UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~__________________________~~________________

FORM 10-Q

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

For the quarterly period ended ~~March 31,~~June 30, 2020

Commission File Number 1-4422

ROLLINS, INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

30324

(Zip Code)

(404) 888-2000

(Registrant’s telephone number, including area code)

~~__________________________~~________________

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

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

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

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

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

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

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

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

Yes

Rollins, Inc. had ~~327,767,449~~327,758,819 shares of its $1 par value Common Stock outstanding as of ~~April 17,~~July 16, 2020.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF ~~MARCH 31,~~JUNE 30, 2020, AND DECEMBER 31, 2019

(in thousands except share data)

	March 31,			December 31,			June 30,			December 31,
	2020			2019			2020			2019
	(Unaudited)						(Unaudited)
ASSETS
Cash and cash equivalents	$	92,582		$	94,276		$	134,829		$	94,276
Trade receivables, net of allowance for doubtful accounts of $11,861 and $16,699, respectively		123,166			122,766
Financed receivables, short-term, net of allowance for doubtful accounts of $1,805 and $1,675, respectively		22,209			22,267
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		21,527			19,476			34,064			19,476
Other current assets		45,346			51,002			41,626			51,002
Total current assets		304,830			309,787			363,101			309,787
Equipment and property, net		194,854			195,533			191,141			195,533
Goodwill		596,067			572,847			602,310			572,847
Customer contracts, net		279,361			273,720			275,782			273,720
Trademarks & tradenames, net		104,863			102,539			104,760			102,539
Other intangible assets, net		10,314			10,525			10,176			10,525
Operating lease, right-of-use assets		207,975			200,727			214,874			200,727
Financed receivables, long-term, net of allowance for doubtful accounts of $1,248 and $1,284 respectively		33,952			30,792
Financed receivables, long-term, net of allowance for doubtful accounts of $1,204 and $1,284 respectively								38,281			30,792
Benefit plan assets		15,639			21,565			9,312			21,565
Deferred income taxes		1,961			2,180			2,105			2,180
Other assets		21,663			24,161			24,540			24,161
Total assets	$	1,771,479		$	1,744,376		$	1,836,382		$	1,744,376
LIABILITIES
Accounts payable	$	36,844			35,234		$	48,037		$	35,234
Accrued insurance		30,739			30,441			31,230			30,441
Accrued compensation and related liabilities		68,289			81,943			87,050			81,943
Unearned revenues		129,352			122,825			139,541			122,825
Operating lease liabilities - current		69,094			66,117			71,494			66,117
Current portion of long-term debt		12,500			12,500			12,500			12,500
Other current liabilities		71,050			60,975			88,321			60,975
Total current liabilities		417,868			410,035			478,173			410,035
Accrued insurance, less current portion		34,921			34,920			35,520			34,920
Operating lease liabilities, less current portion		140,152			135,651			144,846			135,651
Long-term debt		307,300			279,000			242,500			279,000
Deferred income tax liability		14,257			9,927			14,482			9,927
Long-term accrued liabilities		56,610			59,093			58,031			59,093
Total liabilities		971,108			928,626			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 and 375,000,000 shares authorized, 327,767,449 and 327,430,846 shares issued and outstanding, respectively		327,767			327,431
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		84,865			89,413			88,640			89,413
Accumulated other comprehensive loss		(38,711	)		(21,109	)		(29,163	)		(21,109	)
Retained earnings		426,450			420,015			475,594			420,015
Total stockholders’ equity		800,371			815,750			862,830			815,750
Total liabilities and stockholders’ equity	$	1,771,479		$	1,744,376		$	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 SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2020 AND 2019

(in thousands except per share data)

(unaudited)

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


	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 SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2020 AND 2019

(in thousands)

(unaudited)

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


	(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 SIX MONTHS ENDED ~~MARCH 31,~~JUNE 30, 2020 AND 2019

(in thousands)

(unaudited)

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

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


	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

CONSOLIDATED STATEMENTS OF STATEMENT OF CASH FLOWS

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

(in thousands)

(unaudited)


