~June 30, ~~2019~~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 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, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

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

Large ~~accelerated filer~~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 ~~327,441,726~~ 327,758,819shares of its $1 par value Common Stock outstanding as of ~~October~~July 16, ~~2019.~~2020.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF ~~SEPTEMBER~~JUNE 30, ~~2019,~~2020, AND DECEMBER 31, ~~2018~~2019

(in thousands except share data)

September 30, December 31,
2019 2018
(Unaudited)
ASSETS
Cash and cash equivalents $ 104,362 $ 115,485
Trade receivables, net of allowance for doubtful accounts of $15,736 and $13,080, respectively 132,065 104,016
Financed receivables, short-term, net of allowance for doubtful accounts of $1,726 and $1,691, respectively 23,821 18,454
Materials and supplies 17,500 15,788
Other current assets 46,440 32,278
Total current assets 324,188 286,021
Equipment and property, net 197,549 136,885
Goodwill 570,759 368,481
Customer contracts, net 283,830 178,075
Trademarks & tradenames, net 102,657 54,140
Other intangible assets, net 11,008 11,043
Operating lease, right-of-use assets 196,854 —
Financed receivables, long-term, net of allowance for doubtful accounts of $1,342 and $1,416 respectively 30,750 28,227
Benefit plan assets 25,949 —
Prepaid pension — 5,274
Deferred income taxes — 6,915
Other assets 21,249 19,063
Total assets $ 1,764,793 $ 1,094,124
LIABILITIES
Accounts payable $ 32,932 $ 27,168
Accrued insurance 29,817 27,709
Accrued compensation and related liabilities 78,699 77,741
Unearned revenues 132,915 116,005
Operating lease liabilities - current 63,952 —
Current portion of long-term debt 12,500 —
Other current liabilities 60,065 50,406
Total current liabilities 410,880 299,029
Accrued insurance, less current portion 34,157 33,867
Operating lease liabilities, less current portion 133,703 —
Long-term debt 313,500 —
Deferred income tax liability 7,971 —
Long-term accrued liabilities 57,685 49,320
Total liabilities 957,896 382,216
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, 327,441,726 and 327,308,079 shares issued and outstanding, respectively 327,442 327,308
Paid in capital 86,208 85,386
Accumulated other comprehensive loss (26,746 ) (71,078 )
Retained earnings 419,993 370,292
Total stockholders' equity 806,897 711,908
Total liabilities and stockholders' equity $ 1,764,793 $ 1,094,124

	June 30,			December 31,
	2020			2019
	(Unaudited)
ASSETS
Cash and cash equivalents	$	134,829		$	94,276
Trade receivables, net of allowance for doubtful accounts of $16,452 and $16,699, respectively		129,297			122,766
Financed receivables, short-term, net of allowance for doubtful accounts of $1,810 and $1,675, respectively		23,285			22,267
Materials and supplies		34,064			19,476
Other current assets		41,626			51,002
Total current assets		363,101			309,787
Equipment and property, net		191,141			195,533
Goodwill		602,310			572,847
Customer contracts, net		275,782			273,720
Trademarks & tradenames, net		104,760			102,539
Other intangible assets, net		10,176			10,525
Operating lease, right-of-use assets		214,874			200,727
Financed receivables, long-term, net of allowance for doubtful accounts of $1,204 and $1,284 respectively		38,281			30,792
Benefit plan assets		9,312			21,565
Deferred income taxes		2,105			2,180
Other assets		24,540			24,161
Total assets	$	1,836,382		$	1,744,376
LIABILITIES
Accounts payable	$	48,037		$	35,234
Accrued insurance		31,230			30,441
Accrued compensation and related liabilities		87,050			81,943
Unearned revenues		139,541			122,825
Operating lease liabilities - current		71,494			66,117
Current portion of long-term debt		12,500			12,500
Other current liabilities		88,321			60,975
Total current liabilities		478,173			410,035
Accrued insurance, less current portion		35,520			34,920
Operating lease liabilities, less current portion		144,846			135,651
Long-term debt		242,500			279,000
Deferred income tax liability		14,482			9,927
Long-term accrued liabilities		58,031			59,093
Total liabilities		973,552			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 shares authorized, 327,758,819 and 327,430,846 shares issued and outstanding, respectively		327,759			327,431
Paid in capital		88,640			89,413
Accumulated other comprehensive loss		(29,163	)		(21,109	)
Retained earnings		475,594			420,015
Total stockholders’ equity		862,830			815,750
Total liabilities and stockholders’ equity	$	1,836,382		$	1,744,376

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 ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020 AND ~~2018~~2019

(in thousands except per share data)

(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
REVENUES
Customer services $ 556,466 $ 487,739 $ 1,509,492 $ 1,376,942
COSTS AND EXPENSES
Cost of services provided 268,718 236,287 739,309 673,202
Depreciation and amortization 21,690 16,867 58,505 50,149
Pension settlement loss 49,898 — 49,898 —
Sales, general and administrative 167,168 145,072 468,584 414,938
Gain on sale of assets, net 27 (314 ) (406 ) (678 )
Interest expense, net 2,826 (63 ) 4,451 70
INCOME BEFORE INCOME TAXES 46,139 89,890 189,151 239,261
PROVISION FOR INCOME TAXES 2,078 23,262 36,569 58,566
NET INCOME $ 44,061 $ 66,628 $ 152,582 $ 180,695
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.13 $ 0.20 $ 0.47 $ 0.55
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.09 $ 0.32 $ 0.28
Weighted average participating shares outstanding - basic and diluted 327,459 327,321 327,490 327,283


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
REVENUES
Customer services	$	553,329		$	523,957		$	1,041,230		$	953,026
COSTS AND EXPENSES
Cost of services provided		255,622			253,333			506,774			470,591
Depreciation and amortization		21,925			20,132			43,522			36,815
Sales, general and administrative		171,253			161,886			329,115			301,416
Gain on sale of assets, net		(451	)		(252	)		(726	)		(433	)
Interest expense, net		1,460			1,899			3,625			1,625
INCOME BEFORE INCOME TAXES		103,520			86,959			158,920			143,012
PROVISION FOR INCOME TAXES		28,162			22,664			40,294			34,491
NET INCOME	$	75,358		$	64,295		$	118,626		$	108,521
NET INCOME PER SHARE - BASIC AND DILUTED	$	0.23		$	0.20		$	0.36		$	0.33
DIVIDENDS PAID PER SHARE	$	0.08		$	0.11		$	0.20		$	0.21
Weighted average participating shares outstanding - basic and diluted		327,763			327,506			327,723			327,506

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

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020 AND ~~2018~~2019

(in thousands)

(unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
NET INCOME $ 44,061 $ 66,628 $ 152,582 $ 180,695
Other comprehensive earnings (loss)
Pension settlement 45,990 — 45,990 —
Change in derivative values (118 ) — (375 ) —
Foreign currency translation adjustments (4,110 ) (611 ) (1,283 ) (8,681 )
Other comprehensive earnings (loss) 41,762 (611 ) 44,332 (8,681 )
Comprehensive earnings $ 85,823 $ 66,017 $ 196,914 $ 172,014


	(In thousands)
	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020			2019
NET INCOME	$	75,358	$	64,295		$	118,626		$	108,521
Other comprehensive (loss) / earnings
Foreign currency translation adjustments		9,378		485			(7,490	)		2,827
Change in derivatives		170		(257	)		(564	)		(257	)
Other comprehensive (loss) / earnings		9,548		228			(8,054	)		2,570
Comprehensive earnings	$	84,906	$	64,523		$	110,572		$	111,091

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

ROLLINS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE AND ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020 AND ~~2018~~2019

(Inin thousands) ~~(unaudited)~~

(unaudited)

Common Stock Paid-in-capital Accumulated
Other
Comprehensive
income/ (loss) Retained
Earnings Total
Shares Amount
Balance at June 30, 2018 327,326 $ 327,326 $ 78,212 $ (54,026 ) $ 344,299 $ 695,811
Net Income — — — — 66,628 66,628
Other comprehensive income, net of tax
Foreign currency translation adjustments — — — (611 ) — (611 )
Cash dividends — — — — (30,535 ) (30,535 )
Stock compensation (4 ) (4 ) 3,662 — 2 3,660
Employee stock buybacks (4 ) (4 ) (192 ) — 1 (195 )
Balance at September 30, 2018 327,318 $ 327,318 $ 81,682 $ (54,637 ) $ 380,395 $ 734,758

