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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2021

Commission File Number 1-4422

ROLLINS, INC.

(Exact name of registrant as specified in its charter)

Delaware

51-0068479

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

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

(Address of principal executive offices)

30324

(Zip Code)

(404) 888-2000

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

 

ROL

 

NYSE

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

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

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

Large Accelerated Filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

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

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

Yes

No

 

Rollins, Inc. had 492,048,685 shares of its $1 par value Common Stock outstanding as of October 15, 2021.

ROLLINS, INC. AND SUBSIDIARIES

PART 1 FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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

(in thousands except share data)

(unaudited)

    

September 30, 

    

December 31, 

    

2021

    

2020

ASSETS

  

  

Cash and cash equivalents

$

117,655

$

98,477

Trade receivables, net of allowance for expected credit losses of $13,473 and $16,854, respectively

 

152,866

 

126,337

Financed receivables, short-term, net of allowance for expected credit losses of $1,519 and $1,297, respectively

 

27,294

 

23,716

Materials and supplies

 

26,976

 

30,843

Other current assets

 

48,663

 

35,404

Total current assets

 

373,454

 

314,777

Equipment and property, net of accumulated depreciation of $315,921 and $294,226, respectively

 

131,549

 

178,052

Goodwill

 

665,645

 

653,176

Customer contracts, net

 

284,393

 

298,949

Trademarks & tradenames, net

 

108,231

 

109,044

Other intangible assets, net

 

9,914

 

10,777

Operating lease, right-of-use assets

 

251,374

 

212,342

Financed receivables, long-term, net of allowance for expected credit losses of $2,488 and $1,934, respectively

 

45,410

 

38,187

Benefit plan assets

 

1,118

 

1,198

Deferred income taxes

 

2,568

 

2,222

Other assets

 

31,157

 

27,176

Total assets

$

1,904,813

$

1,845,900

LIABILITIES

 

  

 

  

Accounts payable

$

38,509

$

64,596

Accrued insurance

 

34,790

 

31,675

Accrued compensation and related liabilities

 

96,285

 

91,011

Unearned revenues

 

151,645

 

131,253

Operating lease liabilities - current

 

76,684

 

73,248

Current portion of long-term debt

 

18,750

 

17,188

Other current liabilities

 

60,833

 

63,540

Total current liabilities

 

477,496

 

472,511

Accrued insurance, less current portion

 

32,582

 

36,067

Operating lease liabilities, less current portion

 

177,381

 

140,897

Long-term debt

 

49,250

 

185,812

Deferred income tax liabilities

 

13,288

 

10,612

Other long-term accrued liabilities

 

53,187

58,641

Total liabilities

 

803,184

 

904,540

Commitments and contingencies (see Note 6)

 

  

 

  

STOCKHOLDERS’ EQUITY

 

  

 

  

Preferred stock, without par value; 500,000 shares authorized, zero shares issued

 

 

Common stock, par value $1 per share; 800,000,000 shares authorized, 492,048,685 and 491,612,059 shares issued and outstanding, respectively

 

492,049

 

491,612

Additional paid in capital

 

102,484

 

101,757

Accumulated other comprehensive loss

 

(17,465)

 

(10,897)

Retained earnings

 

524,561

 

358,888

Total stockholders’ equity

 

1,101,629

 

941,360

Total liabilities and stockholders’ equity

$

1,904,813

$

1,845,900

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

2

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands except per share data)

(unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

REVENUES

  

  

  

  

Customer services

$

650,199

$

583,698

$

1,823,957

$

1,624,928

COSTS AND EXPENSES

 

  

 

  

 

  

 

  

Cost of services provided

 

305,474

 

275,474

 

864,888

 

782,248

Depreciation and amortization

 

23,617

 

22,404

 

70,519

 

65,926

Sales, general and administrative

 

194,261

 

168,006

 

539,951

 

497,121

Chairman's accelerated stock vesting expense

 

 

6,691

 

 

6,691

(Gain) loss on sale of assets, net

 

(447)

 

1,355

 

(33,598)

 

629

Interest expense, net

 