	Three Months Ended
	March 31,						Six Months Ended June 30,
	2020			2019			2020			2019
OPERATING ACTIVITIES
Net income	$	43,268		$	44,226		$	118,626		$	108,521
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,597			16,683			43,522			36,815
Provision for deferred income taxes		2,999			3,327			3,055			4,763
Provision for bad debts		2,288			1,682			9,769			4,925
Stock-based compensation expense		3,819			3,889			7,640			7,586
Other, net		(615	)		(591	)		(1,078	)		(900	)
Changes in operating assets and liabilities		18,607			(7,794	)		53,238			(19,534	)
Net cash provided by operating activities		91,963			61,422			234,772			142,176
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(47,586	)		(7,041	)		(56,030	)		(410,067	)
Purchases of equipment and property		(6,674	)		(6,481	)		(12,441	)		(13,436	)
Proceeds from sales of franchises		267			395			285			486
Other		941			569			1,820			1,097
Net cash used in investing activities		(53,052	)		(12,558	)		(66,366	)		(421,920	)
FINANCING ACTIVITIES
Payment of contingent consideration		(2,040	)		(2,807	)		(7,862	)		(5,233	)
Repayment of term loan		(35,700	)		—			(7,000	)		(3,125	)
Repayment on revolving commitment								(97,500	)		(17,000	)
Borrowings on term loan								—			250,000
Borrowings on revolving commitment		64,000			—			68,000			118,000
Cash paid for common stock purchased		(8,031	)		(9,121	)		(8,085	)		(9,834	)
Dividends paid		(39,317	)		(34,332	)		(65,531	)		(68,699	)
Net cash used in financing activities		(21,088	)		(46,260	)
Net cash provided by/(used in) financing activities								(117,978	)		264,109
Effect of exchange rate changes on cash		(19,517	)		(1,482	)		(9,875	)		(1,384	)
Net (decrease)/increase in cash and cash equivalents		(1,694	)		1,122
Net increase/(decrease) in cash and cash equivalents								40,553			(17,019	)
Cash and cash equivalents at beginning of period		94,276			115,485			94,276			115,485
Cash and cash equivalents at end of period	$	92,582		$	116,607		$	134,829		$	98,466
Supplemental disclosure of cash flow information:
Non-cash additions to operating lease right-of-use assets	$	27,894			6,920		$	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

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, 2019 other than updates related to Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (ASC 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 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 compensation, inventory adjustments, discounts and volume incentives earned, among others.

~~The~~In March 2020, the World Health Organization declared the outbreak of COVID-19 a global ~~response~~pandemic, which continues to spread throughout the ~~COVID-19 pandemic~~U.S. and the world. This has ~~triggered an economic downturn.~~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 ~~has been~~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, and it was determined that there were some adverse impacts on the Company’s results of the first quarter ended March 31, 2020. The Company’s business, results of operations and financial condition will be impacted by future developments related to the COVID-19 pandemic, but the magnitude of such impacts cannot be determined at this time.

statements. In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made. These adjustments are of a normal recurring nature, but complicated by the uncertainty surrounding the global economic impact of the COVID-19 pandemic. ~~We began to experience this impact in mid-March 2020 and expect it to persist and be more significant in the second quarter of 2020.~~ The results of operations for the ~~three~~six months ended ~~March 31,~~June 30, 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 one reportable segment, its pest and termite control business. The Company’s results of operations and its financial condition are not reliant upon any single customer, a few customers, or the Company’s foreign operations.

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

NOTE 2.

RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting standards

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 Company adopted ASU 2016-13 effective January1, 2020 and recognized the decrease in the allowance for doubtful accounts, net of tax, as a $2.5 million increase to beginning retained earnings.

ROLLINS, INC. AND SUBSIDIARIES

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

~~ROLLINS, INC. AND SUBSIDIARIES~~

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

The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current and economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written-off against the allowance for doubtful accounts when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. Below is a ~~rollforward~~roll forward of the Company’s allowance for credit losses for the ~~three~~six months ended ~~March 31,~~June 30, 2020.

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


	Allowance for Doubtful Accounts
	Trade Receivables			Financed Receivables			Total Receivables			Trade Receivables			Financed Receivables			Total Receivables
Balance at January 1, 2020	$	16,699		$	2,959		$	19,658		$	16,699		$	2,959		$	19,658
Adoption of ASC 326		(3,330	)		—			(3,330	)		(3,330	)		—			(3,330	)
Adjusted balance at January 1, 2020		13,369			2,959			16,328			13,369			2,959			16,328
Provision for expected credit losses		1,553			734			2,287			8,480			1,288			9,768
Write-offs charged against the allowance		(3,779	)		(640	)		(4,419	)		(8,233	)		(1,233	)		(9,466	)
Recoveries collected		908			—			908			2,729			—			2,729
Currency conversion		(190	)		—			(190	)
Balance at March 31, 2020	$	11,861		$	3,053		$	14,914
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 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 would record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). The Company adopted ASU 2017-04 effective January 1, 2020. The Company does not expect the adoption of this standard to have a material impact on its future consolidated financial statements.

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

ROLLINS, INC. AND SUBSIDIARIES

Recently issued accounting standards to be adopted in 2021 or later

In December, 2019, the FASB issued ASU No. 2019-12 Income Taxes (topic 740): Simplifying the Accounting for Income Taxes. The standard eliminates the need for an organization to analyze whether the following apply in a given period (1) exception to the incremental approach for intraperiod tax allocation (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (3) exceptions in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (1) franchise taxes that are partially based on income, (2) transactions with a government that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that are not subject to tax, and (4) enacted changes in tax laws in interim periods. The standard in this update is effective for the Company’s financial statements issued for fiscal years beginning in 2021. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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				(In thousands)
	March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
United States	$	452,346	$	394,000	$	517,576	$	485,170	$	969,922	$	879,170
Other countries		35,555		35,069		35,753		38,787		71,308		73,856
Total Revenues	$	487,901	$	429,069	$	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				(In thousands)
	March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
Residential revenue	$	204,657	$	172,507	$	257,921	$	224,682	$	462,578	$	397,190
Commercial revenue		183,315		169,671		179,900		191,456		363,215		361,127
Termite completions, bait monitoring, & renewals		94,227		80,250		109,817		102,352		204,044		182,601
Franchise revenues		3,417		3,261		3,521		3,442		6,938		6,703
Other revenues		2,285		3,380		2,170		2,025		4,455		5,405
Total Revenues	$	487,901	$	429,069	$	553,329	$	523,957	$	1,041,230	$	953,026

ROLLINS, INC. AND SUBSIDIARIES

NOTE 4.

EARNINGS PER SHARE

The Company follows ASC 260, Earnings Per Share (ASC 260) that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to participating common stockholders by the weighted average number of participating common shares outstanding for the period.

~~ROLLINS, INC. AND SUBSIDIARIES~~

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

	Three Months Ended
	March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2020		2019
Basic and diluted earnings per share
Common stock	$	0.13	$	0.14	$	0.23	$	0.20	$	0.36	$	0.33
Restricted shares of common stock	$	0.12	$	0.12	$	0.22	$	0.18	$	0.35	$	0.30

NOTE 5.

CONTINGENCIES

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 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.

NOTE 6.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their respective fair values.

At ~~March 31,~~June 30, 2020 and 2019, the Company had ~~$51.3~~$47.1 million and ~~$29.0~~$54.7 million of acquisition holdback and earnout liabilities with the former owners of acquired companies. The earnout liabilities were discounted to reflect the expected probability of payout, and both earnout and holdback liabilities were discounted to their net present value on the Company’s books and are considered level 3 liabilities. The table below presents a summary of the changes in fair value for these liabilities.

T~~he table below presents a summary of the changes in fair value for these liabilities.~~


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020			2019			2020			2019			2020			2019
Beginning	$	49,131		$	30,926		$	51,328		$	28,999		$	49,131		$	30,926
New acquisitions and revaluations		4,489			1,557			1,054			27,893			5,543			29,450
Payouts		(2,040	)		(2,807	)		(5,822	)		(2,426	)		(7,862	)		(5,233	)
Interest on outstanding contingencies		583			212			565			510			1,148			722
Charge offset, forfeit and other		(835	)		(889	)		(40	)		(291	)		(875	)		(1,180	)
Ending Balance	$	51,328		$	28,999		$	47,085		$	54,685		$	47,085		$	54,685

ROLLINS, INC. AND SUBSIDIARIES

NOTE 7.

UNEARNED REVENUE

~~Revenue allocated~~The Company records unearned revenue when we have either received payment or contractually have the right to ~~remaining~~bill for services in advance of the services or performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both unearned revenue and revenue that will be invoiced and recognized in future periods.being performed. Deferred revenue recognized in the three and six months ended ~~March 31,~~June 30, 2020 and 2019 were ~~$42.7~~$43.2 million and ~~$40.0~~$40.5 million, respectively and $85.9 million and $80.5 million, respectively. Changes in unearned revenue were as follows:

C~~hanges in unearned revenue were as follows:~~


	Three Months Ended March 31,
For the period ended							June 30,			December 31,			June 30,
(in thousands)	2020			2019			2020			2019			2019
Balance at beginning of year	$	136,507		$	127,075		$	136,507		$	127,075		$	127,075
Deferral of unearned revenue		49,552			47,737			105,928			174,404			100,188
Recognition of unearned revenue		(42,707	)		(39,958	)		(85,936	)		(164,972	)		(80,496	)
Balance at end of period	$	143,352		$	134,854		$	156,499		$	136,507		$	146,767

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

At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had long-term unearned revenue of $~~14.0~~17.0 million and $13.7 million, respectively. Unearned short-term revenue is recognized over the next 12-month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2029.

NOTE 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 ~~March 31,~~June 30, 2020 and December 31, 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 sole discretion. It is reasonably certain that the Company will exercise the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants.

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

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

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

ROLLINS, INC. AND SUBSIDIARIES

(in thousands)
Lease Classification	Financial Statement Classification	Six Months Ended June 30, 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 options at ~~March 31,~~June 30, 2020 were as follows:

(in thousands)	Operating Leases		Operating Leases
2020 (excluding the three months ended March 31, 2020)	$	58,250
2020 (excluding the six months ended June 30, 2020)			$	40,717
2021		65,533		71,763
2022		47,137		53,682
2023		27,744		33,800
2024		11,624		14,063
2025		7,382		7,913
Thereafter		10,723		11,987
Total Future Minimum Lease Payments		228,393	$	233,925
Less: Amount representing interest		19,147	$	17,585
Total future minimum lease payments, net of interest	$	209,246	$	216,340

Total future minimum lease payments for operating leases, including the amount representing interest, are comprised of $~~96.8~~95.0 million for building leases and $~~131.6~~138.9 million for vehicle leases. As of ~~March 31,~~June 30, 2020, the Company had no additional future obligations for leases that had not yet commenced.

~~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.~~

ROLLINS, INC. AND SUBSIDIARIES

NOTE 9.

DEBT

The Company entered into a 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 terms commencing on April 29, 2019. In addition, the Credit Agreement has provisions to extend each term beyond the Revolving Commitment termination date as well as optional prepayment rights at any time and from time to time to prepay any borrowing, in whole or in part, without premium or penalty. As of ~~March 31,~~June 30, 2020, the Revolving Commitment had outstanding borrowings of $~~133.0~~72.0 million and the Term Loan had outstanding borrowings of $~~186.8~~183.0 million. As of December 31, 2019, the Revolving Commitment had outstanding borrowings of $101.5 million and the Term Loan had outstanding borrowings of $190.0 million. The Credit Agreement includes a debt covenant that requires the Company’s leverage ratio to be no greater than 3.00:1.00. The Leverage Ratio is calculated as of the last day of the fiscal quarter most recently ~~ended.~~ended. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance throughout 2020.

NOTE 10.

STOCKHOLDERS’ EQUITY

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, the Company paid ~~$39.3~~$65.5 million, or $~~0.12~~0.20 per share, in cash dividends compared to ~~$34.3~~$68.7 million, or ~~$0.105~~$0.21 per share, during the same period in 2019.

~~The~~During the second quarter ended June 30, 2020 and during the same period in 2019 the Company did not repurchase shares on the open ~~market during either of the first quarters ended March 31, 2020 or 2019.~~market.

~~ROLLINS, INC. AND SUBSIDIARIES~~

The Company repurchases shares from employees for the payment of their taxes on restricted shares that have vested. The Company repurchased $~~8.0~~0.1 million and $~~9.1~~0.7 million for the ~~quarters~~quarter ended ~~March 31,~~June 30, 2020 and 2019, respectively and $8.1 million and $9.8 million of common stock during the six month period ended June 30, 2020 and 2019, respectively.

As more fully discussed in Note 17 of the Company’s notes to the consolidated financial statements in its 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 Employee Stock Incentive Plans. The Company issues new shares from its authorized but unissued share pool. At ~~March 31,~~June 30, 2020, approximately 4.9 million shares of the Company’s common stock were reserved for issuance.

Time Lapse Restricted Shares and Restricted Stock Units

The following table summarizes the components of the Company’s 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
March 31,
(in thousands) 2020 2019
Time lapse restricted stock:
Pre-tax compensation expense $ 3,819 $ 3,889
Tax benefit (837 ) (821 )
Restricted stock expense, net of tax $ 2,982 $ 3,068

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

						Number of Shares			Average Grant- Date Fair Value
	Number of Shares			Average Grant- Date Fair Value
Unvested Restricted Stock at December 31, 2019		2,310		$	25.84		2,310		$	25.84
Forfeited		(16	)		24.28		(24	)		24.22
Vested		(626	)		19.76		(627	)		19.46
Granted		572			36.73		573			36.73
Unvested Restricted Stock at March 31, 2020		2,240		$	30.42
Unvested Restricted Stock at June 30, 2020							2,232		$	30.44

At ~~March 31,~~June 30, 2020 and December 31, 2019, the Company had $~~58.1~~54.1 million and $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 ~~4.4~~4.2 years and 4.0 years, respectively.

NOTE 11.

PENSION AND POST RETIREMENT BENEFIT PLAN

~~During~~In September 2019, the Company settled its fully-funded pension plan. At December 31, 2019, $21.6 million of pension assets remained available to fund other employee benefits. The Company used ~~$5.9~~$6.3 million and $12.3 million to fund its 401(k)-match obligation during the quarter and sixth months ended ~~March 31,~~June 30, 2020, ~~and~~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. As of ~~March 31,~~June 30, 2020, the Company had approximately $~~15.6~~9.3 million remaining of benefit plan assets.

~~ROLLINS, INC. AND SUBSIDIARIES~~

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


	Three Months Ended March 31,						Three Months Ended June 30,						Six Month Ended June 30,
(in thousands)	2020			2019			2020			2019			2020			2019
Interest and service cost	$	25		$	924		$	28		$	1,762		$	53		$	3,524
Expected return on plan assets		(35	)		(30	)		(24	)		(2,640	)		(59	)		(5,280	)
Amortization of net loss		25			892			25			878			50			1,756
Net periodic benefit	$	15		$	1,786
Net periodic loss							$	29		$	—		$	44		$	—

During the ~~three~~six months ended ~~March 31,~~June 30, 2020, and the same period in 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, 2019.

ROLLINS, INC. AND SUBSIDIARIES

NOTE 12.

BUSINESS COMBINATIONS

The Company made 713 acquisitions during the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2020, and 30 acquisitions for the year ended December 31, 2019, some of which have been disclosed on various press releases and related Current Reports on Form ~~8- K.~~8-K. For the ~~seven~~13 acquisitions so far in 2020, 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):

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

	March 31, 2020			June 30, 2020
Accounts receivable, net	$	1,556		$	1,835
Materials and supplies		103
Materials & supplies					192
Equipment and property		2,850			3,446
Goodwill		26,505			29,080
Customer contracts		22,027			27,968
Other intangible assets		3,029			3,094
Other assets and liabilities, net					4,003
Current liabilities		(6,827	)		(7,906	)
Other assets and liabilities, net		2,987
Total consideration paid	$	52,230
Total purchase price				$	61,712
Less: Contingent consideration liability		(4,644	)		(5,682	)
Total cash purchase price	$	47,586		$	56,030

Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. For the ~~three-month~~ period ~~ending March 31,~~ended June 30, 2020, ~~$26.5~~$29.1 million of goodwill was added related to the ~~seven~~13 acquisitions noted above. The cumulative carrying amount of goodwill was ~~$596.1~~$602.3 million and $572.8 million at ~~March 31,~~June 30, 2020 and December 31, 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 $~~53.9~~57.5 million at ~~March 31,~~June 30, 2020 and $55.8 million at December 31, 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 $~~279.4~~ 275.8million and $273.7million at ~~March 31,~~June 30, 2020, and December 31, 2019, respectively. The carrying amount of trademarks and tradenames was $~~104.9~~ 104.8million and $102.5million at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The carrying amount of other intangible assets was $~~10.3~~ 10.2 million and $10.5million at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The carrying amount of customer contracts in foreign countries was $~~32.9~~ 33.5~~million and $33.5~~ million at ~~March 31,~~both June 30, 2020 and December 31, ~~2019, respectively.~~2019. The carrying amount of trademarks and tradenames in foreign countries was ~~$3.1~~$3.1 million and $3.4million at ~~March 31,~~June 30, 2020 and December 31, 2019, respectively. The carrying amount of other intangible assets in foreign countries was $1.0million and $1.2million at ~~March 31,~~June 30, 2020 and December 31, 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 ~~March 31,~~June 30, 2020 (in thousands):

Intangible Asset	Carrying Value		Useful Life in Years		Carrying Value		Useful Life in Years
Customer contracts	$	279,361		3-12	$	275,782		3-12
Trademarks and tradenames		104,863		N/A-20		104,760		N/A - 20
Non-compete agreements		4,505		3-20		4,337		3-20
Patents		1,461		3-15		1,458		3-15
Other assets		2,121		10		2,154		10
Internet domains		2,227		N/A		2,227		N/A
Total customer contracts and other intangible assets	$	394,538			$	390,718

ROLLINS, INC. AND SUBSIDIARIES

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 our international business operations and global economic conditions. The Company enters into certain derivative financial instruments to lock in certain interest rates, as well as to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate swap arrangements to manage or hedge its interest rate risk. Notwithstanding the terms of the swaps, the Company is ultimately obligated for all amounts due and payable under the Revolving Commitment and the Term Loan (“Credit Facility”). The Company does not use such instruments for speculative or trading purposes.

On June 19, 2019, the Company entered into a floating-to-fixed interest rate swap for an aggregate notional amount of ~~$80.0~~$100.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility. The Company designated the swap as a cash flow hedge. The swap requires us to pay a fixed rate of 1.94% per annum on the notional amount. The cash flows from the swap began June 30, 2019 and ends on December 31, 2021. As of December 31, 2019, $0.3 million had been recorded as an Accumulated Loss in Other Comprehensive Income (“AOCI”). An additional loss of ~~$0.7~~$0.6 million was recorded in AOCI in the ~~three~~six months ~~ending March 31,~~ended June 30, 2020. Realized gains and losses in connection with each required interest payment are reclassified from AOCI to interest expense during the period of the cash flows. During the ~~first three~~quarter and six months ~~as of March 31,~~ended June 30, 2020, ~~$0.1 million was recorded as interest income to offset~~ the ~~floating rate~~Company reclassified into interest expense ~~on our Credit Facility.~~$0.2 million and $0.3 million, respectively. The fair value of the Company’s interest rate swaps was recorded as ~~$0.8~~$0.7 million in Other Current Liabilities and ~~$0.2~~$0.1 million in Long-Term Liabilities for a combined obligation of ~~$1.0~~$0.8 million at ~~March 31,~~June 30, 2020. The fair value of the Company’s interest rate swaps was recorded as $0.2 million in Other Current Liabilities and $0.1 million in Long-Term Liabilities for a combined obligation of $0.3 million at December 31, 2019. On a quarterly basis, management evaluates any swap agreement to determine its effectiveness or ineffectiveness and records the change in fair value as an adjustment to AOCI. Management intends that the swap remains effective.

1516

ROLLINS, INC. AND SUBSIDIARIES

Hedges of Foreign Exchange Risk

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. We use foreign currency derivatives, specifically vanilla foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards were recorded in other income/expense and were equal to a net ~~gain~~loss of ~~$1.1~~$0.3 million and $0.1 million for the ~~three months~~quarter ended ~~March 31,~~June 30, 2020 and 2019, respectively, and a net gain of $0.8 million and a net loss of ~~$0.1~~$0.2 million for the ~~three~~six months ~~ending March 31, 2019.~~ended June 30, 2020 and 2019, respectively. The fair value of the Company’s FX Forwards was recorded as ~~$0.6~~$0.1 million in Other Current Assets at ~~March 31,~~June 30, 2020 and was a net obligation of $0.2 million in Other Current Liabilities at December 31, 2019.

As of ~~March 31,~~June 30, 2020, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):


Non-Designated Derivative Summary	Non-Designated Derivative Summary							Non-Designated Derivative Summary
FX Forward Contracts		Number of Instruments		Sell Notional		Buy Notional			Number of Instruments		Sell Notional		Buy Notional
Sell AUD/Buy USD Fwd Contract			4	$	600	$	416			5	$	1,000	$	690
Sell CAD/Buy USD Fwd Contract			10	$	12,000	$	9,127			7	$	8,500		6,343
Total			14			$	9,543			12			$	7,033

The financial statement impact related to these derivative instruments was insignificant for the 36 months ended ~~March 31,~~June 30, 2020 and year ended December 31, 2019.

NOTE 14.

SUBSEQUENT EVENTS

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

ROLLINS, INC. AND SUBSIDIARIES

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

On ~~April~~July 29, 2020, the Company reported ~~first~~second quarter revenues of ~~$487.9~~$553.3 million, an increase of ~~13.7%~~5.6% over the prior year’s ~~first~~second quarter revenue of ~~$429.1~~$524.0 million. Rollins’ net income ~~decreased 2.2%~~increased 17.2% to ~~$43.3~~$75.4 million, or ~~$0.13~~$0.23 per diluted share for the ~~first~~second quarter ended ~~March 31,~~June 30, 2020, compared with ~~$44.2~~$64.3 million, or ~~$0.14~~$0.20 per diluted share for the same period in 2019.

~~ROLLINS, INC. AND SUBSIDIARIES~~

Results of Operations:

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

COVID-19 Pandemic Impact

~~The~~Going into the quarter ended June 30, 2020, we were faced with the global spread of the coronavirus (“COVID-19”), which was declared a global pandemic by the World Health Organization in March 2020, has created significant volatility, uncertainty and global macroeconomic disruption. Our business, operations and financial results have been, and may continue to be, adversely impacted byeconomic downturn resulting from 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 ledpandemic. The Company responded with numerous operational adjustments to ~~disruption in global~~address the economic and ~~labor market conditions. While many businesses have been required~~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 temporarily close to slow the spread of the virus, pest control has been designated as “essential” by the Department of Homeland Security. We have been able to remain operational in every part of the world in which we operate, and we are keeping most of our employees working to benefit our customers at this time.

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

~~To address ongoing cash flow and liquidity risks, we have taken certain steps~~remote work locations to reduce ~~or delay certain controllable expenses across our various brands, including the following,~~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 ~~others:~~other actions.

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

~~Deferred normally scheduled annual compensation merit increases for some locations,~~

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

~~Eliminated non-essential contractor and temporary services,~~

~~Implemented work hour reductions for select personnel, and~~

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

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

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

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

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

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

~~ROLLINS, INC. AND SUBSIDIARIES~~

Revenue

Revenues for the ~~first~~second quarter ended ~~March 31,~~June 30, 2020 increased ~~$58.8~~$29.4 million, or ~~13.7%~~5.6%, to ~~$487.9~~$553.3 million compared to ~~$429.1~~$524.0 million for the ~~first~~second quarter ended ~~March 31,~~June 30, 2019. ~~Growth occurred across all service lines.~~ Approximately ~~8.6~~3.1 percentage points of the ~~13.7%~~5.6% increase in revenues came from acquisitions, while growth in customers and pricing made up the remaining ~~5.1~~2.5 percentage points.

The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the ~~first~~second quarter ended ~~March 31,~~June 30, 2020, commercial pest control revenue approximated ~~38%~~33% of the Company’s revenues, residential pest control approximated ~~42%~~47% of the Company’s revenues, and termite and ancillary service revenue approximated ~~19%~~20% of the Company’s revenues. ~~Comparing~~

ROLLINS, INC. AND SUBSIDIARIES

Our commercial customers’ operations were most heavily impacted by the ~~first~~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 ~~first~~second quarter of 2019, the Company’s commercial pest control revenue ~~increased 8.0%,~~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 ~~increased 18.6%, and termite~~grew 14.8%. Termite and ancillary services revenue ~~increased 17.4%~~grew 7.3%. Foreign operations accounted for approximately 7%6% and 8%7% of total revenues during the ~~first quarters~~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)
2020 2019 2018
First Quarter $ 487,901 $ 429,069 $ 408,742
Second Quarter — 523,957 480,461
Third Quarter — 556,467 487,739
Fourth Quarter — 505,985 444,623
Year ended December 31, $ 487,901 $ 2,015,478 $ 1,821,565

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 ~~first~~second quarters ~~ended March 31,~~of 2020, 2019, and 2018, acquisitions increased revenues by ~~$37.0~~$16.5 million, ~~$4.5~~$26.2 million, and ~~$16.0~~$23.4 million, respectively.

Cost of Services Provided

Cost of Services provided for the ~~first~~second quarter ended ~~March 31,~~June 30, 2020 increased ~~$33.9~~$2.3 million, or ~~15.6%~~0.9%, to ~~$251.2~~$255.6 million, compared to ~~$217.3~~$253.3 million for the ~~first~~second quarter of the prior year. Gross Margin for the ~~first~~second quarter of 2020 was ~~48.5%~~53.8%, ~~down 0.9~~up 2.1 percentage points from ~~49.4%~~51.7% for the ~~first~~second quarter of 2019. ~~The~~During the quarter, ~~experienced higher~~the Company’s margin improvement was driven by expense ~~percent growth~~reductions in the following areas: higher auto, workers compensation and general liability insurance premiums and claim payments; personnel-related expenses from an increase in medical claim activity and from benefits accrued for furloughed service technicians ; materials and supplies expended for additional PPE for employee safety, and higher service salaries as acquired businesses are yet to achieve the operational efficiencies experienced within our organic base. Service salaries, materials and supplies and fleet are more variable in nature, and have increased with the production of the 13.7% additional revenue for the period.

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 ~~first~~second quarter ended ~~March 31,~~June 30, 2020 increased ~~$4.9~~$1.8 million to ~~$21.6~~$21.9 million, an increase of ~~29.5%~~8.9% from the same period in the prior year. Depreciation increased ~~$2.0~~$1.0 million due to acquisitions and equipment purchases while amortization of intangible assets increased ~~$2.9~~$0.8 million due to the amortization of customer contracts from several acquisitions.

~~ROLLINS, INC. AND SUBSIDIARIES~~

Sales, General and Administrative

Sales, General and Administrative Expenses for the ~~first~~second quarter ended ~~March 31,~~June 30, 2020 ~~increased $18.3~~remained at 30.9% of revenues, increasing $9.4 million, or ~~13.1%~~5.8%, to ~~$157.9~~$171.3 million, ~~or 32.4% of revenues, down 0.1 percentage points from $139.5~~compared to $161.9 million ~~or 32.5% of revenues~~ for the ~~first~~second quarter ended ~~March 31,~~June 30, 2019. The Company experienced higher expense growth in telecommunication expenses and additional reserves for bad debt risks. These were offset by lower expense growth in administrative salaries, fleet, advertising, and professional services.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 ~~first~~second quarter ended ~~March 31,~~June 30, 2020 was ~~$2.2~~$1.5 million compared to ~~net interest income of $0.3~~$1.9 million for the same period last ~~year,~~year. The change was driven primarily ~~due~~by the lower average debt balance in 2020 compared to the ~~implementation of our Credit Facility~~same quarter in ~~April 2019 to fund acquisition growth.~~ 2019.

Income Taxes

The effective tax rate was ~~21.9%~~27.2% for the ~~first~~second quarter ended ~~March 31,~~June 30, 2020 and ~~21.1%~~26.1% for the ~~first~~second quarter ended ~~March 31,~~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 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 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 50.6% for the 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 June 30, 2020 increased $6.7 million to $43.5 million, an increase of 18.2% from the same period in the prior year. Depreciation increased $3.0 million due to acquisitions and 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

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 controlled spending through the 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 compared to $1.6 million for the same period last year. The change was driven from new financing borrowed in April 2019 to fund acquisition growth.

Income Taxes

The effective tax rate was 25.4% for the six months ended June 30, 2020 and 24.1% for the six months ended June 30, 2019. The increase to the effective tax rate for ~~first quarter~~six months ended ~~March 31,~~June 30, 2020 was primarily due to reductions in certain beneficial deductions.

ROLLINS, INC. AND SUBSIDIARIES

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 ~~$92.0~~$234.8 million and ~~$61.4~~$142.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2020 and 2019, respectively. The Company made no contributions to its sole remaining defined benefit retirement plan during the ~~three~~six months ~~ending March~~ended June 30, 2020 and 2019 and had approximately ~~$15.6~~$9.3 million of benefit plan assets remaining ~~from the 2019 pension plan settlement.~~as of June 30, 2020.

The Company invested approximately ~~$6.7~~$12.4 million in capital expenditures, exclusive of expenditures for business acquisitions, during the ~~three~~six months ended ~~March 31,~~on June 30, 2020, compared to ~~$6.5~~$13.4 million during the same period in 2019. Non-essential capital expenditures for 2020 have been cancelled in response to the pandemic crisis. Capital expenditures for the ~~first three~~six months ended on June 30, 2020 consisted primarily of the purchase of operating equipment replacements and technology-related projects. During the ~~three~~six months ended ~~March 31,~~on June 30, 2020, the Company made expenditures for acquisitions totaling ~~$47.6~~$56.0 million, compared to ~~$7.0~~$410.1 million during the same period in 2019. A total of ~~$39.3~~$65.5 million was paid in cash dividends ~~($0.12~~(an aggregate of $0.20 per share), during the six month period ended June 30, 2020, compared to ~~$34.3~~$68.7 million ~~or ($0.105~~paid in cash dividends (an aggregate of $0.21 per share) during the same period in 2019.

On ~~April~~July 28, 2020, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.08 per share payable ~~June~~September 10, 2020 to stockholders of record at the close of business ~~May 11,~~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 ~~three~~six months of 2020 or during the same period in 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 ~~$8.0~~$8.1 million and ~~$9.1~~$9.8 million of common stock for the first ~~three~~six months ended ~~March 31,~~on June 30, 2020 and 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 ~~March 31,~~June 30, 2020 and December 31, 2019 includes short-term unearned revenues of ~~$129.4~~$139.5 million and $122.8 million, respectively, representing approximately 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 ~~$92.6~~$134.8 million at ~~March 31,~~June 30, 2020 is held at various banking institutions. Approximately ~~$64.2~~$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.

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.

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, 2019, other than ASC 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.

2023

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 ~~general economic activity~~its commercial pest control business will ~~negatively impact our new customer sales demand and that this impact will further~~ persist for the remainder of 2020 and beyond, with the degree of the impact depending upon the extent and duration of the economic contraction; the ~~Company’s plan~~Company belief that with many people working from or confined to ~~keep most~~their homes, the awareness of unwanted pests has helped contribute to its employees working to benefit its customers at this time; the Company’s ability to innovate to enhance sales demand; the Company’s anticipation that the economy will rebound as the shelter-in-place and business-shuttering mandates are lifted;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 ~~any~~a level of impairment for intangible ~~impairment;~~assets; the effect of the future adoption of recent accounting pronouncements on the Company’s financial statements; the Company’s ~~plans to suspend~~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 ~~$80.0~~$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 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 2020; ~~our~~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 forego non-essential capital expenditures for the remainder of 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; the Company’s estimation regarding the reclassification of accumulated other comprehensive income related to derivatives; and the Company’s belief that no changes in our internal control over financial reporting during the ~~first~~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, 2019. The Company does not undertake to update its forward-looking statements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of ~~March 31,~~June 30, 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 ~~$133.0~~$175.0 million revolving credit facility and ~~$186.8~~$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.

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ROLLINS, INC. AND SUBSIDIARIES

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 ~~March 31,~~June 30, 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 ~~first~~second quarter that materially affected, or are reasonably likely to materially affect our internal control over financial reporting. As of ~~March 31,~~June 30, 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

In light of recent developments relating to the COVID-19 global pandemic, the Company is supplementing the risk factors previously disclosed in Part I., Item 1A. of its Annual Report on Form 10-K for the fiscal year ended December 31, 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 ~~have~~ contributed to a decline in revenues and other adverse impacts on our financial results. Other potential impacts of the spread of COVID-19 include continued or expanded closures of our ~~customers'~~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 ~~potential~~evolving developments, ~~we expect~~ our business, operations and financial results have the potential to continue to be negatively ~~affected.~~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 ~~March 31,~~June 30, 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
January 1 to 31, 2020 213,732 $ 36.52 — 7,610,416
February 1 to 29, 2020 1,351 39.60 — 7,610,416
March 1 to 31, 2020 4,289 40.12 — 7,610,416
Total 219,372 $ 39.60 — 7,610,416

					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: ~~January~~April 2020: ~~213,732; February~~0; May 2020: ~~1,351;~~0 and ~~March~~June 2020: ~~4,289.~~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.

2326

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 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 Schema Document

	(101.CAL)	Inline XBRL Calculation Linkbase Document

	(101.DEF)	Inline XBRL Definition Linkbase Document

	(101.LAB)	Inline XBRL Label Linkbase Document

	(101.PRE)	Inline XBRL 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.

2427

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: ~~April 30,~~July 31, 2020	By:	/s/ Gary W. Rollins
		Gary W. Rollins
		Vice Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~April 30,~~July 31, 2020	By:	/s/ Paul E. Northen
		Paul E. Northen
		Senior Vice President, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

2528

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