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 — — — — 180,695 180,695
Other comprehensive income, net of tax
Foreign currency translation adjustments — — — (8,681 ) — (8,681 )
Cash dividends — — — — (91,677 ) (91,677 )
Stock compensation 613 613 9,621 — (204 ) 10,030
Employee stock buybacks (283 ) (283 ) (9,344 ) — 94 (9,533 )
Balance at September 30, 2018 327,318 $ 327,318 $ 81,682 $ (54,637 ) $ 380,395 $ 734,758

Common Stock Paid-in-capital Accumulated
Other
Comprehensive
income/ (loss) Retained
Earnings Total
Shares Amount
Balance at June 30, 2019 327,486 $ 327,486 $ 82,960 $ (68,508 ) $ 410,326 $ 752,264
Net Income — — — — 44,061 44,061
Other comprehensive income, net of tax
Pension settlement — — — 45,990 — 45,990
Change in derivatives — — — (118 ) — (118 )
Foreign currency translation adjustments — — — (4,110 ) — (4,110 )
Cash dividends — — — — (34,394 ) (34,394 )
Stock compensation (42 ) (42 ) 3,347 — — 3,305
Employee stock buybacks (2 ) (2 ) (99 ) — — (101 )
Balance at September 30, 2019 327,442 $ 327,442 $ 86,208 $ (26,746 ) $ 419,993 $ 806,897

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 — — — — 152,582 152,582
Impact of adoption of ASC 842 — — — — 212 212
Other comprehensive income, net of tax
Pension settlement — — — 45,990 — 45,990
Change in derivatives — — — (375 ) — (375 )
Foreign currency translation adjustments — — — (1,283 ) — (1,283 )
Cash dividends — — — — (103,093 ) (103,093 )
Stock compensation 395 395 10,496 — — 10,891
Employee stock buybacks (261 ) (261 ) (9,674 ) — — (9,935 )
Balance at September 30, 2019 327,442 $ 327,442 $ 86,208 $ (26,746 ) $ 419,993 $ 806,897


	Common Stock						Paid-in-			Accumulated Other Comprehensive			Retained
	Shares			Amount			capital			income/ (loss)			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
Foreign currency translation adjustments		—			—			—			485			—			485
Change in derivatives		—			—			—			(257	)		—			(257	)
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-			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		—			—			—			—			108,521			108,521
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			2,827			—			2,827
Change in derivatives		—			—			—			(257	)		—			(257	)
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

	Common Stock						Paid-in-			Accumulated Other Comprehensive			Retained
	Shares			Amount			capital			income/ (loss)			Earnings			Total
Balance at March 31, 2020		327,767		$	327,767		$	84,865		$	(38,711	)	$	426,450		$	800,371
Net Income		—			—			—			—			75,358			75,358
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			9,378			—			9,378
Change in derivatives		—			—			—			170			—			170
Cash dividends		—			—			—			—			(26,214	)		(26,214	)
Stock compensation		(6	)		(6	)		3,827			—			—			3,821
Employee stock buybacks		(2	)		(2	)		(52	)		—			—			(54	)
Balance at June 30, 2020		327,759		$	327,759		$	88,640		$	(29,163	)	$	475,594		$	862,830

	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		—			—			—			—			118,626			118,626
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			(7,490	)		—			(7,490	)
Change in derivatives		—			—			—			(564	)		—			(564	)
Cash dividends		—			—			—			—			(65,531	)		(65,531	)
Stock compensation		549			549			7,091			—			—			7,640
Employee stock buybacks		(221	)		(221	)		(7,864	)		—			—			(8,085	)
Balance at June 30, 2020		327,759		$	327,759		$	88,640		$	(29,163	)	$	475,594		$	862,830

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 NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(in thousands)
(unaudited)

Nine Months Ended
September 30,
2019 2018
OPERATING ACTIVITIES
Net income $ 152,582 $ 180,695
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 58,505 50,149
Provision for deferred income taxes (6,972 ) 4,604
Provision for bad debts 10,216 9,509
Stock-based compensation expense 10,891 10,030
Other, net (951 ) (1,920 )
Benefit settlement 25,949 —
Changes in operating assets and liabilities (19,902 ) (39,793 )
Net cash provided by operating activities 230,318 213,274
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired (431,249 ) (71,785 )
Purchases of equipment and property (18,701 ) (19,645 )
Proceeds from sales of franchises 612 343
Other 1,370 1,002
Net cash used in investing activities (447,968 ) (90,085 )
FINANCING ACTIVITIES
Cash paid for common stock purchased (9,935 ) (9,533 )
Dividends paid (103,093 ) (91,677 )
Repayment of Term Loan (27,000 ) —
Repayment of Revolving Commitment (45,000 ) —
Borrowings under Term Loan 250,000 —
Borrowings under Revolving Commitment 148,000 —
Net cash provided by/(used in) financing activities 212,972 (101,210 )
Effect of exchange rate changes on cash (6,445 ) (10,377 )
Net increase/(decrease) in cash and cash equivalents (11,123 ) 11,602
Cash and cash equivalents at beginning of period 115,485 107,050
Cash and cash equivalents at end of period $ 104,362 $ 118,652
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets $ 23,415 —

CONSOLIDATED STATEMENTS OF STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019

(in thousands)

(unaudited)


	Six Months Ended June 30,
	2020			2019
OPERATING ACTIVITIES
Net income	$	118,626		$	108,521
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		43,522			36,815
Provision for deferred income taxes		3,055			4,763
Provision for bad debts		9,769			4,925
Stock-based compensation expense		7,640			7,586
Other, net		(1,078	)		(900	)
Changes in operating assets and liabilities		53,238			(19,534	)
Net cash provided by operating activities		234,772			142,176
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(56,030	)		(410,067	)
Purchases of equipment and property		(12,441	)		(13,436	)
Proceeds from sales of franchises		285			486
Other		1,820			1,097
Net cash used in investing activities		(66,366	)		(421,920	)
FINANCING ACTIVITIES
Payment of contingent consideration		(7,862	)		(5,233	)
Repayment of term loan		(7,000	)		(3,125	)
Repayment on revolving commitment		(97,500	)		(17,000	)
Borrowings on term loan		—			250,000
Borrowings on revolving commitment		68,000			118,000
Cash paid for common stock purchased		(8,085	)		(9,834	)
Dividends paid		(65,531	)		(68,699	)
Net cash provided by/(used in) financing activities		(117,978	)		264,109
Effect of exchange rate changes on cash		(9,875	)		(1,384	)
Net increase/(decrease) in cash and cash equivalents		40,553			(17,019	)
Cash and cash equivalents at beginning of period		94,276			115,485
Cash and cash equivalents at end of period	$	134,829		$	98,466
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets	$	52,273		$	31,242

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.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the U.S. and the world. This has resulted in authorities implementing numerous measures to contain the virus, including, but not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The pest control industry was 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. 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. The results of operations for the ~~three and nine month periods~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of results for the entire year.

The severity, magnitude and duration, as well as the economic consequences of the COVID-19 pandemic, are uncertain, rapidly changing and difficult to predict. Therefore, our accounting estimates and assumptions may change over time in response to COVID-19 and may change materially in future periods.

The Company has only 1one 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.

~~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~~The Company ~~records all derivatives on the balance sheet at fair value. The accounting for changes~~reclassified certain prior period amounts in the ~~fair value~~Statement of ~~derivatives depends on the intended use~~Cash Flows from Operating Activities to Financing Activities for payment of ~~the derivative, whether the Company has elected~~contingent consideration 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 attributableconform 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 risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

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.current period presentation.

~~ROLLINS, INC. AND SUBSIDIARIES~~

~~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 January 1, 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.

ROLLINS, INC. AND SUBSIDIARIES

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.

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 roll forward of the Company’s allowance for credit losses for the six months ended June 30, 2020.