222

 

866

 

1,334

 

4,491

INCOME BEFORE INCOME TAXES

 

127,072

 

108,902

 

380,863

 

267,822

PROVISION FOR INCOME TAXES

 

33,219

 

29,323

 

95,513

 

69,617

NET INCOME

$

93,853

$

79,579

$

285,350

$

198,205

NET INCOME PER SHARE - BASIC AND DILUTED

$

0.19

$

0.16

$

0.58

$

0.40

DIVIDENDS PAID PER SHARE

$

0.08

$

0.05

$

0.24

$

0.19

Weighted average shares outstanding - basic and diluted

 

492,069

 

491,631

 

492,058

 

491,236

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

3

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands)

(unaudited)

Three Months Ending

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

NET INCOME

$

93,853

$

79,579

$

285,350

$

198,205

Other comprehensive income / (loss), net of tax:

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

(7,207)

 

5,758

 

(6,924)

 

(1,732)

Change in derivatives

 

632

 

252

 

356

 

(312)

Other comprehensive income / (loss), net of tax

 

(6,575)

 

6,010

 

(6,568)

 

(2,044)

Comprehensive income

$

87,278

$

85,589

$

278,782

$

196,161

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

4

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands)

(unaudited)

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at June 30, 2021

492,079

$

492,079

$

98,842

$

(10,890)

$

470,653

$

1,050,684

Net Income

93,853

93,853

Other comprehensive income / (loss), net of tax:

 

 

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

 

 

  

 

(7,207)

 

  

 

(7,207)

Change in derivatives

 

 

 

  

 

632

 

  

 

632

Cash dividends

 

 

 

  

 

  

 

(39,945)

 

(39,945)

Stock compensation

 

(22)

 

(22)

 

3,942

 

 

  

 

3,920

Employee stock buybacks

 

(8)

 

(8)

 

(300)

 

 

  

 

(308)

Balance at September 30, 2021

 

492,049

$

492,049

$

102,484

$

(17,465)

$

524,561

$

1,101,629

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at June 30, 2020

491,643

$

491,643

$

88,640

$

(29,163)

$

311,710

$

862,830

Net Income

79,579

79,579

Other comprehensive income / (loss), net of tax:

 

 

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

 

 

  

 

5,758

 

  

 

5,758

Change in derivatives

 

 

 

  

 

252

 

  

 

252

Cash dividends

 

 

 

  

 

  

 

(26,214)

 

(26,214)

Stock compensation

 

(18)

 

(18)

 

10,521

 

 

8

 

10,511

Employee stock buybacks

 

(1)

 

(1)

 

 

 

1

 

Balance at September 30, 2020

 

491,624

$

491,624

$

99,161

$

(23,153)

$

365,084

$

932,716

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at December 31, 2020

491,612

$

491,612

$

101,757

$

(10,897)

$

358,888

$

941,360

Net Income

285,350

285,350

Other comprehensive income / (loss), net of tax:

Foreign currency translation adjustments

 

 

 

  

 

(6,924)

 

  

 

(6,924)

Change in derivatives

 

 

 

  

 

356

 

  

 

356

Cash dividends

 

 

  

 

  

 

(119,677)

 

(119,677)

Stock compensation

 

728

 

728

 

11,034

 

 

  

 

11,762

Employee stock buybacks

 

(291)

 

(291)

 

(10,307)

 

 

  

 

(10,598)

Balance at September 30, 2021

 

492,049

$

492,049

$

102,484

$

(17,465)

$

524,561

$

1,101,629

Accumulated Other

Common Stock

Paid-in-

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Income / (Loss)

    

Earnings

    

Total

Balance at December 31, 2019

491,146

$

491,146

$

89,413

$

(21,109)

$

256,300

$

815,750

Impact of adoption of ASC 842

2,484

2,484

Net Income

198,205

198,205

Other comprehensive income / (loss), net of tax:

 

 

 

  

 

  

 

  

 

  

Foreign currency translation adjustments

 

 

  

 

(1,732)

 

 

(1,732)

Change in derivatives

 

 

  

 

(312)

 

 

(312)

Cash dividends

 

 

 

  

 

  

 

(91,745)

 

(91,745)

Stock compensation

 

809

 

809

 

17,612

 

 

(270)

 

18,151

Employee stock buybacks

 

(331)

 

(331)

 

(7,864)

 

 

110

 

(8,085)

Balance at September 30, 2020

 

491,624

$

491,624

$

99,161

$

(23,153)

$

365,084

$

932,716

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

5

ROLLINS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(in thousands)

(unaudited)

Nine Months Ended

September 30, 

    

2021

    

2020

OPERATING ACTIVITIES

  

  

Net income

$

285,350

$

198,205

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization

 

70,519

 

65,926

Provision for deferred income taxes

 

2,221

 

3,701

Provision for expected credit losses

 

8,522

 

12,820

(Gain) loss on sale of assets, net

(33,598)

629

Stock-based compensation expense

 

11,762

 

18,151

Other, net

(83)

1,423

Changes in operating assets and liabilities

 

(45,782)

 

39,752

Net cash provided by operating activities

 

298,911

 

340,607

INVESTING ACTIVITIES

 

  

 

  

Cash used for acquisitions of companies, net of cash acquired

 

(39,692)

 

(79,880)

Purchases of equipment and property

 

(20,031)

 

(17,690)

Proceeds from sales of assets

 

70,967

 

2,131

Proceeds from sales of franchises

134

430

Other, net

(274)

478

Net cash provided by/(used in) investing activities

 

11,104

 

(94,531)

FINANCING ACTIVITIES

 

 

  

Payment of contingent consideration

 

(19,413)

 

(24,168)

Borrowings under revolving commitment

 

82,500

 

68,000

Repayments of term loan

 

(83,000)

 

(20,000)

Repayments of revolving commitment

 

(134,500)

 

(169,500)

Payment of dividends

 

(119,677)

 

(91,745)

Cash paid for common stock purchased

 

(10,598)

 

(8,085)

Net cash used in financing activities

 

(284,688)

 

(245,498)

Effect of exchange rate changes on cash

 

(6,149)

 

586

Net increase in cash and cash equivalents

 

19,178

 

1,164

Cash and cash equivalents at beginning of period

 

98,477

 

94,276

Cash and cash equivalents at end of period

$

117,655

$

95,440

Supplemental disclosure of cash flow information:

 

  

 

  

Non-cash additions to operating lease right-of-use assets

$

101,720

$

67,877

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

6

ROLLINS, INC. AND SUBSIDIARIES

NOTE 1.BASIS OF PREPARATION AND OTHER

Basis of Preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (including its subsidiaries unless the context otherwise requires, “Rollins,” “we,” “us,” “our,” or the “Company”) for the year ended December 31, 2020. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 2020 Annual Report on Form 10-K.

The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates in its interim condensed consolidated financial statements for the termite accrual, allowance for expected credit losses, environmental, regulatory and litigation claims, the insurance accrual, which includes auto liability, general liability, worker’s compensation and medical claims, inventory adjustments, discounts and volume incentives earned, among others.

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

Three-for-Two Stock Split

All prior year share and per share data presented have been adjusted to account for the three-for-two stock split effective December 10, 2020.

NOTE 2.RECENT ACCOUNTING PRONOUNCEMENTS

In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of the standard to have a material impact on the Company’s condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The standard eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments and (3) exceptions in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (1) franchise taxes that are partially based on income, (2) transactions with a government that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that are not subject to tax, and (4) enacted changes in tax laws in interim periods. The Company adopted ASU 2019-12 effective January 1, 2021, and the adoption did not have a material impact on the Company’s condensed 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 10% or more of the sales for the periods listed on the following table.