	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		8,480			1,288			9,768
Write-offs charged against the allowance		(8,233	)		(1,233	)		(9,466	)
Recoveries collected		2,729			—			2,729
Currency Conversion		107			—			107
Balance at June 30, 2020	$	16,452		$	3,014		$	19,466

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 ~~standard in this update is~~Company adopted ASU 2017-04 effective ~~for the 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.~~2020. The Company does not expect the adoption of this ~~ASU is not expected~~standard to have a material impact on ~~the Company's~~its future consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure ~~Framework-Changes~~Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance ~~modifies~~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 financial statements issued for fiscal years beginning in ~~2020.~~2021. The ~~Company~~adoption of this ASU is ~~currently evaluating~~not expected to have a material impact on the ~~effect the guidance will have on its~~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 Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
United States $ 516,022 $ 448,910 $ 1,395,189 $ 1,268,652
Other countries 40,444 38,829 114,303 108,290
Total Revenues $ 556,466 $ 487,739 $ 1,509,492 $ 1,376,942

	(In thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
United States	$	517,576	$	485,170	$	969,922	$	879,170
Other countries		35,753		38,787		71,308		73,856
Total Revenues	$	553,329	$	523,957	$	1,041,230	$	953,026

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

	(In thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Residential revenue	$	257,921	$	224,682	$	462,578	$	397,190
Commercial revenue		179,900		191,456		363,215		361,127
Termite completions, bait monitoring, & renewals		109,817		102,352		204,044		182,601
Franchise revenues		3,521		3,442		6,938		6,703
Other revenues		2,170		2,025		4,455		5,405
Total Revenues	$	553,329	$	523,957	$	1,041,230	$	953,026

(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
Residential revenue $ 249,227 $ 211,906 $ 646,420 $ 578,464
Commercial revenue 204,595 187,378 565,720 527,311
Termite completions, bait monitoring, & renewals 96,145 83,297 278,746 253,665
Franchise revenues 3,433 3,105 10,136 10,349
Other revenues 3,066 2,053 8,470 7,153
Total Revenues $ 556,466 $ 487,739 $ 1,509,492 $ 1,376,942

ROLLINS, INC. AND SUBSIDIARIES

~~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.

Basic and diluted earnings per share attributable to common and restricted shares of common stock for the period were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Basic and diluted earnings per share
Common stock	$	0.23	$	0.20	$	0.36	$	0.33
Restricted shares of common stock	$	0.22	$	0.18	$	0.35	$	0.30

Three Months Ended Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
Basic and diluted earnings per share
Common stock $ 0.13 $ 0.20 $ 0.47 $ 0.55
Restricted shares of common stock $ 0.14 $ 0.20 $ 0.43 $ 0.56

~~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.

At ~~September~~June 30, 2020 and 2019, the Company had ~~$21.0~~$47.1 million and $54.7 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 ~~at $21.0 million~~ and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for ~~level 3 assets and~~these liabilities.

Recurring Fair Value Measurements
Quoted Prices in Active
Markets for Identical Significant Other Significant Unobservable
Assets and Liabilities Observable Inputs Inputs
at September 30, at September 30, at September 30, Total Fair Value
(Level 1) (Level 2) (Level 3) at September 30,
2019 2018 2019 2018 2019 2018 2019 2018
Liabilities
Acquisition earnouts $ — $ — $ — $ — $ 21,030 $ 15,640 $ 21,030 $ 15,640


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020			2019			2020			2019
Beginning	$	51,328		$	28,999		$	49,131		$	30,926
New acquisitions and revaluations		1,054			27,893			5,543			29,450
Payouts		(5,822	)		(2,426	)		(7,862	)		(5,233	)
Interest on outstanding contingencies		565			510			1,148			722
Charge offset, forfeit and other		(40	)		(291	)		(875	)		(1,180	)
Ending Balance	$	47,085		$	54,685		$	47,085		$	54,685

~~The table below shows the rollforward activity for the level 3 liabilities in the summary table above.~~

Nine Months Ended
September 30, 2019
(in thousands) 2019 2018
Acquisition earnouts:
Beginning balance $ 14,339 $ 17,959
New acquisition earnouts 12,700 3,025
Adjustments and Accrued Interest 2,121 685
Earnout payments (8,130 ) (6,029 )
Ending balance $ 21,030 $ 15,640

ROLLINS, INC. AND SUBSIDIARIES

NOTE 7.

UNEARNED REVENUE

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

~~Changes in~~The Company records unearned revenue ~~were as follows:~~

For the period ended September 30, December 31 September 30,
(in thousands) 2019 2018 2018
Balance at beginning of year $ 127,075 $ 117,614 $ 117,614
Deferral of unearned revenue 141,867 166,053 134,527
Recognition of unearned revenue (122,465 ) (156,592 ) (117,297 )
Balance at end of period $ 146,477 $ 127,075 $ 134,844

when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 were $~~42.0~~43.2 million and $~~39.0~~40.5 million, respectively and $~~122.5~~$85.9 million and $~~117.3~~$80.5 million, respectively.

~~Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both~~ Changes in unearned revenue ~~and revenue that will be invoiced and recognized in future periods.~~ were as follows:

For the period ended	June 30,			December 31,			June 30,
(in thousands)	2020			2019			2019
Balance at beginning of year	$	136,507		$	127,075		$	127,075
Deferral of unearned revenue		105,928			174,404			100,188
Recognition of unearned revenue		(85,936	)		(164,972	)		(80,496	)
Balance at end of period	$	156,499		$	136,507		$	146,767

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

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had long-term unearned revenue of $~~13.5~~17.0 million and $~~11.1~~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 ~~September~~June 30, ~~2019,~~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.

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 Nine Months Ended
September 30, 2019
Short-term lease cost Cost of services provided, Sales, general, and administrative expenses $ 135
Operating lease cost Cost of services provided, Sales, general, and administrative expenses 19,361
Total lease expense $ 19,496

Other Information
      Weighted-average remaining lease term - operating leases 4.00
      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 19,091

ROLLINS, INC. AND SUBSIDIARIES

(in thousands)
Lease Classification	Financial Statement Classification	Six Months Ended June 30, 2020
Short-term lease cost	Cost of services provided, Sales, general, and administrative expenses	$	133
Operating lease cost	Cost of services provided, Sales, general, and administrative expenses		42,024
Total lease expense		$	42,157

Other Information
Weighted-average remaining lease term – operating leases			3.78
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		$	41,599

Lease Commitments

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

(in thousands)	Operating Leases		Operating Leases
2019 (excluding the nine months ended September 30, 2019)	$	18,791
2020		66,981
2020 (excluding the six months ended June 30, 2020)			$	40,717
2021		51,969		71,763
2022		33,688		53,682
2023		17,716		33,800
2024		9,492		14,063
2025				7,913
Thereafter		15,257		11,987
Total future minimum lease payments		213,894
Total Future Minimum Lease Payments			$	233,925
Less: Amount representing interest		16,239	$	17,585
Total future minimum lease payments, net of interest	$	197,655	$	216,340

Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $~~96.4~~95.0million for building leases and $~~117.5~~138.9million for vehicle leases. As of ~~September~~June 30, ~~2019,~~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 were as summarized:~~ROLLINS, INC. AND SUBSIDIARIES

(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~~

NOTE 9.

DEBT

The Company entered into a ~~new~~ Credit Agreement with SunTrust Bank, now known as Truist 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, now known as Truist Bank and Bank of America, N.A. Both the Revolving Commitment and the Term Loan have ~~five year durations~~five-year terms commencing on April 29, 2019. In addition, the ~~agreement~~Credit Agreement has provisions to extend ~~the duration~~each term beyond the Revolving Commitment ~~Termination~~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 ~~September~~June 30, ~~2019,~~2020, the Revolving Commitment had outstanding borrowings of $~~103.0~~72.0 million and the Term Loan had outstanding borrowings of $~~223.0~~183.0 million. As of December 31, ~~2018, there were~~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 ~~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.~~ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance ~~through 2019.~~throughout 2020.

~~NOTE 10.~~ ~~STOCKHOLDERS' EQUITY~~

NOTE 10.

STOCKHOLDERS’ EQUITY

During the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the Company paid ~~$103.1~~$65.5 million, or $~~0.315~~0.20 per share, in cash dividends compared to ~~$91.7~~$68.7 million, or $~~0.28~~0.21 per share, during the same period in ~~2018.~~2019.

During the ~~third~~second quarter ended ~~September~~June 30, ~~2019~~2020 and during the same period in ~~2018~~2019 the Company did not repurchase shares on the open market.

The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $0.1 million and $~~0.2~~0.7 million for the quarter ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, respectively and $~~9.9~~8.1 million and $~~9.5~~9.8 million of common stock during the ~~nine months~~six month period ended ~~September~~June 30, 2020 and 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 ~~September~~June 30, ~~2019,~~2020, approximately ~~5.5~~4.9 million shares of the ~~Company's~~Company’s common stock were reserved for issuance.

~~ROLLINS, INC. AND SUBSIDIARIES~~

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:~~expense:


	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020			2019			2020			2019
Time lapse restricted stock:
Pre-tax compensation expense	$	3,821		$	3,697		$	7,640		$	7,586
Tax benefit		(1,100	)		(963	)		(1,937	)		(1,784	)
Restricted stock expense, net of tax	$	2,721		$	2,734		$	5,703		$	5,802

ROLLINS, INC. AND SUBSIDIARIES

Three Months Ended Nine months ended
September 30, September 30,
(in thousands) 2019 2018 2019 2018
Time lapse restricted stock:
Pre-tax compensation expense $ 3,305 $ 3,660 $ 10,891 $ 10,030
Tax benefit (982 ) (947 ) (2,728 ) (2,766 )
Restricted stock expense, net of tax $ 2,323 $ 2,713 $ 8,163 $ (8,125 )

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

	Number of Shares			Average Grant- Date Fair Value

Unvested Restricted Stock at December 31, 2019		2,310		$	25.84
Forfeited		(24	)		24.22
Vested		(627	)		19.46
Granted		573			36.73
Unvested Restricted Stock at June 30, 2020		2,232		$	30.44

Number of
Shares Average Grant-
Date Fair Value
Unvested Restricted Stock at December 31, 2018 2,724 $ 21.08
Forfeited (87 ) 25.01
Vested (791 ) 15.84
Granted 484 38.40
Unvested Restricted Stock at September 30, 2019 2,330 $ 26.32

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had $~~44.7~~54.1 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 4.2 years and ~~4.1~~4.0 years, respectively.

NOTE 11.

PENSION AND POST RETIREMENT BENEFIT PLAN

~~NOTE 11.~~ ~~PENSION AND POST RETIREMENT BENEFIT PLAN~~

~~During~~In September 2019, the Company settled its fully-funded pension plan through a combination of lump sum payments to participants, payments to the Pension Benefit Guaranty Corporation (PBGC), and the purchase of a group annuity contract. With the completed funding of the plan payout settlements, the Company had approximately $31.8plan. At December 31, 2019, $21.6 million of pension assets remaining. The remaining assets were the result of the funded status of the plan, higher take rate of lump sum payment election by participants and optimal pricing of the group annuity contract. The Company has evaluated the ERISA allowable opportunities for utilization of the excess pension assets including fundingremained available to fund other employee benefits. The Company used ~~$5.2~~$6.3 million ~~of the $31.8~~and $12.3 million to fund its 401(k) ~~match~~-match obligation during the quarter and sixth months ended ~~September~~June 30, ~~2019, and~~2020, respectively. The Company plans to continue funding future benefit plan obligations, with a possible reversion of any remaining pension assets to the Company per ERISA regulations. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life of the plan. Net of tax, the expense was $26.6 million. As of ~~September~~June 30, ~~2019,~~2020, the Company had approximately $~~25.9~~9.3 million remaining of benefit plan assets.

Components of Net Pension Benefit ~~Loss/~~Loss / (Gain)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,						Three Months Ended June 30,						Six Month Ended June 30,
(in thousands)	2019			2018			2019			2018			2020			2019			2020			2019
Interest and service cost	$	1,175		$	1,995		$	4,699		$	5,985		$	28		$	1,762		$	53		$	3,524
Expected return on plan assets		(2,285	)		(3,443	)		(7,565	)		(10,329	)		(24	)		(2,640	)		(59	)		(5,280	)
Amortization of net loss		1,110			826			2,866			2,478			25			878			50			1,756
Pension settlement loss		49,898			—			49,898			—
Net periodic loss	$	49,898		$	(622	)	$	49,898		$	(1,866	)	$	29		$	—		$	44		$	—

During the ~~nine~~six months ended ~~September~~June 30, ~~2019~~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.~~2019.

ROLLINS, INC. AND SUBSIDIARIES

~~NOTE 12.~~ ~~BUSINESS COMBINATIONS~~

NOTE 12.

BUSINESS COMBINATIONS

The Company made 2913 acquisitions during the ~~nine month~~six-month period ended ~~September~~June 30, ~~2019,~~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,~~ For the ~~Company acquired~~ ~~Clark Pest Control of Stockton, Inc., (“Clark Pest Control”) located~~13 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. The Company's consolidated statements of income include the results of operations of Clark Pest Control for the period beginning April 30, 2019 through September 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.~~

~~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 )
Other long term liabilities (9,352 )
Accrued insurance, less current portion (1,870 )
Contingent Consideration, long-term (5,923 )
$ 395,269

~~ROLLINS, INC. AND SUBSIDIARIES~~

~~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 Nine Months Ended
September 30, September 30,
2019 2018 2019 2018
REVENUES
Customer services $ 593,830 $ 523,957 $ 1,615,922 $ 1,481,329
COSTS AND EXPENSES 548,111 430,970 1,427,851 1,231,662
INCOME BEFORE INCOME TAXES 45,719 92,987 188,071 249,667
PROVISION FOR INCOME TAXES 2,078 23,262 36,569 58,566
NET INCOME $ 43,641 $ 69,725 $ 151,502 $ 191,101
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.13 $ 0.21 $ 0.46 $ 0.58
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.09 $ 0.32 $ 0.28
Weighted average participating shares outstanding - basic and diluted 327,459 327,320 327,490 327,283

~~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 as follows (in thousands):

	September 30, 2019			June 30, 2020
Accounts receivable, net	$	8,535		$	1,835
Materials & supplies		1,378			192
Equipment and property		68,704			3,446
Goodwill		201,443			29,080
Customer contracts and other intangible assets		189,581
Customer contracts					27,968
Other intangible assets					3,094
Other assets and liabilities, net					4,003
Current liabilities		(18,180	)		(7,906	)
Other assets and liabilities, net		(7,512	)
Total purchase price	$	443,949		$	61,712
Less: Contingent consideration liability		(12,700	)		(5,682	)
Total cash purchase price	$	431,249		$	56,030

Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. For the period ended June 30, 2020, $29.1 million of goodwill was added related to the 13 acquisitions noted above. The cumulative carrying amount of goodwill was ~~$570.8~~$602.3 million and ~~$368.5~~$572.8 million at ~~September~~June 30, ~~2019~~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 $~~53.8~~57.5 million at ~~September~~June 30, ~~2019~~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, 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 $~~283.8~~ 275.8million and $~~178.1~~ 273.7million at ~~September~~June 30, ~~2019~~2020, and December 31, ~~2018,~~2019, respectively. The carrying amount of trademarks and tradenames was $~~102.7~~ 104.8million and $~~54.1~~ 102.5million at ~~September~~June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of other intangible assets was $~~11.0~~10.2 million and $10.5million at ~~both September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively. The carrying amount of customer contracts in foreign countries was $~~33.4~~ 33.5~~million and $37.1~~ million at ~~September~~both June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019. The carrying amount of trademarks and tradenames in foreign countries was $~~3.4~~ 3.1million and $~~3.7~~ 3.4million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. The carrying amount of other intangible assets in foreign countries was $~~1.3~~ 1.0million and $~~1.6~~ 1.2million at ~~September~~June 30, ~~2019~~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 ~~September~~June 30, ~~2019~~2020 (in thousands):

Intangible Asset	Carrying Value		Useful Life in Years
Customer contracts	$	275,782		3-12
Trademarks and tradenames		104,760		N/A - 20
Non-compete agreements		4,337		3-20
Patents		1,458		3-15
Other assets		2,154		10
Internet domains		2,227		N/A
Total customer contracts and other intangible assets	$	390,718

ROLLINS, INC. AND SUBSIDIARIES

Intangible Asset Carrying
Value Useful Life
in Years
Customer contracts $ 283,830 3-12
Trademarks and tradenames 102,657 N/A-20
Non-compete agreements 4,877 3-20
Patents 1,613 3-15
Other assets 2,291 10
Internet domains 2,227 N/A
Total customer contracts and other intangible assets $ 397,495

~~NOTE 13.~~ ~~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 ~~swaps~~swap for an aggregate notional amount of $100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility. The Company designated the swap as a cash flow ~~hedges involve~~hedge. The swap requires us to pay a fixed rate of 1.94% per annum on the ~~receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying~~ notional amount. ~~During 2019, such derivatives were used to hedge the~~The cash flows ~~associated with existing unsecured variable rate debt.~~

~~For derivatives designated~~from the swap began June 30, 2019 and ~~that qualify~~ends on December 31, 2021. As of December 31, 2019, $0.3 million had been recorded as ~~cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded~~an Accumulated Loss in ~~Accumulated~~ Other Comprehensive Income (“AOCI”). An additional loss of $0.6 million was recorded in AOCI in the six months ended June 30, 2020. Realized gains and ~~subsequently~~losses in connection with each required interest payment are reclassified from AOCI to interest expense during the period of the cash flows. During the quarter and six months ended June 30, 2020, the Company reclassified into interest ~~expense/income in the same period(s) during which the hedged transaction affects earnings. Gains~~expense $0.2 million and ~~losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized currently in earnings recognized over the life~~$0.3 million, respectively. The fair value of the ~~hedge on~~Company’s interest rate swaps was recorded as $0.7 million in Other Current Liabilities and $0.1 million in Long-Term Liabilities for a ~~systematic~~combined obligation of $0.8 million at June 30, 2020. The fair value of the Company’s interest rate swaps was recorded as $0.2 million in Other Current Liabilities and ~~rational~~$0.1 million in Long-Term Liabilities for a combined obligation of $0.3 million at December 31, 2019. On a quarterly basis, ~~as documented at hedge inception~~management evaluates any swap agreement to determine its effectiveness or ineffectiveness and records the change 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~~fair value as an ~~increase~~adjustment to ~~interest expense in~~AOCI. Management intends that the ~~next 12 months.~~swap remains effective.

ROLLINS, INC. AND SUBSIDIARIES

~~As of September 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 $ 90,000

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

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

Derivatives in Subtopic
815-20 Hedging Amount of Gain or (Loss)
Relationships Recognized in OCI on Derivative
Three Months Ended September 30, Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships 2019 2018 2019 2018
Interest Rate Products $ (118 ) $ — $ (375 ) $ —
Total $ (118 ) $ — $ (375 ) $ —

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 were recorded in ~~hedging relationships are recorded directly in earnings and were equal to a net gain of $144~~ ~~thousand for the quarter ended September 30, 2019 and a net loss of $~~72 ~~thousand for the same quarter in the prior year~~other income/expense and were equal to a net loss of $12 ~~thousand~~$0.3 million and $0.1 million for the ~~first nine months~~quarter ended ~~September~~June 30, 2020 and 2019, respectively, and a net gain of $~~225~~ ~~thousand~~$0.8 million and a net loss of $0.2 million for the ~~same period~~six months ended June 30, 2020 and 2019, respectively. The fair value of the Company’s FX Forwards was recorded as $0.1 million in ~~the prior year.~~ Other Current Assets at June 30, 2020 and was a net obligation of $0.2 million in Other Current Liabilities at December 31, 2019.

As of ~~September~~June 30, ~~2019,~~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 7 $ 800 $ 544
Sell CAD/Buy USD Fwd Contract 12 $ 14,750 $ 11,161
Total 19 $ 11,705

~~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 September 30, 2019 and December 31, 2018 (in thousands):~~

Tabular Disclosure of Fair Values of Derivative Instruments
Derivative Assets Derivative Liabilities
Fair Value as of:
Derivatives Not Designated as
Hedging Instruments September 30,
2019 December 31,
2018 September 30,
2019 December 31,
2018
FX Forward Contracts (375)
Balance Sheet Location Other
Current
Assets Other
Current
Assets Other
Current
Liabilities Other
Current
Liabilities
Sell AUD/Buy USD Fwd Contract $ 3 $ 18 $ (1 ) $ (1 )
Sell CAD/Buy USD Fwd Contract 39 121 (32 ) (4 )
Total $ 42 $ 139 $ (33 ) $ (5 )


Non-Designated Derivative Summary
FX Forward Contracts	Number of Instruments		Sell Notional		Buy Notional
Sell AUD/Buy USD Fwd Contract		5	$	1,000	$	690
Sell CAD/Buy USD Fwd Contract		7	$	8,500		6,343
Total		12			$	7,033

The ~~table below presents the effect of the Company’s derivative~~ financial ~~instruments on the income~~ statement ~~as of September 30, 2019 and September 30, 2018 (in thousands):~~

~~Effect of Derivative Instruments on the Income Statement~~~~for Derivatives Designated as Hedging Instruments~~

Amount of Gain or (Loss) Recognized in Income
Derivatives Designated as
Hedging Instruments Location of Gain or (Loss)
Recognized in Income Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Swap Other inc/(exp) $ 77 $ — $ 78 $ —
Total $ 77 $ — $ 78 $ —

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

Amount of Gain or (Loss) Recognized in Income
Derivatives Not Designated as
Hedging Instruments Location of Gain or (Loss)
Recognized in Income Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Sell AUD/Buy USD Fwd Contract Other inc/(exp) $ 1 $ 9 $ 1 $ 47
Sell CAD/Buy USD Fwd Contract Other inc/(exp) 66 (81 ) (91 ) 178
Total $ 67 $ (72 ) $ (90 ) $ 225

~~The table below presents the~~ ~~total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions~~ ~~at September 30, 2019 and September 30, 2018 (in thousands):~~

Recurring Fair Value Measurements
Quoted Prices in Active
Markets for Identical Significant Other Significant Unobservable
Assets and Liabilities Observable Inputs Inputs
at September 30, at September 30, at September 30, Total Fair Value
(Level 1) (Level 2) (Level 3) at September 30,
2019 2018 2019 2018 2019 2018 2019 2018
Assets
Derivative Financial Instruments $ — $ — $ 42 $ 32 $ — $ — $ 42 $ 32
Liabilities
Derivative Financial Instruments $ — $ — $ (33 ) $ (41 ) $ — $ — $ (33 ) $ (41 )

~~ROLLINS, INC. AND SUBSIDIARIES~~

As of September 30, 2019, the fair value of derivatives in a net asset position was nine thousand dollars inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateralimpact related to these ~~agreements. If~~derivative instruments was insignificant for the ~~Company had breached any of these provisions at September~~6 months ended June 30, ~~2019, it could have been required to settle its instruments under the agreements at their termination value~~2020 and ~~yielded nine thousand dollars.~~year ended December 31, 2019.

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

NOTE 14.

SUBSEQUENT EVENTS

On ~~October 23, 2019,~~July 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 ~~plus a special year-end dividend of $0.05 per share both~~ payable ~~December~~on September 10, ~~2019~~2020 to stockholders of record at the close of business ~~November 11, 2019.~~August 10, 2020.

ROLLINS, INC. AND SUBSIDIARIES

~~ITEM 2.~~

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

On ~~October 23, 2019,~~July 29, 2020, the Company reported ~~third~~second quarter revenues of ~~$556.5~~$553.3 million, an increase of ~~14.1%~~5.6% over the prior year’s ~~third~~second quarter revenue of ~~$487.7~~$524.0 million. Rollins’ net income ~~decreased 33.9%~~increased 17.2% to ~~$44.1~~$75.4 million, or ~~$0.13~~$0.23 per diluted share for the ~~third~~second quarter ended ~~September~~June 30, ~~2019 reflecting the expenses related to the retirement of its pension plan,~~2020, compared with ~~$66.6~~$64.3 million, or $0.20 per diluted share for the same period in ~~2018.~~

Rollins revenues rose 9.6% to $1.509 billion for the first nine months of 2019 compared to $1.377 billion for the same period in the prior year. Net income decreased 15.6% to $152.6 million or $0.47 per diluted share for the first nine months of 2019 compared to $180.7 million or $0.55 per diluted share for the first nine months of 2018.

On April 30, 2019, the Company completed the purchase of Clark Pest Control. Clark Pest Control 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, a pest control materials distribution company. Currently, Clark Pest Control operates in 26 locations and offers both residential and commercial pest control throughout California and northwestern Nevada. Clark Pest Control’s President, Robert Baker, has remained on to run day to day operations in California.

2019.

Results of Operations:

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

COVID-19 Pandemic Impact

Going into the quarter ended June 30, 2020, we were faced with the global economic downturn resulting from the COVID-19 pandemic. The Company responded with numerous operational adjustments to address the economic and health safety challenges. These included new COVID-related procedures, modified customer service and related protocols, daily health screenings before entering shared offices, and a transition to remote work locations to reduce concentrations of personnel in offices where appropriate. Cost containment efforts included furloughs, layoffs, elimination of non-essential travel, postponing capital expenditures, and temporary salary reductions for upper management, among other actions.

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, unfortunately, there are a notable number of others forced to temporarily close their doors. We expect this impact will 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.

While we have a substantial amount of intangible assets on our balance sheet, based on our second quarter revenues, we 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.

Revenue

Revenues for the ~~third~~second quarter ended ~~September~~June 30, ~~2019~~2020 increased ~~$68.7~~$29.4 million, or ~~14.1%~~5.6%, to ~~$556.5~~$553.3 million compared to ~~$487.7~~$524.0 million for the ~~third~~second quarter ended ~~September~~June 30, ~~2018. Growth occurred across all service lines.~~2019. Approximately ~~7.7~~3.1 percentage points of the ~~14.1%~~5.6% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining ~~6.4~~2.5 percentage points.

The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the ~~third~~second quarter ended ~~September~~June 30, ~~2019,~~2020, commercial pest control revenue approximated ~~37%~~33% of the Company’s revenues, residential pest control approximated ~~45%~~47% of the Company’s revenues, and termite and ancillary service revenue approximated ~~17%~~20% of the Company’s revenues. Comparing the third quarter of 2019 to third quarter 2018, the Company’s commercial pest control revenue increased 9.2%, residential pest control revenue grew 17.6%, and termite and ancillary services revenue grew 15.4%. Foreign operations accounted for approximately 7% and 8% of total revenues during the third quarters of 2019 and 2018, respectively.

ROLLINS, INC. AND SUBSIDIARIES

Our commercial customers’ operations were most heavily impacted by the various governmental shelter-in-place mandates and their negative effect on small to medium size businesses. As a result, when comparing the second quarter of 2020 to the second quarter of 2019, the Company’s commercial pest control revenue decreased 6.0%. However, the Company’s believes the launch of its new VitalClean sanitation services helped some of its commercial customers reopen and protect their employees and customers. By contrast, demand for our residential pest control service offerings grew significantly during the second quarter of 2020. For example, mosquito sales grew more than 30% compared to the second quarter of 2019. The Company believes with many people working from or confined to their homes, the awareness of unwanted pests has helped contribute to our growth in residential service revenues. Comparing the second quarter of 2020 to the second quarter of 2019, residential pest control revenue grew 14.8%. Termite and ancillary services revenue grew 7.3%. Foreign operations accounted for approximately 6% and 7% of total revenues during the second quarter of 2020 and 2019, respectively.

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

Consolidated Net Revenues
(in thousands)
2019 2018 2017
First Quarter $ 429,069 $ 408,742 $ 375,247
Second Quarter 523,957 480,461 433,555
Third Quarter 556,466 487,739 450,442
Fourth Quarter — 444,623 414,713
Year ended December 31, $ 1,509,492 $ 1,821,565 $ 1,673,957

Consolidated Net Revenues
(in thousands)
	2020		2019		2018
First Quarter	$	487,901	$	429,069	$	408,742
Second Quarter		553,329		523,957		480,461
Third Quarter		—		556,467		487,739
Fourth Quarter		—		505,985		444,623
Year ended December 31,	$	1,041,230	$	2,015,478	$	1,821,565

Revenues are also impacted by the Company’s acquisitions. For the ~~third~~second quarters ~~ended September 30,~~of 2020, 2019, ~~2018,~~ and ~~2017,~~2018, acquisitions increased revenues by ~~$37.4~~$16.5 million, ~~$14.2~~$26.2 million, and ~~$10.1~~$23.4 million, respectively.

For the nine months ended September 30, 2019, 2018, and 2017, acquisitions increased revenues by $68.0 million, $55.4 million, and $16.2 million, respectively. The chart above does not highlight any one acquisition.

Cost of Services Provided

Cost of Services provided for the ~~third~~second quarter ended ~~September~~June 30, ~~2019~~2020 increased ~~$32.4~~$2.3 million, or ~~13.7%~~0.9%, to ~~$268.7~~$255.6 million, compared to ~~$236.3~~$253.3 million for the ~~third~~second quarter of the prior year. Gross Margin for the ~~third~~second quarter of ~~2019~~2020 was ~~51.7%~~53.8%, up ~~0.1~~2.1 percentage points from ~~51.6%~~51.7% for the ~~third~~second quarter of 2019. ~~The~~During the quarter, ~~experienced increases~~the Company’s margin improvement was driven by expense reductions in most expenses due to acquisitions as well as in professional services associated with automation initiatives, credit card fees from increased auto-pay percentages, and increased salaries. Service salaries, materials and supplies and fleet increased with production for the ~~period.~~following areas:

Furloughs and layoffs, which reduced service salaries and benefits as a percentage of revenues; and

Lower fuel prices and improved routing and scheduling efficiencies, which reduced fleet expenses.

Depreciation and Amortization

Depreciation and amortization expense for the ~~third~~second quarter ended ~~September~~June 30, ~~2019~~2020 increased ~~$4.8~~$1.8 million to ~~$21.7~~$21.9 million, an increase of ~~28.6%~~8.9% from the same period in the prior year. Depreciation increased ~~$1.7~~$1.0 million due to acquisitions and equipment purchases while amortization of intangible assets increased ~~$3.1~~$0.8 million due to the amortization of customer contracts from several acquisitions.

Sales, General and Administrative

Sales, General and Administrative Expenses for the ~~third~~second quarter ended ~~September~~June 30, ~~2019 increased $22.1~~2020 remained at 30.9% of revenues, increasing $9.4 million, or ~~15.2%~~5.8%, to ~~$167.2~~$171.3 million, compared to $161.9 million for the second quarter ended June 30, 2019. The Company controlled spending through the following:

Temporary top management salary reductions;

Furloughs and layoffs, which drove down administrative salaries and benefits as a percentage of revenues;

ROLLINS, INC. AND SUBSIDIARIES

Lower fuel prices reduced sales and administrative fleet expenses;

Elimination of other non-essential spending reduced meeting, travel and office supply expense;

Reduced acquisition activity compared to 2019 resulted in lower professional services expense; but

Offset by higher bad debt reserve adjustments, primarily from our commercial services.

Interest Expense, Net

Net interest expense for the second quarter ended June 30, 2020 was $1.5 million compared to $1.9 million for the same period last year. The change was driven primarily by the lower average debt balance in 2020 compared to the same quarter in 2019.

Income Taxes

The effective tax rate was 27.2% for the second quarter ended June 30, 2020 and 26.1% for the second quarter ended June 30, 2019. The increase in the effective tax rate for second quarter ended June 30, 2020 was primarily due to reductions in certain beneficial deductions.

SIX MONTHS ENDED JUNE 30, 2020 COMPARED TO SIX MONTHS ENDED JUNE 30, 2019

Revenue

Revenues for the six months ended June 30, 2020 increased $88.2 million or ~~30.0%~~9.3% to $1.041 billion compared to $953.0 million for the six months ended June 30, 2019. Growth occurred across all service lines. Approximately 5.7 percentage points of the 9.3% increase in revenues came from acquisitions, while growth in customers and pricing made up ~~0.3~~the remaining 3.6 percentage points.

During the six months ended June 30, 2020, commercial pest control revenue approximated 35% of the Company’s revenues, residential pest control approximated 44% of the Company’s revenues, and termite and ancillary service revenue approximated 20% of the Company’s revenues. Comparing the first six months of 2020 to the first six months of 2019, the Company’s commercial pest control revenue increased 0.6%, residential pest control revenue grew 16.5%, and termite and ancillary services revenue grew 11.7%. Foreign operations accounted for approximately 7% and 8% of total revenues during the first six months of 2020 and 2019, respectively.

Cost of Services Provided

Cost of Services provided for the six months ended June 30, 2020 increased $36.2 million, or 7.7%, to $506.8 million, compared to $470.6 million for the six months ended June 30, 2019. Gross Margin for the six months of 2020 was 51.3%, up 0.7 percentage points from ~~$145.1 million or 29.7% of revenues~~50.6% for the ~~third quarter~~six months of 2019. Margin improvement was driven by the following:

Furloughs and layoffs, which resulted in a reduction of service salaries as a percentage of revenues; and

Lower fuel prices and improved routing and scheduling efficiencies, which reduced fleet expenses.

Depreciation and Amortization

Depreciation and amortization expense for the six months ended ~~September~~June 30, ~~2018. The Company experienced increases~~2020 increased $6.7 million to $43.5 million, an increase of 18.2% from the same period in ~~most expenses~~the prior year. Depreciation increased $3.0 million due to acquisitions ~~as well as increases in sales compensation, enhanced 401(k) participation expenses, professional services~~ and ~~maintenance and repairs contract expenses.~~equipment purchases while amortization of intangible assets increased $3.7 million due to the amortization of customer contracts from several acquisitions.

ROLLINS, INC. AND SUBSIDIARIES

~~Pension Settlement Expense~~Sales, General and Administrative

Sales, General and Administrative Expenses for the six months ended June 30, 2020 remained at 31.6% of revenues, increasing $27.7 million, or 9.2%, to $329.1 million, compared to $301.4 million for the six months ended June 30, 2019. The Company ~~completed~~controlled spending through the ~~transfer of $198.3~~following:

Temporary top management salary reductions;

Furloughs and layoffs, which reduced administrative salaries and benefits as a percentage of revenues;

Lower fuel prices, which reduced sales and administrative fleet expenses;

Elimination of other non-essential spending reduced meeting expense, travel and office supply spend;

Reduced acquisition activity compared to 2019 resulted in lower professional services expense; but

Offset by higher bad debt reserve adjustments, primarily from our commercial services.

Interest Expense, Net

Net interest expense for the six months ended June 30, 2020 was $3.6 million ~~of its pension obligations through a full termination of its fully-funded pension plan during~~compared to $1.6 million for the third quarter ended September 30, 2019. Based on participant elections, the pension obligations were distributed through a combination of lump sum payments to participants, the purchase of a group annuity contract, and payments to the Pension Benefit Guaranty Corporation. With the completed funding of the plan payout settlements, the Company had approximately $31.8 million of pension assets remaining.same period last year. The remaining assets were the result of the funded status of the plan, higher take rate of lump sum payment election by participants and optimal pricing of the group annuity contract. The Company has evaluated the allowable opportunities for utilization of the excess pension assets including funding other employee benefits. The Company used $5.2 million of the $31.8 millionchange was driven from new financing borrowed in April 2019 to fund its 401(k) match obligation during the quarter ended September 30, 2019, and plans to continue funding future benefit plan obligations, with a possible reversion of any remaining pension assets to the Company per ERISA regulations. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life of the plan. Net of tax, the expense was $26.6 million.

acquisition growth.

Income Taxes

The effective tax rate was ~~4.5%~~25.4% for the ~~third quarter~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~25.9%~~24.1% for the ~~third quarter~~six months ended ~~September~~June 30, ~~2018.~~2019. The ~~decrease~~increase to the effective tax rate for ~~third quarter~~six months ended ~~September~~June 30, ~~2019~~2020 was primarily due to ~~the~~reductions in certain beneficial ~~tax adjustments for the pension settlement.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018~~

~~Revenue~~

Revenues for the nine months ended September 30, 2019 increased $132.6 million or 9.6% to $1.509 billion compared to $1.377 billion for the nine months ended September 30, 2018. Growth occurred across all service lines. Approximately 4.9 percentage points of the 9.6% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining 4.7 percentage points.

During the nine months ended September 30, 2019, commercial pest control revenue approximated 37% of the Company’s revenues, residential pest control approximated 43% of the Company’s revenues, and termite and ancillary service revenue approximated 18% of the Company’s revenues. Comparing the first nine months of 2019 to the first nine months of 2018, the Company’s commercial pest control revenue increased 7.3%, residential pest control revenue grew 11.7%, and termite and ancillary services revenue grew 9.9%. Foreign operations accounted for approximately 8% of total revenues during the first nine months of both 2019 and 2018.

~~Cost of Services Provided~~

Cost of Services provided for the nine months ended September 30, 2019 increased $66.1 million or 9.8% to $739.3 million, compared to $637.2 million for the nine months ended September 30, 2018. Gross Margin for the first nine months of 2019 was 51.0%, down 0.1 percentage points from 51.1% prior year. During the first nine months of 2019 the Company experienced increases in most expenses due to acquisitions as well as in administrative salaries due to amortization of restricted shares from the 2018 special grant to long-term employees 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 nine months ended September 30, 2019 increased $8.4 million to $58.5 million, an increase of 16.7%. Depreciation increased $3.6 million due to acquisitions and equipment purchases while amortization of intangible assets increased $4.8 million due to the amortization of customer contracts from several acquisitions.deductions.

ROLLINS, INC. AND SUBSIDIARIES

~~Sales, General and Administrative~~

Sales, General and Administrative Expenses for the first nine months ended September 30, 2019 increased $53.6 million or 12.9%, to $468.6 million or 31.0% of revenues, up 0.9 percentage points from $414.9 million or 30.1% of revenues for the nine months ended September 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, enhanced 401(k) participation expenses, sales compensation, acquisition-related professional services and maintenance and repairs contract expenses.

~~Pension Settlement Expense~~

As described above, the Company completed the transfer of $198.3 million of its pension obligations through a full termination of its fully-funded pension plan during the first nine months ended September 30, 2019. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life of the plan. Net of tax, the expense was $26.6 million.

~~Income Taxes~~

The effective tax rate was 19.3% for the nine months ended September 30, 2019 and 24.5% for the nine months ended September 30, 2018. The decrease to the effective tax rate for nine months ended September 30, 2019 was primarily due to the beneficial tax adjustments for the pension settlement.

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 facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future. The Company’s operating activities generated net cash of ~~$230.3~~$234.8 million and ~~$213.3~~$142.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020 and ~~2018,~~2019, respectively. The Company made no contributions to its sole remaining defined benefit retirement ~~plans~~plan during the ~~nine~~six months ~~ending September~~ended June 30, 2020 and 2019 and ~~2018 as the plans had remained adequately funded through the settlement that occurred this quarter. With the completed funding of the plan payout settlements, the Company~~ had approximately ~~$25.9~~$9.3 million of ~~pension~~benefit plan assets ~~remaining.~~remaining as of June 30, 2020.

The Company invested approximately ~~$18.7~~$12.4 million in capital expenditures, exclusive of expenditures for business acquisitions, during the ~~nine~~six months ended ~~September~~on June 30, ~~2019,~~2020, compared to ~~$19.6~~$13.4 million during the same period in ~~2018, and expects~~2019. Non-essential capital expenditures for 2020 have been cancelled in response to ~~invest approximately $4.7 million for~~ the ~~remainder of 2019.~~pandemic crisis. Capital expenditures for the ~~first nine~~six months ended on June 30, 2020 consisted primarily of the purchase of operating equipment replacements and ~~technology related~~technology-related projects. During the ~~nine~~six months ended ~~September~~on June 30, ~~2019,~~2020, the Company made expenditures for acquisitions totaling ~~$431.2~~$56.0 million, compared to ~~$71.8~~$410.1 million during the same period in ~~2018.~~2019. A total of ~~$103.1~~$65.5 million was paid in cash dividends ~~($0.315~~(an aggregate of $0.20 per share), during the six month period ended June 30, 2020, compared to ~~$91.7~~$68.7 million ~~or ($0.28~~paid in cash dividends (an aggregate of $0.21 per share) during the same period in ~~2018.~~ 2019.

On ~~October 23, 2019,~~July 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 ~~plus a special year-end dividend of $0.05 per share both~~ payable ~~December~~September 10, ~~2019~~2020 to stockholders of record at the close of business ~~November 11, 2019~~August 10, 2020, to be funded with existing cash 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 ~~nine~~six months of ~~2019~~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 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 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 ~~$9.9~~$8.1 million and ~~$9.5~~$9.8 million of common stock for the first ~~nine~~six months ended ~~September~~on June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, from employees for the payment of taxes on vesting restricted shares. 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 balance sheet as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 includes short-term unearned revenues of ~~$132.9~~$139.5 million and ~~$116.0.~~$122.8 million, respectively, representing approximately 7%6% of our annual ~~revenue.~~revenue as of each balance sheet date. 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 total cash and cash equivalents of ~~$104.4~~$134.8 million at ~~September~~June 30, ~~2019~~2020 is held at various banking institutions. Approximately ~~$71.0~~$73.2 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 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 foreign subsidiaries is not a part of the 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 facility 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.

ROLLINS, INC. AND SUBSIDIARIES

Litigation

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

Critical Accounting Policies

There have been no changes to the 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, accounting estimates and assumptions and/or liquidity may be impacted by future developments related to the COVID-19 pandemic; the Company’s expectation that the adverse impact of COVID-19 on its commercial pest control business will 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 belief that with many people working from or confined to their homes, the awareness of unwanted pests has helped contribute to its growth in residential service revenues; 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 a level of impairment for intangible assets; the effect of the future adoption of recent accounting pronouncements ~~and guidance~~ on the Company’s financial statements; the Company’s suspension of 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 $100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility remains effective; statements regarding management’s expectation regarding the effect of the ultimate resolution and guidance of pending claims, proceedings or litigation on the Company’s financial position, results of operation and liquidity; the Company’s reasonable certainty that it will exercise the renewal options on its 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 allocation of the purchase price is subject to material revision in its future financial statements; 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’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 credit facility and $250.0 million 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 ~~2019; our~~2020; the Company’s expectation that ~~the Company~~it will continue to pay cash dividends to common stockholders, subject to earnings and financial condition of the Company; ~~our~~the Company’s 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~~Company’s foreign subsidiaries is not a part of the 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 that it will ~~invest $4.7 million in~~forego non-essential capital ~~expenditure~~expenditures for the remainder of ~~2019;~~2020; the Company’s expectation tothat it will maintain compliance with debt covenants and the Company’s belief that foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward; the Company’s belief that 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 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 second 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, accounting assumptions and estimates 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 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 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 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 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 ~~September~~June 30, ~~2019,~~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 $175.0 million revolving credit facility and ~~$250~~$250.0 million term loan facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See Note 13 to Part I, Item 1 for a discussion of the 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 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 ~~September~~June 30, ~~2019~~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 quarterly evaluation identified no changes in our internal control over financial reporting during the ~~third~~second quarter that materially affected, or are reasonably likely to materially affect our internal control over financial reporting. As of ~~September~~June 30, ~~2019,~~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

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

Item 1A.

Risk Factors

~~See~~In light of recent developments relating to the ~~Company’s~~COVID-19 global pandemic, the Company is supplementing the risk factors previously disclosed in ~~the Company’s~~Part I., Item 1A. 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, and Part II, Item 1A. of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the Securities and Exchange Commission on April 30, 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. There have been no other material changes from the risk factors previously disclosed.

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. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known. 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 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 continue to offset revenue declines with cost savings through expense-related initiatives, human capital management initiatives or otherwise. As a result of these observed and evolving developments, our business, operations and financial results have the potential to continue to be negatively affected in the future. 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.

ROLLINS, INC. AND SUBSIDIARIES

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 ~~third~~second quarter ended ~~September~~June 30, ~~2019~~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
July 1 to 30, 2019 — $ — — 7,610,416
August 1 to 31, 2019 2,847 35.77 — 7,610,416
September 1 to 30, 2019 — — — 7,610,416
Total 2,847 $ 35.77 — 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
April 1 to 30, 2020		—	$	—		—		7,610,416
May 1 to 31, 2020		—		—		—		7,610,416
June 1 to 30, 2020		1,371		39.25		—		7,610,416
Total		1,371	$	39.25		—		7,610,416

(1)

Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts: ~~July 2019:~~April 2020: 0; ~~August 2019: 2,847;~~May 2020: 0 and ~~September 2019: 0.~~June 2020: 1,371.

(2)

The Company has a share repurchase plan, adopted in 2012, to repurchase up to 11.25 million shares of the 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.


		(31.1)		Certification of Chief Executive ~~Officepror~~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.

			(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: ~~October 25, 2019~~July 31, 2020	By:	/s/ Gary W. Rollins
		Gary W. Rollins
		Vice Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~October 25, 2019~~July 31, 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 June 30, 2018		327,326		$	327,326		$	78,212		$	(54,026	)	$	344,299		$	695,811
Net Income		—			—			—			—			66,628			66,628
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			(611	)		—			(611	)
Cash dividends		—			—			—			—			(30,535	)		(30,535	)
Stock compensation		(4	)		(4	)		3,662			—			2			3,660
Employee stock buybacks		(4	)		(4	)		(192	)		—			1			(195	)
Balance at September 30, 2018		327,318		$	327,318		$	81,682		$	(54,637	)	$	380,395		$	734,758

	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		—			—			—			—			180,695			180,695
Other comprehensive income, net of tax
Foreign currency translation adjustments		—			—			—			(8,681	)		—			(8,681	)
Cash dividends		—			—			—			—			(91,677	)		(91,677	)
Stock compensation		613			613			9,621			—			(204	)		10,030
Employee stock buybacks		(283	)		(283	)		(9,344	)		—			94			(9,533	)
Balance at September 30, 2018		327,318		$	327,318		$	81,682		$	(54,637	)	$	380,395		$	734,758

	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 June 30, 2019		327,486		$	327,486		$	82,960		$	(68,508	)	$	410,326		$	752,264
Net Income		—			—			—			—			44,061			44,061
Other comprehensive income, net of tax
Pension settlement		—			—			—			45,990			—			45,990
Change in derivatives		—			—			—			(118	)		—			(118	)
Foreign currency translation adjustments		—			—			—			(4,110	)		—			(4,110	)
Cash dividends		—			—			—			—			(34,394	)		(34,394	)
Stock compensation		(42	)		(42	)		3,347			—			—			3,305
Employee stock buybacks		(2	)		(2	)		(99	)		—			—			(101	)
Balance at September 30, 2019		327,442		$	327,442		$	86,208		$	(26,746	)	$	419,993		$	806,897

	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		—			—			—			—			152,582			152,582
Impact of adoption of ASC 842		—			—			—			—			212			212
Other comprehensive income, net of tax
Pension settlement		—			—			—			45,990			—			45,990
Change in derivatives		—			—			—			(375	)		—			(375	)
Foreign currency translation adjustments		—			—			—			(1,283	)		—			(1,283	)
Cash dividends		—			—			—			—			(103,093	)		(103,093	)
Stock compensation		395			395			10,496			—			—			10,891
Employee stock buybacks		(261	)		(261	)		(9,674	)		—			—			(9,935	)
Balance at September 30, 2019		327,442		$	327,442		$	86,208		$	(26,746	)	$	419,993		$	806,897


	Recurring Fair Value Measurements
	Quoted Prices in Active
	Markets for Identical				Significant Other				Significant Unobservable
	Assets and Liabilities				Observable Inputs				Inputs
	at September 30,				at September 30,				at September 30,				Total Fair Value
	(Level 1)				(Level 2)				(Level 3)				at September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Liabilities
Acquisition earnouts	$	—	$	—	$	—	$	—	$	21,030	$	15,640	$	21,030	$	15,640

For the period ended	September 30,			December 31			September 30,
(in thousands)	2019			2018			2018
Balance at beginning of year	$	127,075		$	117,614		$	117,614
Deferral of unearned revenue		141,867			166,053			134,527
Recognition of unearned revenue		(122,465	)		(156,592	)		(117,297	)
Balance at end of period	$	146,477		$	127,075		$	134,844

	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	)
Other long term liabilities		(9,352	)
Accrued insurance, less current portion		(1,870	)
Contingent Consideration, long-term		(5,923	)
	$	395,269

Intangible Asset	Carrying Value		Useful Life in Years
Customer contracts	$	283,830		3-12
Trademarks and tradenames		102,657		N/A-20
Non-compete agreements		4,877		3-20
Patents		1,613		3-15
Other assets		2,291		10
Internet domains		2,227		N/A
Total customer contracts and other intangible assets	$	397,495

	Number of		Notional
Interest Rate Derivative	Instruments		Amount
Interest Rate Floors		1	$	90,000

Derivatives in Subtopic
815-20 Hedging	Amount of Gain or (Loss)
Relationships	Recognized in OCI on Derivative
	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	2019			2018		2019			2018
Interest Rate Products	$	(118	)	$	—	$	(375	)	$	—
Total	$	(118	)	$	—	$	(375	)	$	—

	Tabular Disclosure of Fair Values of Derivative Instruments
	Derivative Assets				Derivative Liabilities
			Fair Value as of:
Derivatives Not Designated as Hedging Instruments	September 30, 2019		December 31, 2018		September 30, 2019			December 31, 2018
FX Forward Contracts						(375)
Balance Sheet Location	Other Current Assets		Other Current Assets		Other Current Liabilities			Other Current Liabilities
Sell AUD/Buy USD Fwd Contract	$	3	$	18	$	(1	)	$	(1	)
Sell CAD/Buy USD Fwd Contract		39		121		(32	)		(4	)
Total	$	42	$	139	$	(33	)	$	(5	)

		Amount of Gain or (Loss) Recognized in Income
Derivatives Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income	Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018
Swap	Other inc/(exp)	$	77	$	—	$	78	$	—
Total		$	77	$	—	$	78	$	—

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		556,466		487,739		450,442
Fourth Quarter		—		444,623		414,713
Year ended December 31,	$	1,509,492	$	1,821,565	$	1,673,957