7

ROLLINS, INC. AND SUBSIDIARIES

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

(in thousands)

United States

$

602,336

$

540,763

$

1,686,371

$

1,510,685

Other countries

 

47,863

 

42,935

 

137,586

 

114,243

Total Revenues

$

650,199

$

583,698

$

1,823,957

$

1,624,928

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

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Residential revenue

$

307,747

$

275,581

$

835,871

$

738,159

Commercial revenue

 

218,648

 

199,561

 

618,183

 

562,777

Termite completions, bait monitoring, & renewals

 

117,423

 

102,144

 

350,791

 

306,188

Franchise revenues

4,128

3,852

11,698

10,791

Other revenues

 

2,253

 

2,560

 

7,414

 

7,013

Total Revenues

$

650,199

$

583,698

$

1,823,957

$

1,624,928

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

NOTE 4.ALLOWANCE FOR CREDIT LOSSES

Effective January 1, 2020, the Company adopted ASC 326, the new accounting standard related to credit losses. The Company is exposed to credit losses primarily related to accounts receivables and financed receivables derived from customer services revenue. To reduce credit risk for residential pest control accounts receivable, we promote enrollment in our auto-pay programs. In general, we may suspend future services for customers with past due balances. The Company’s credit risk is generally low with a large number of entities comprising Rollins’ customer base and dispersion across many different geographical regions.

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

The Company’s allowances for credit losses for trade accounts receivable and financed receivables are developed using historical collection experience, current economic and market conditions, reasonable and supportable forecasts, and a review of the current status of customers’ receivables. The Company’s receivable pools are classified between residential customers, commercial customers, large commercial customers, and financed receivables. Accounts are written-off against the allowance for credit losses when the Company determines that amounts are uncollectible, and recoveries of amounts previously written off are recorded when collected. The Company stops accruing interest to these receivables when they

8

ROLLINS, INC. AND SUBSIDIARIES

are deemed uncollectible. Below is a roll forward of the Company’s allowance for credit losses for the three and nine months ended September 30, 2021 and 2020.

(in thousands)

Allowance for Credit Losses

    

Trade

    

Financed

    

Total

Receivables

Receivables

Receivables

Balance at June 30, 2021

$

13,863

$

4,341

$

18,204

Provision for expected credit losses

 

3,526

 

323

 

3,849

Write-offs charged against the allowance

 

(5,163)

 

(657)

 

(5,820)

Recoveries collected

 

1,247

 

 

1,247

Balance at September 30, 2021

$

13,473

$

4,007

$

17,480

Allowance for Credit Losses

Trade

Financed

Total

    

Receivables

    

Receivables

    

Receivables

Balance at December 31, 2020

$

16,854

$

3,231

$

20,085

Provision for expected credit losses

 

5,760

 

2,762

 

8,522

Write-offs charged against the allowance

 

(12,912)

 

(1,986)

 

(14,898)

Recoveries collected

 

3,771

 

 

3,771

Balance at September 30, 2021

$

13,473

$

4,007

$

17,480

Allowance for Credit Losses

Trade

Financed

Total

    

Receivables

    

Receivables

    

Receivables

Balance at June 30, 2020

$

16,452

$

3,014

$

19,466

Provision for expected credit losses

 

2,363

 

689

 

3,052

Write-offs charged against the allowance

 

(3,502)

 

(567)

 

(4,069)

Recoveries collected

 

660

 

 

660

Balance at September 30, 2020

$

15,973

$

3,136

$

19,109

Allowance for Credit Losses

Trade

Financed

Total

    

Receivables

    

Receivables

    

Receivables

Balance at December 31, 2019

$

16,699

$

2,959

$

19,658

Adoption of ASC 326

 

(3,330)

 

 

(3,330)

Provision for expected credit losses

 

10,843

 

1,977

 

12,820

Write-offs charged against the allowance

 

(11,735)

 

(1,800)

 

(13,535)

Recoveries collected

 

3,496

 

 

3,496

Balance at September 30, 2020

$

15,973

$

3,136

$

19,109

NOTE 5.EARNINGS PER SHARE

The Company reports 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.

9

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

Nine Months Ended

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Basic and diluted earnings per share

Common stock

$

0.19

$

0.16

$

0.58

$

0.40

Restricted shares of common stock

$

0.19

$

0.16

$

0.58

$

0.40

NOTE 6.CONTINGENCIES

In the normal course of business, from time to time, the Company and certain subsidiaries are parties to lawsuits, claims, arbitrations, regulatory actions or investigations. In addition, from time to time in the ordinary course of business, the Company also defends employment-related cases as well as claims arising out of environmental matters.

As previously disclosed, the SEC is conducting an investigation which we believe is primarily focused on how the Company established accruals and reserves at period-ends for periods beginning January 1, 2015 and the impact of those accruals and reserves on reported earnings per share.  The Company’s Audit Committee retained independent counsel to conduct an internal investigation into matters related to the SEC investigation and that investigation is being supplemented as previously reported.  To date the internal investigation findings include certain inadequately supported journal entries and certain other errors, all primarily related to the Company’s reserve and accrual accounting, which the Company has determined were individually and in the aggregate immaterial to the impacted quarterly and annual financial statements. As previously disclosed in the Company’s 2020 Form 10-K, based on the results of the internal investigation, it was determined that there was a significant deficiency in the Company’s internal controls relating to the documentation and review of accounting entries for certain reserves and accruals, which was remediated as of December 31, 2020 and as discussed below.  The supplemental investigation regarding the assertions described in the Current Report on Form 8-K furnished to the SEC on July 28, 2021 is ongoing.  The Company continues to believe that its financial statements filed with the SEC on Forms 10-K and 10-Q for the relevant periods fairly present in all material respects its financial condition, results of operations and cash flows as of their respective balance sheet dates and for the periods then ended.

The Company is continuing to cooperate fully with the SEC investigation and has initiated discussions with the SEC staff regarding a potential resolution of the investigation.  In accordance with the accounting guidance in ASC 450, “Contingencies,” and based on the findings described above and other information, the Company recorded an accrual related to this matter in the third quarter of 2021, which is reflected in other current liabilities in our condensed consolidated statements of financial position. We cannot predict the outcome of the SEC investigation and it is possible that the ultimate amount of any potential liability could be different from the amount accrued.

As previously disclosed in the Company’s 2020 Form 10-K, in connection with the SEC investigation, the Company reevaluated and strengthened its internal controls over financial reporting, including improving processes and procedures and supporting documentation, including those related to management’s judgments and estimates.

There can be no assurance that the SEC or another regulatory body will not make further regulatory inquiries or pursue action against the Company and its senior officers that could result in potentially significant sanctions and penalties, or that could require the Company to take additional remedial steps.  Further, the Company may be subject to litigation from third parties related to the matters under review by the SEC.

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

10

ROLLINS, INC. AND SUBSIDIARIES

NOTE 7.FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, financed and notes receivable, accounts payable, other short-term liabilities, and debt. The carrying amounts of these financial instruments approximate their respective fair values. The Company also has derivative instruments as further discussed in Note 15. Derivative Instruments and Hedging Activities.

During the nine months ended September 30, 2021, the Company invested $10.6 million of unrestricted cash in international bonds, a level 2 asset under the fair value hierarchy. The investment is recorded in other current assets. The fair market values of the bonds approximate their amortized costs.

As of September 30, 2021 and December 31, 2020, the Company had $21.5 million and $35.7 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.

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Beginning balance

$

27,057

$

47,085

$

35,744

$

49,131

New acquisitions and revaluations

 

1,341

 

3,160

 

5,314

 

8,703

Payouts

 

(6,540)

 

(16,306)

 

(19,413)

 

(24,168)

Interest on outstanding contingencies

 

178

 

386

 

715

 

1,534

Charge offset, forfeit and other

 

(514)

 

(554)

 

(838)

 

(1,429)

Ending balance

$

21,522

$

33,771

$

21,522

$

33,771

NOTE 8.UNEARNED REVENUE

The Company records unearned revenue when we have either received payment or contractually have the right to bill for services in advance of the services or performance obligations being performed. Deferred revenue recognized in the three months ended September 30, 2021 and 2020 were $47.3 million and $43.4 million, respectively. Deferred revenue recognized for the nine months ended September 30, 2021 and 2020 were $139.6 million and $129.4 million respectively. Changes in unearned revenue were as follows: