Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Rollins, Inc. and Subsidiaries (in thousands except share information)
December 31,	2013			2012
ASSETS
Cash and cash equivalents	$	118,216		$	65,082
Trade receivables, net of allowance for doubtful accounts of $9,078 and $8,211, respectively		72,849			68,920
Financed receivables, short-term, net of allowance for doubtful accounts of $1,777 and $1,842, respectively		12,220			11,823
Materials and supplies		12,251			11,847
Deferred income taxes		39,518			33,338
Other current assets		19,388			14,982
Total Current Assets		274,442			205,992
Equipment and property, net		87,215			82,263
Goodwill		211,847			212,477
Customer contracts, net		101,457			113,400
Other intangible assets, net		27,112			28,389
Deferred income taxes		4,544			26,841
Financed receivables, long-term, net of allowance for doubtful accounts of $1,423 and $1,408, respectively		11,608			11,681
Prepaid pension		7,113			—
Other assets		13,879			11,463
Total Assets	$	739,217		$	692,506
LIABILITIES
Accounts payable		23,194			24,854
Accrued insurance		25,631			24,164
Accrued compensation and related liabilities		66,175			60,042
Unearned revenue		91,014			87,753
Other current liabilities		29,778			31,603
Total current liabilities		235,792			228,416
Accrued insurance, less current portion		28,245			31,283
Accrued pension		691			43,271
Long-term accrued liabilities		36,234			34,580
Total Liabilities		300,962			337,550
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock, without par value; 500,000 authorized, zero shares issued		—			—
Common stock, par value $1 per share; 250,000,000 shares authorized, respectively, 145,864,443 and 146,015,082 shares issued, respectively		145,864			146,015
Paid-in-capital		53,765			45,156
Accumulated other comprehensive loss		(31,771	)		(56,967	)
Retained earnings		270,397			220,752
Total Stockholders' Equity		438,255			354,956
Total Liabilities and Stockholders' Equity	$	739,217		$	692,506

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

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CONSOLIDATED STATEMENTS OF INCOME

Rollins, Inc. and Subsidiaries (in thousands except per share data)
Years ended December 31,	2013			2012			2011
REVENUES
Customer services	$	1,337,374		$	1,270,909		$	1,205,064

COSTS AND EXPENSES
Cost of services provided		678,459			647,578			616,842
Depreciation and amortization		39,571			38,655			37,503
Sales, general and administrative		428,288			407,488			388,710
(Gain)/loss on sales/impairment of assets, net		(165	)		(468	)		405
Pension settlement loss		—			1,000			—
Interest (income)/expense		(385	)		14			508
		1,145,768			1,094,267			1,043,968
INCOME BEFORE INCOME TAXES		191,606			176,642			161,096
PROVISION FOR INCOME TAXES
Current		67,920			67,180			59,601
Deferred		356			(1,870	)		784
		68,276			65,310			60,385
NET INCOME	$	123,330		$	111,332		$	100,711
INCOME PER SHARE - BASIC	$	0.84		$	0.76		$	0.69
INCOME PER SHARE - DILUTED	$	0.84		$	0.76		$	0.69
Weighted average shares outstanding - basic		146,081			146,299			146,882
Weighted average shares outstanding - diluted		146,081			146,306			146,946
DIVIDENDS PAID PER SHARE	$	0.45		$	0.44		$	0.28

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

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

Rollins, Inc. and Subsidiaries (in thousands)
Years ended December 31,	2013			2012			2011

NET INCOME	$	123,330		$	111,332		$	100,711
Other comprehensive earnings (loss), net of tax
Foreign currency translation adjustments		(2,906	)		656			(708	)
Pension and other postretirement benefit plans		28,102			(9,533	)		(14,892	)
Other comprehensive loss		25,196			(8,877	)		(15,600	)
Comprehensive earnings	$	148,526		$	102,455		$	85,111

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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Rollins, Inc. and Subsidiaries
(In thousands)
										Accumulated
										Other
	Common Stock						Paid-			Comprehensive			Retained
	Shares			Amount			In-Capital			Income (Loss)			Earnings			Total
Balance at December 31, 2010		147,181		$	147,181		$	27,816		$	(32,490	)	$	155,463		$	297,970
Net Income														100,711			100,711
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment											(14,892	)					(14,892	)
Foreign Currency Translation Adjustments											(708	)					(708	)
Cash Dividends														(41,110	)		(41,110	)
Common Stock Purchased (1)		(1,458	)		(1,458	)								(25,782	)		(27,240	)
Stock Compensation		595			595			6,960									7,555
Employee Stock Buybacks and Common Stock Options Exercised		(67	)		(67	)		(2,838	)								(2,905	)
Excess Tax Benefit on Restricted Stock, Dividend Compensation and Non-Qualified Stock Options								4,616									4,616
Balance at December 31, 2011		146,251		$	146,251		$	36,554		$	(48,090	)	$	189,282		$	323,997
Net Income														111,332			111,332
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment											(9,533	)					(9,533	)
Foreign Currency Translation Adjustments											656						656
Cash Dividends														(64,282	)		(64,282	)
Common Stock Purchased (1)		(782	)		(782	)								(15,580	)		(16,362	)
Stock Compensation		684			684			8,810									9,494
Employee Stock Buybacks and Common Stock Options Exercised		(138	)		(138	)		(3,439	)								(3,577	)
Excess Tax Benefit on Restricted Stock, Dividend Compensation and Non-Qualified Stock Options								3,231									3,231
Balance at December 31, 2012		146,015		$	146,015		$	45,156		$	(56,967	)	$	220,752		$	354,956
Net Income														123,330			123,330
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment											28,102						28,102
Foreign Currency Translation Adjustments											(2,906	)					(2,906	)
Cash Dividends														(65,658	)		(65,658	)
Common Stock Purchased (1)		(341	)		(341	)								(8,027	)		(8,368	)
Stock Compensation		407			407			10,020									10,427
Employee Stock Buybacks and Common Stock Options Exercised		(217	)		(217	)		(5,133	)								(5,350	)
Excess Tax Benefit on Restricted Stock, Dividend Compensation								3,722									3,722
Balance at December 31, 2013		145,864		$	145,864		$	53,765		$	(31,771	)	$	270,397		$	438,255

(1) Charges to Retained Earnings are from purchases of the Company’s Common Stock.

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Rollins, Inc. and Subsidiaries (in thousands)
Years ended December 31,	2013			2012			2011
OPERATING ACTIVITIES
Net Income	$	123,330		$	111,332		$	100,711
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		39,571			38,655			37,503
Pension Settlement		—			1,000			—
Provision for deferred income taxes		356			(1,870	)		784
Stock based compensation expense		10,427			9,494			7,555
(Gain)/loss on sales/impairments of assets, net		(165	)		(468	)		405
Excess tax benefits from share-based payments		(3,722	)		(3,231	)		(2,367	)
Provision for bad debts		10,388			11,095			8,879
Other, net		(102	)		(113	)		(762	)
Changes in assets and liabilities:
Trade accounts receivables and other accounts receivables		(13,617	)		(16,438	)		(10,663	)
Financed receivables		(950	)		(1,453	)		(1,855	)
Materials and supplies		(118	)		(655	)		837
Other current assets		(4,613	)		(1,469	)		5,457
Other non-current assets		(1,343	)		286			1,894
Accounts payable and accrued expenses		4,918			(2,175	)		5,695
Unearned revenue		3,561			1,935			(59	)
Accrued insurance		(1,572	)		6,087			3,487
Pension funding		(5,000	)		(5,203	)		(4,900	)
Long-term accrued liabilities		1,316			(4,890	)		2,046
Net cash provided by operating activities		162,665			141,919			154,647
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(12,632	)		(25,030	)		(11,410	)
Purchase of equipment and property		(18,632	)		(19,040	)		(18,652	)
Cash from sales of franchises		102			322			149
Proceeds from sales of assets		372			1,055			759
Net cash used in investing activities		(30,790	)		(42,693	)		(29,154	)
FINANCING ACTIVITIES
Payments on line of credit borrowings		—			—			(26,000	)
Cash paid for common stock purchased		(13,723	)		(19,938	)		(30,215	)
Dividends paid		(65,658	)		(64,282	)		(41,110	)
Book overdrafts in bank accounts		—			—			(4,500	)
Proceeds received upon exercise of stock options		6			—			69
Principal payments on capital lease obligations		—			—			(38	)
Excess tax benefits from share-based payments		3,722			3,231			2,367
Net cash used in financing activities		(75,653	)		(80,989	)		(99,427	)
Effect of exchange rate changes on cash		(3,088	)		570			(704	)
Net increase in cash and cash equivalents		53,134			18,807			25,362
Cash and cash equivalents at beginning of year		65,082			46,275			20,913
Cash and cash equivalents at end of year	$	118,216		$	65,082		$	46,275
Supplemental disclosure of cash flow information
Cash paid for interest	$	—		$	—		$	123
Cash paid for income taxes, net	$	69,354		$	62,998		$	51,983

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

Supplemental Disclosures of Non-Cash Items

Pension—Non-cash (increases) decreases in the minimum pension liability which were (charged) credited to other comprehensive income/(loss) were $45.7 million, $(15.4) million, and $(24.5) million in 2013, 2012, and 2011, respectively.

Business Combinations —There were $3.3 million in non-cash acquisitions of assets in business combinations for the year ended December 31, 2013, $3.0 million in 2012 and $0.8 million for 2011.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2013, 2012, and 2011, Rollins, Inc. and Subsidiaries

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description—Rollins, Inc. (the “Company”) was originally incorporated in 1948 under the laws of the state of Delaware as Rollins Broadcasting, Inc.

The Company is an international service company with headquarters located in Atlanta, Georgia, providing pest and termite control services through its wholly-owned subsidiaries to both residential and commercial customers in North America with international franchises in Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico. Services are performed through a contract that specifies service frequency and the pricing arrangement with the customer.

Orkin, LLC. (“Orkin”), a wholly-owned subsidiary of the Company founded in 1901, is the world’s largest pest and termite control company. It provides customized services from over 400 locations. Orkin serves customers, either directly or indirectly through franchises, in the United States, Canada, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico providing essential pest control services and protection against termite damage, rodents and insects to homes and businesses, including hotels, food service establishments, food manufacturers, retailers and transportation companies. Orkin operates under the Orkin®, and Orkin Canada® trademarks and the AcuridSM service mark. The Orkin® brand name makes Orkin the most recognized pest and termite company throughout the United States. The Orkin Canada brand name provides similar brand recognition throughout Canada.

Orkin Canada, a wholly-owned subsidiary of Orkin founded in 1952, was acquired by Orkin in 1999. Orkin Canada is Canada's largest pest control provider and a leader in the development of fast, effective and environmentally responsible pest control solutions.

Western Pest Services (“Western”), a wholly-owned subsidiary of the Company founded in 1928, was acquired by Rollins, Inc. in 2004. Western is primarily a commercial pest control service company and its business complements most of the services Orkin offers focusing on the northeastern United States.

The Industrial Fumigant Company (“IFC”), a wholly-owned subsidiary of the Company founded in 1937, was acquired by Rollins, Inc. in 2005. IFC is a leading provider of pest management and sanitation services and products to the food and commodity industries.

HomeTeam Pest Defense (“HomeTeam”), a wholly-owned subsidiary of the Company established in 1996, was acquired by Rollins, Inc. in April 2008. At the time of the acquisition, HomeTeam, with its unique Taexx tubes in the wall pest control system, was recognized as a premier pest control business and ranked as the 4th largest company in the industry. HomeTeam services home builders nationally.

The Company has several smaller wholly-owned subsidiaries that in total make up less than 5% of the Company’s total revenues.

The Company has only one reportable segment, its pest and termite control business. Revenue, operating profit and identifiable assets for this segment, includes the United States, Canada, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico. The Company’s results of operations and its financial condition are not reliant upon any single customer, few customers or foreign operations.

Principles of Consolidation— The Company’s Consolidated Financial Statements include the accounts of Rollins, Inc. and our wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The Company does not consolidate the financial statements of any company in which it has an ownership interest of 50% or less. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity. The Company reclassified certain prior period amounts, none of which were material, to conform to the current period presentation. All material intercompany accounts and transactions have been eliminated.

Subsequent Events—The Company evaluates its financial statements through the date the financial statements are issued. As of the filing date, February 26, 2014, there were no subsequent events that would affect the Company’s financial statements.

Rollins Australia (“Rollins Australia”), a wholly-owned subsidiary of the Company, acquired Allpest WA (“Allpest”), in February 2014 subsequent to Rollins 2013 fiscal year end. Allpest was established in 1959 and is headquartered in Perth, Australia. Allpest provides traditional residential, commercial and termite service as well as consulting services on border protection related to Australia’s biosecurity program and provides specialized services to Australia’s mining and oil and gas sectors.

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Estimates Used in the Preparation of Consolidated Financial Statements—The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying notes and financial statements. Actual results could differ from those estimates.

Revenue Recognition— The Company’s revenue recognition policies are designed to recognize revenues at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. For pest control customers, the Company offers a discount for those customers who prepay for a full year of services. The Company defers recognition of these advance payments and recognizes the revenue as the services are rendered. The Company classifies the discounts related to the advance payments as a reduction in revenues.

Termite baiting revenues are recognized based on the delivery of the individual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue in a pattern that approximates the timing of performing monitoring visits. The allocation of the purchase price to the two deliverables is based on the relative selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that approximates the timing of performing the required monitoring visits.

At inception revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.

All revenues are reported net of sales taxes.

The Company’s foreign operations accounted for approximately 8% of revenues for each of the years ended December 31, 2013, 2012 and 2011.

Interest income on installment receivables is accrued monthly based on actual loan balances and stated interest rates. Recognition of initial franchise fee revenues occurs when all material services or conditions relating to a new agreement have been substantially performed or satisfied by the Company. Initial franchise fees are treated as unearned revenue in the Statement of Financial Position until such time. Royalties from Orkin franchises are accrued and recognized as revenues as earned on a monthly basis. Gains on sales of pest control customer accounts to franchises are recognized at the time of sale and when collection is reasonably assured.

Allowance for Doubtful Accounts— The Company maintains an allowance for doubtful accounts based on the expected collectability of accounts receivable. Management uses historical collection results as well as accounts receivable aging in order to determine the expected collectability of accounts receivable. Substantially all of the Company’s receivables are due from pest control and termite services in the United States and selected international locations. The Company’s allowance for doubtful accounts is determined using a combination of factors to ensure that our receivables are not overstated due to uncollectability. The Company’s established credit evaluation procedures seek to minimize the amount of business we conduct with higher risk customers. Provisions for doubtful accounts are recorded in selling, general and administrative expenses. 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. Significant recoveries will generally reduce the required provision in the period of recovery. Therefore, the provision for doubtful accounts can fluctuate significantly from period to period. There were no large recoveries in 2013, 2012 and 2011. We record specific provisions when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, our estimates of the realizability of receivables would be further adjusted, either upward or downward.

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Advertising—Advertising costs are charged to sales, general and administrative expense during the year in which they are incurred.

Years ended December 31,		2013				2012				2011
(in thousands)
Advertising		$	55,282			$	48,909			$	46,081

Cash and Cash Equivalents— The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents. Short-term investments, included in cash and cash equivalents, are stated at cost, which approximates fair market value. At times, cash and cash equivalents may exceed federally insured amounts.

The Company’s $118.2 million of total cash at December 31, 2013, is primarily cash held at various banking institutions. Approximately $51.0 million is held in cash accounts at international bank institutions and the remaining $67.2 million 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 reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. 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 while having little third-party debt to service. Rollins maintains adequate liquidity and capital resources without regard to its foreign deposits that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future.

At December 31,		2013				2012
(in thousands)
Cash held in foreign bank accounts		$	51,012			$	40,933

Marketable Securities— From time to time, the Company maintains investments held by several large, well-capitalized financial institutions. The Company’s investment policy does not allow investment in any securities rated less than “investment grade” by national rating services.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included as a component of interest income.

The Company had no marketable securities other than those held in the defined pension benefit plan and the nonqualified deferred compensation plan at December 31, 2013 and 2012. See note 13 for further details.

Materials and Supplies—Materials and supplies are recorded at the lower of cost (first-in, first-out basis) or market.

Income Taxes-The Company provides for income taxes based on FASB ASC topic 740 "Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. The Company provides an allowance for deferred tax assets when it is determined that it is more likely than not that the deferred tax assets will not be utilized. The Company establishes additional provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold. The Company's policy is to record interest and penalties related to income tax matters in income tax expense.

Equipment and Property—Equipment and Property are stated at cost, net of accumulated depreciation, which includes the amortization of assets recorded under capital leases and are provided principally on a straight-line basis over the estimated useful lives of the related assets. Annual provisions for depreciation are computed using the following asset lives: buildings, ten to forty years; and furniture, fixtures, and operating equipment, two to ten years. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are expensed as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income. The annual provisions for depreciation, below, have been reflected in the Consolidated Statements of Income in the line item entitled Depreciation and Amortization.

		Years ended December 31,
(in thousands)		2013				2012				2011
Depreciation		$	14,415			$	15,212			$	15,112

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Goodwill and Other Intangible Assets - In accordance with FASB ASC Topic 350, “Intangibles - Goodwill and other”, the Company classifies intangible assets into three categories: (1) intangible assets with definite lives subject to amortization; (2) intangible assets with indefinite lives not subject to amortization; and (3) goodwill. The Company does not amortize intangible assets with indefinite lives and goodwill. Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or circumstances indicate the assets might be impaired. Such conditions may include an economic downturn or a change in the assessment of future operations. The Company performs impairment tests of goodwill at the Company level. Such impairment tests for goodwill include comparing the fair value of the appropriate reporting unit (the Company) with its carrying value. If the fair value of the reporting unit is lower than its carrying value, then the Company will compare the implied fair value of goodwill to its carrying value. Impairment losses are recognized whenever the implied fair value of goodwill is less than its carrying value. The Company performs impairment tests for indefinite-lived intangible assets by comparing the fair value of each indefinite-lived intangible asset unit to its carrying value. The Company recognizes an impairment charge if the asset’s carrying value exceeds its estimated fair value. The Company completed its most recent annual impairment analyses as of September 30, 2013. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.

Impairment of Long-Lived Assets - In accordance with FASB ASC Topic 360, “Property, Plant and Equipment”, the Company’s long-lived assets, such as property and equipment and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. We periodically evaluate the appropriateness of remaining depreciable lives assigned to long-lived assets, including customer contracts and assets that may be subject to a management plan for disposition.

Insurance—The Company self-insures, up to specified limits, certain risks related to general liability, workers’ compensation and vehicle liability. The estimated costs of existing and future claims under the self-insurance program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts an independent third party actuary on a semi-annual basis to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective and a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events.

Accrual for Termite Contracts—The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future costs include termiticide life expectancy and government regulation. It is significant that the actual number of claims has decreased in recent years due to changes in the Company’s business practices. However, it is not possible to precisely predict future significant claims. An accrual for termite contracts is included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with FASB ASC Topic 450 “Contingencies,” management estimates and accrues for its liability and costs associated with the litigation. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the litigation, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liability may vary from amounts estimated or accrued. However, in the opinion of management, the outcome of the litigation will not have a material adverse impact on the Company’s financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

Earnings Per Share - FASB ASC Topic 260-10 “Earnings Per Share- Overall,” requires a basic earnings per share and diluted earnings per share presentation. Further, all outstanding unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and an entity is required to include participating securities in its calculation of basic earnings per share.

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The Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and therefore are considered participating securities. See note 14 for further information on restricted stock granted to employees.

The basic and diluted calculations differ as a result of the dilutive effect of stock options included in diluted earnings per share, but excluded from basic earnings per share. Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods.

A reconciliation of weighted average shares outstanding along with the earnings per share attributable to restricted shares of common stock (participating securities) is as follows (in thousands except per share data):

Years Ended December 31,	2013			2012			2011
Net income	$	123,330		$	111,332		$	100,711
Less: Dividends paid
Common Stock		(64,571	)		(63,120	)		(40,383	)
Restricted shares of common stock		(1,087	)		(1,162	)		(727	)
Undistributed earnings for the period	$	57,672		$	47,050		$	59,601

Allocation of undistributed earnings:
Common stock	$	56,663		$	46,150		$	58,497
Restricted shares of common stock		1,009			900			1,104

Diluted allocation of undistributed earnings:
Common stock	$	56,663		$	46,150		$	58,498
Restricted shares of common stock		1,009			900			1,103

Basic shares outstanding:
Common stock		143,526			143,499			144,162
Restricted shares of common stock		2,555			2,800			2,720
		146,081			146,299			146,882
Diluted shares outstanding:
Common stock		143,526			143,499			144,162
Dilutive effect of stock options					7			64
		143,526			143,506			144,226
Restricted shares of common stock		2,555			2,800			2,720
		146,081			146,306			146,946

Basic earnings per share
Common stock:
Distributed earnings	$	0.45		$	0.44		$	0.28
Undistributed earnings		0.39			0.32			0.41
	$	0.84		$	0.76		$	0.69
Restricted shares of common stock
Distributed earnings	$	0.43		$	0.42		$	0.27
Undistributed earnings		0.39			0.32			0.41
	$	0.82		$	0.74		$	0.68
Total shares of common stock
Distributed earnings	$	0.45		$	0.44		$	0.28
Undistributed earnings		0.39			0.32			0.41
	$	0.84		$	0.76		$	0.69
Diluted earning per share:
Common stock:
Distributed earnings	$	0.45		$	0.44		$	0.28
Undistributed earnings		0.39			0.32			0.41
	$	0.84		$	0.76		$	0.69
Restricted shares of common stock
Distributed earnings	$	0.43		$	0.42		$	0.27
Undistributed earnings		0.39			0.32			0.41
	$	0.82		$	0.74		$	0.68
Total shares of common stock
Distributed earnings	$	0.45		$	0.44		$	0.28
Undistributed earnings		0.39			0.32			0.41
	$	0.84		$	0.76		$	0.69

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Translation of Foreign Currencies—Assets and liabilities reported in functional currencies other than U.S. dollars are translated into U.S. dollars at the year-end rate of exchange. Revenues and expenses are translated at the weighted-average exchange rates for the year. The resulting translation adjustments are charged or credited to other comprehensive income. Gains or losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables, denominated in foreign currency are included in the earnings of the current period.

Stock-Based Compensation— The Company accounts for its stock-based compensation in accordance with FASB ASC Topic 718 “Compensation – Stock Compensation.” Stock options and time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plan. The Company’s stock options generally vest over a five-year period and expire ten years from the issuance date.

TLRSs provide for the issuance of a share of the Company’s Common Stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. Outstanding TLRSs vest in 20 percent increments starting with the second anniversary of the grant, over six years from the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed. These awards are amortized, net of forfeitures, on a straight-line basis over six years.

The Company has not granted stock options since 2003.

Comprehensive Income (Loss)—Other Comprehensive Income (Loss) results from foreign currency translations and minimum pension liability adjustments.

Franchising Program – Rollins’ wholly-owned subsidiary, Orkin, had 54, 57 and 58 domestic franchises as of December 31, 2013, 2012 and 2011, respectively. Transactions with domestic franchises involve sales of customer contracts to establish new franchises, initial franchise fees and royalties. The customer contracts and initial franchise fees are typically sold for a combination of cash and notes due over periods ranging up to five years. Notes receivable from franchises were $4.1 million at December 31, 2013 and $5.1 million at December 31, 2012. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

The Company recognizes gains from the sale of customer contracts at the time they are sold to franchises and collection on the notes is reasonably assured. The Company recognized net gains of $0.2 million, $0.5 million and $0.8 million for the years ended December 31, 2013, 2012 and 2011, respectively for the sale of customer contracts. These amounts are included as revenues in the accompanying Consolidated Statements of Income.

All domestic franchises have a guaranteed repurchase clause that the franchise may be repurchased by Orkin at a later date once it has been established; therefore, initial domestic franchise fees are deferred in accordance with FASB ASC Topic 952-605 “Franchisor Revenue Recognition,” for the duration of the initial contract period and are included as unearned revenue in the Consolidated Statements of Financial Position. Deferred franchise fees were $2.9 million, $3.0 million and $2.9 million at December 31, 2013, 2012 and 2011, respectively.

Royalties from franchises are accrued and recognized in accordance with FASB ASC Topic 952-605 “Franchisor Revenue Recognition,” as revenues are earned on a monthly basis. Revenue from franchises was $3.9 million for the year ended December 31, 2013 and $3.7 million and 3.4 million for the years ended December 31, 2012 and 2011, respectively.

As of December 31, 2013, 2012 and 2011, Orkin had 26, 22 and 18 international franchises, respectively. Orkin’s international franchise program began with its first international franchise in 2000 and since has expanded to Central America, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico.

The Company’s maximum exposure to loss (notes receivable from franchises less deferred franchise fees) relating to the franchises was $1.2 million, $2.1 million and $1.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.

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New Accounting Standards

Recently adopted accounting standards

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02). This standard provides new accounting guidance that permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test. An entity would continue to calculate the fair value of an indefinite-lived intangible asset if the asset fails the qualitative assessment, while no further analysis would be required if it passes. The provisions of the new guidance was effective as of the beginning of our 2013 fiscal year. Adoption of this new guidance did not have an impact on the 2013 impairment test results.

Recently issued accounting standards to be adopted in 2014 or later

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02) to Comprehensive Income. The guidance requires disclosure of significant amounts reclassified out of accumulated other comprehensive income by component and their corresponding effect on the respective line items of net income. This guidance is effective for the Company beginning in the first quarter of 2014; we do not expect the new guidance to have a material effect on our financial statements.

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force). This guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This stipulates that (1) it will include the amount the entity agreed to pay for the arrangement between them and the other entities that are also obligated to the liability and (2) any additional amount the entity expects to pay on behalf of the other entities. The objective of this update is to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. The amendments in this update are effective for fiscal periods (and interim reporting periods within those years) beginning after December 15, 2013. This standard is not expected to have a material impact on the Company’s reported results of operations or financial position.

In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The objective of the amendments in this Update is to resolve the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. This guidance is effective for the Company beginning in the first quarter of 2015; we do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Topic 740, Income Taxes, does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. There is diversity in practice in the presentation of unrecognized tax benefits in those instances. Some entities present unrecognized tax benefits as a liability unless the unrecognized tax benefit is directly associated with a tax position taken in a tax year that results in, or that resulted in, the recognition of a net operating loss or tax credit carryforward for that year and the net operating loss or tax credit carryforward has not been utilized. Other entities present unrecognized tax benefits as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward in certain circumstances. The objective of the amendments in this Update is to eliminate that diversity in practice. This guidance is effective for the Company beginning in the first quarter of 2014; we do not expect the new guidance to have a material effect on our financial statements.

2.	ACQUISITIONS

The Company has made several acquisitions that are not material individually or in total to the Company’s consolidated financial statements during the years ended December 31, 2013, 2012 and 2011.

Rollins Australia (“Rollins Australia”), a wholly-owned subsidiary of the Company, acquired Allpest WA (“Allpest”), in February 2014 subsequent to Rollins 2013 fiscal year end. Allpest was established in 1959 and is headquartered in Perth, Australia. Allpest provides traditional commercial, residential, and termite service as well as consulting services on border protection related to Australia’s biosecurity program and provides specialized services to Australia’s mining and oil and gas sectors.

3.	DEBT

On October 31, 2012, the Company entered into a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility, and a $25.0 million swingline subfacility. As of December 31, 2013, no borrowings were outstanding under the line of credit or under the swingline subfacility. The Company maintains approximately $30.1 million in letters of credit. These letters of credit are required by the Company’s fronting insurance companies and/or certain states, due to the Company’s self-insured status, to secure various workers’ compensation and casualty insurance contracts coverage. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate such claims.

The Revolving Credit Agreement is guaranteed by certain of Rollins’ domestic-subsidiaries. The maturity date of the Credit Agreement is October 31, 2017, subject to optional annual extensions on the next two anniversaries of the Credit Agreement for one year each. Revolving loans under the Revolving Credit Agreement bear interest at one of the following two rates, at the Company’s election:

	·	the Base Rate, which shall mean the highest of (i) the per annum rate which the Administrative Agent publicly announces from time to time as its prime lending rate, (ii) the Federal Funds rate, plus 0.50% per annum, and (iii) the Adjusted LIBOR Rate (which equals LIBOR as increased to account for the maximum reserve percentages established by the U.S. Federal Reserve) determined on a daily basis for an interest period of one (1) month, plus 1.0% per annum.

	·	with respect to any Eurodollar borrowings, the Adjusted LIBOR Rate plus an additional amount, which varies between .75% and 1.00%, based upon Rollins’ then-current debt-to-EBITDA ratio. As of December 31, 2013, the additional rate allocated was .75%.

The Revolving Credit Agreement contains customary terms and conditions, including, without limitation, certain financial covenants including covenants restricting the Company’s ability to incur certain indebtedness or liens, or to merge or consolidate with or sell substantially all of its assets to another entity. Further, the Revolving Credit Agreement contains financial covenants restricting the Company’s ability to permit the ratio of the Company’s consolidated debt to EBITDA to exceed certain limits.

The Company remained in compliance with applicable debt covenants at December 31, 2013 and expects to maintain compliance throughout 2014.

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4.	TRADE RECEIVABLES

The Allowance for Doubtful Accounts is principally calculated based on the application of estimated loss percentages to delinquency aging totals, based on contractual terms, for the various categories of receivables. Bad debt write-offs occur according to Company policies that are specific to pest control, commercial and termite accounts.

December 31,	2013			2012
(in thousands)
Gross Trade Receivables, short-term	$	81,927		$	77,131
Allowance for Doubtful Accounts		(9,078	)		(8,211	)
Net Trade Receivables	$	72,849		$	68,920

At any given time, the Company may have immaterial amounts due from related parties, which are invoiced and settled on a regular basis.

5.	FINANCING RECEIVABLES

Rollins manages its financing receivables on an aggregate basis when assessing and monitoring credit risks. 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 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 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.

At December 31,	2013			2012
(in thousands)
Gross Financing Receivables, short-term	$	13,997		$	13,665
Gross Financing Receivables, long-term		13,031			13,089
Allowance for Doubtful Accounts		(3,200	)		(3,250	)
Net Financing Receivables	$	23,828		$	23,504

Total financing receivables, net were $23.8 million and $23.5 million at December 31, 2013 and December 31, 2012, respectively. Financing receivables are charged-off when deemed uncollectable or when 180 days have elapsed since the date of the last full contractual payment. The Company’s charge-off policy has been consistently applied and no significant changes have been made to the policy during the periods reported. Management considers the charge-off policy when evaluating the appropriateness of the allowance for doubtful accounts. Gross charge-offs as a percentage of average financing receivables were 2.7% and 2.6% for the twelve months ended December 31, 2013 and December 31, 2012, respectively. Due to the low percentage of charge-off receivables and the high credit worthiness of the potential obligor, the entire Rollins, Inc. financing receivables portfolio has a low credit risk.

The Company offers 90 days same-as-cash financing to some customers based on their credit worthiness. Interest is not recognized until the 91st day at which time it is recognized retrospectively back to the first day if the contract has not been paid in full. In certain circumstances, such as when delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 180 days past due. As of December 31, 2013, there were no accounts on a non-accrual status, and no financing receivables greater than 180 days past due.

Included in financing receivables are notes receivable from franchise owners. These notes are low risk as the repurchase of these franchises is guaranteed by the Company’s wholly-owned subsidiary, Orkin, Inc., and the repurchase price of the franchise is currently estimated and have historically been well above the receivable due from the franchise owner.

The carrying amount of financing receivables approximates fair value as the interest rates approximate market rates for these types of contracts. Long-term financing receivables, net were $11.6 million and $11.7 million at December 31, 2013 and 2012, respectively.

Rollins establishes an allowance for doubtful accounts to insure financing receivables are not overstated due to uncollectability. The allowance balance is comprised of a general reserve, which is determined based on a percentage of the financing receivables balance, and a specific reserve, which is established for certain accounts with identified exposures, such as customer default, bankruptcy or other events, that make it unlikely that Rollins will recover its investment. The general reserve percentages are based on several factors, which include consideration of historical credit losses and portfolio delinquencies, trends in overall weighted-average risk rating of the portfolio and information derived from competitive benchmarking.

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The allowance for doubtful accounts related to financing receivables was as follows:

At December 31,	2013			2012
(in thousands)
Balance, beginning of period	$	3,250		$	3,000
Additions to allowance		626			906
Deductions, net of recoveries		(676	)		(656	)
Balance, end of period	$	3,200		$	3,250

The following is a summary of the past due financing receivables:

December 31,	2013		2012
(in thousands)
30-59 days past due	$	1,185	$	563
60-89 days past due		251		190
90 days or more past due		355		331
Total	$	1,791	$	1,084

The following is a summary of percentage of gross financing receivables:

December 31,
Current	93.4	%	95.9	%
30-59 days past due	4.4	%	2.1	%
60-89 days past due	0.8	%	0.7	%
90 days or more past due	1.4	%	1.3	%
Total	100.0	%	100.0	%

6.	EQUIPMENT AND PROPERTY

Equipment and property are presented at cost less accumulated depreciation and are detailed as follows:

December 31,	2013			2012
(in thousands)
Buildings	$	46,574		$	45,527
Operating Equipment		90,793			79,411
Furniture and Fixtures		13,477			12,479
Computer Equipment and Systems		56,564			54,501
		207,408			191,918
Less—Accumulated Depreciation		(144,877	)		(134,368	)
		62,531			57,550
Land		24,684			24,713
Net equipment and property	$	87,215		$	82,263

Included in equipment and property, net at December 31, 2013 and 2012, are fixed assets held in foreign countries of $1.9 million, and $2.3 million, respectively.

Total depreciation expense was approximately $14.4 million in 2013, $15.2 million in 2012 and $15.1 million in 2011.

7.	FAIR VALUE MEASUREMENT

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, trade and notes receivables, accounts payable, and other short-term liabilities. The carrying amounts of these financial instruments approximate their fair values. The Company has financial instruments related to its defined benefit pension plan and deferred compensation plan detailed in note 13.

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

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The following table presents our nonqualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2013.

		Total				Level 1				Level 2				Level 3
Cash and cash equivalents		$	480			$	480			$	—			$	—
Total		$	480			$	480			$	—			$	—

The following table presents our nonqualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2012.

		Total				Level 1				Level 2				Level 3
Cash and cash equivalents		$	50			$	50			$	—			$	—
Total		$	50			$	50			$	—			$	—

Cash and cash equivalents, which are used to pay benefits and deferred compensation plan administrative expenses, are held in Money Market Funds.

At December 31, 2013 the Deferred Compensation Plan had 41 life insurance policies with a net face value of $37.2 million. The cash surrender value of these life insurance policies had a net realizable value of $11.5 million and $11.2 million at December 31, 2013 and 2012, respectively. The total deferred compensation plan assets, recorded in other assets on the Company’s consolidated statements of financial position, were $13.7 million and $11.3 million at December 31, 2013 and 2012, respectively.

8.	GOODWILL

Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $211.8 million as of December 31, 2013 and $212.5 million as of December 31, 2012. Goodwill decreased for the year ended December 31, 2013 due primarily to currency conversion of Canadian goodwill partially offset by acquisitions. The carrying amount of goodwill in foreign countries was $9.2 million as of December 31, 2013 $9.8 million as of December 31, 2012. The changes in the carrying amount of goodwill for the twelve months ended December 30, 2013 and 2012 are as follows:

(in thousands)
Goodwill at December 31, 2011	$	211,019
Goodwill acquired		1,237
Goodwill adjustments due to currency translation		221
Goodwill at December 31, 2012	$	212,477
Goodwill acquired and finalization of allocation of purchase price on previous acquisitions		40
Goodwill adjustments due to currency translation		(670	)
Goodwill at December 31, 2013	$	211,847

9.	CUSTOMER CONTRACTS AND OTHER INTANGIBLE ASSETS

Customer contracts are amortized on a straight-line basis over the period of the agreements, as straight-line best approximates the ratio that current revenues bear to the total of current and anticipated revenues, based on the estimated lives of the assets. In accordance with FASB ASC Topic 350 “Intangibles - Goodwill and other”, the expected lives of customer contracts were reviewed, and it was determined that customer contracts should be amortized over a life of 8 to 20 years dependent upon customer type. The carrying amount and accumulated amortization for customer contracts were as follows:

December 31,	2013			2012
(in thousands)
Customer contracts	$	226,717		$	217,384
Less: Accumulated amortization		(125,260	)		(103,984	)
Customer contracts, net	$	101,457		$	113,400

The carrying amount of customer contracts in foreign countries was $6.3 million as of December 31, 2013 and $5.4 million as of December 31, 2012.

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Other intangible assets include non-compete agreements, patents and finite lived and indefinite lived trade names. Non-compete agreements are amortized on a straight-line basis over periods ranging from 3 to 20 years and patents are amortized on a straight-line basis over 15 years. The carrying amount and accumulated amortization for other intangible assets were as follows:

At December 31,	2013			2012
(in thousands)
Other intangible assets	$	36,352		$	35,515
Less: Accumulated amortization		(9,240	)		(7,126	)
Other intangible assets, net	$	27,112		$	28,389

The carrying amount of other intangible assets in foreign countries was $0.4 million as of December 31, 2013 and $0.1 million as of December 31, 2012.

Included in the table above are trademarks and tradenames of $14.8 million and $15.3 million at December 31, 2013 and 2012, respectively. Also included in the table above are non-amortizable, indefinite lived intangible assets of $12.6 million at December 31, 2013 and 2012, respectively.

December 31,	2013		2012
(in thousands)
Customer contracts, net	$	101,457	$	113,400
Other intangible assets, net		27,112		28,389
Customer contracts and other intangible assets, net	$	128,569	$	141,789

Total amortization expense was approximately $25.2 million in 2013, $23.4 million in 2012 and $22.4 million in 2011.

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

(in thousands)

2014			$	22,630
2015				19,978
2016				17,211
2017				15,582
2018				12,094

10.	INCOME TAXES

The Company’s income tax provision consisted of the following:

For the years ended December 31,	2013			2012			2011
(in thousands)
Current:
Federal	$	54,778		$	54,815		$	48,505
State		9,259			8,717			7,723
Foreign		3,883			3,648			3,373
Deferred:
Federal		(468	)		(2,326	)		191
State		730			484			528
Foreign		94			(28	)		65
Total income tax provision	$	68,276		$	65,310		$	60,385

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The primary factors causing income tax expense to be different than the federal statutory rate for 2013, 2012 and 2011 are as follows:

For the years ended December 31,	2013			2012			2011
(in thousands)
Income tax at statutory rate	$	67,063		$	61,825		$	56,384
State income tax expense (net of federal benefit)		6,498			5,835			5,477
Foreign tax benefit		(2,661	)		(2,560	)		(2,109	)
Other		(2,624	)		210			633
Total income tax provision	$	68,276		$	65,310		$	60,385

Other includes the release of deferred tax liabilities, tax credits, valuation allowance, and other immaterial adjustments.

The Provision for Income Taxes resulted in an effective tax rate of 35.6% on Income Before Income Taxes for the year ended December 31, 2013. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes and the release of certain deferred tax liabilities.

For 2012 and 2011 the effective tax rate was 37.0% and 37.5%, respectively. The effective income tax rate differs from the annual federal statutory tax rate primarily because of state and foreign income taxes.

During 2013, 2012, and 2011, the Company paid income taxes of $69.4 million, $63.0 million and $52.0 million, respectively, net of refunds.

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

December 31,	2013			2012
(in thousands)
Deferred tax assets:
Termite accrual	$	2,738		$	2,288
Insurance and contingencies		26,171			25,841
Unearned revenues		14,692			14,413
Compensation and benefits		14,100			11,984
Pension liability		—			16,703
State and foreign operating loss carryforwards		9,637			9,838
Bad debt reserve		4,032			3,703
Other		1,275			1,384
Valuation allowance		(2,245	)		(2,096	)
Total deferred tax assets		70,400			84,058
Deferred tax liabilities:
Depreciation and amortization		(4,605	)		(6,554	)
Foreign currency translation		(1,792	)		(3,606	)
Prepaid pension		(2,485	)		—
Intangibles and other		(17,456	)		(13,719	)
Total deferred tax liabilities		(26,338	)		(23,879	)
Net deferred tax assets	$	44,062		$	60,179

Analysis of the valuation allowance:

December 31,	2013		2012
(in thousands)
Valuation allowance at beginning of year	$	2,096	$	1,646
Increase in valuation allowance		149		450
Valuation allowance at end of year	$	2,245	$	2,096

As of December 31, 2013, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $199.0 million, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2014 and 2028. Management believes that it is unlikely to be able to utilize approximately $10.0 million of foreign net operating losses before they expire and has included a valuation allowance for the effect of these unrealizable operating loss carryforwards. The valuation allowance increased by $0.2 million due to the foreign net operating losses.

Earnings from continuing operations before income tax includes foreign income of $15.0 million in 2013, $13.0 million in 2012 and $11 million in 2011. The Company's international business is expanding and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisition of unrelated companies. Repatriation of cash from the Company's foreign subsidiaries is not part of the Company's current business plan.

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There were no unrecognized tax benefits at December 31, 2013. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

December 31,	2013			2012
(in thousands)
Balance at Beginning of Year	$	1,581		$	2,009
Additions based on tax positions related to current year		0			45
Additions for tax positions of prior years		387			332
Reductions for tax positions of prior years		—			(344	)
Settlements		(1,968	)		(322	)
Expiration of statute of limitation		—			(139	)
Balance at End of Year	$	0		$	1,581

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. In many cases these uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The federal tax audit for 2002 and 2003 was completed in 2011. In addition, the Company has subsidiaries in various state and international jurisdictions that are currently under audit for years ranging from 2006 through 2012. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years prior to 2007.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next 12 months. These changes may be the result of settlement of ongoing audits. None of the reductions in the liability for unrecognized tax benefits discussed above will affect the effective tax rate.

The Company’s policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.5 million and $0.9 million as of December 31, 2013 and December 31, 2012, respectively. During 2013, 2012, and 2011 the Company recognized interest and penalties of $0.9 million, $0.1 million and $0.3 million, respectively.

11.	ACCRUAL FOR TERMITE CONTRACTS

In accordance with FASB ASC Topic 450 “Contingencies,” the Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future cost include termiticide life expectancy and government regulation.

A reconciliation of changes in the accrual for termite contracts is as follows:

For the years ended December 31,	2013			2012
(in thousands)
Beginning balance	$	8,300		$	10,300
Current year provision		2,128			2,856
Settlements, claims, and expenditures		(3,353	)		(4,856	)
Ending balance	$	7,075		$	8,300

The accrual for termite contracts is included in other current liabilities, $2.5 million and $3.3 million at December 31, 2013 and 2012, respectively and long-term accrued liabilities, $4.6 million and $5.0 million at December 31, 2013 and 2012, respectively on the Company’s consolidated statements of financial position.

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12.	COMMITMENTS AND CONTINGENCIES

The Company leases buildings, vehicles and equipment under operating leases, some of which contain escalation clauses. The Company’s operating leases expires at various dates through 2028:

For the years ended December 31,		2013				2012				2011
(in thousands)
Rental Expense		$	51,605			$	48,511			$	45,958

Future commitments under operating leases are as summarized:

(in thousands)	Operating leases
2014	$	27,550
2015		16,039
2016		10,877
2017		7,496
2018		4,698
Thereafter		8,535
Total minimum obligation	$	75,195

In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits or arbitrations which allege that plaintiffs have been damaged as a result of the rendering of services by the defendant subsidiary. The subsidiaries are actively contesting these actions. In addition, the Company defends employment related cases from time to time. John Maciel v. Orkin, Inc., et al. is a wage and hour related matter in which the plaintiffs sought certification of a class. The Maciel lawsuit was filed in the Superior Court of Los Angeles County, California, and has now been settled resulting in a dismissal of the suit with prejudice on January 28, 2014.

Additionally, the Company and a subsidiary, The Industrial Fumigant Company, LLC, are named defendants in Severn Peanut Co. and Meherrin Agriculture & Chemical Co. v. Industrial Fumigant Co., et al. The Severn lawsuit, a matter related to a fumigation service, has been filed in the Northern Division of the United States District Court for the Eastern District of North Carolina. The plaintiffs are seeking damages for breach of contract and negligence. The Industrial Fumigant Company, LLC was also a named defendant in Insurance Company of the State of Pennsylvania as Subrogee of Archer-Daniels-Midland Company, Agrinational Insurance Company, Inc. as Subrogee of Archer-Daniels-Midland Company, and Archer-Daniels-Midland Company v. The Industrial Fumigant Co., The Industrial Fumigant Company, LLC, and James Miller. This lawsuit has been settled resulting in a dismissal of the suit with prejudice on January 24, 2014. 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.

Orkin, LLC is involved in certain environmental matters primarily arising in the normal course of business. In the opinion of management, the Company’s liability under any of these matters would not and did not materially affect its financial condition, results of operations or liquidity.

13.	EMPLOYEE BENEFIT PLANS

Employee Benefit Plans

Defined Benefit Pension Plans

Rollins, Inc. Retirement Income Plan

The Company maintains several noncontributory tax-qualified defined benefit pension plans (the “Plans”) covering employees meeting certain age and service requirements. The Plans provides benefits based on the average compensation for the highest five years during the last ten years of credited service (as defined) in which compensation was received, and the average anticipated Social Security covered earnings. The Company funds the Plans with at least the minimum amount required by ERISA. The Company made contributions of $5.0 million, $5.2 million and $4.9 million to the Plans during the years ended December 31, 2013, 2012 and 2011, respectively.

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In 2005, the Company ceased all future benefit accruals under the Rollins, Inc. Retirement Income Plan, although the Company remains obligated to provide employees benefits earned through June 2005. In 2012 the Plan was amended to allow certain vested terminated participants the ability to elect for a limited time the commencement of their benefit in the form of a single-sum payment, not to exceed $13,500, or an annuity starting date of December 1, 2012. In total $4.7 million was paid by the Plan during the year ended December 31, 2012 under this program. The Plan did not offer this option for the year ended December 31, 2013.

The Company terminated the Waltham Services, LLC Salaried Pension Plan and all benefits have been settled via an annuity purchase or lump sum in December 2012. The total payout by the plan was either in the form of lump sum payments (including rollovers) or annuities. Active employees were eligible to roll their balances into the Rollins 401(k) Plan. The Annuities were purchased through an unaffiliated insurance company. The total amount disbursed to terminate the plan totaled $4.0 million.

The Company also includes the Waltham Services, LLC Hourly Employee Pension Plan in the Company’s financial statements. The Company accounts for these defined benefit plans in accordance with FASB ASC Topic 715 “Compensation- Retirement Benefits”, and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary.

In June 2005, the Company froze the Rollins, Inc. defined benefit pension plan. The Company currently uses December 31 as the measurement date for its defined benefit post-retirement plans. The funded status of the Plans and the net amount recognized in the statement of financial position are summarized as follows as of:

December 31,	2013			2012
(in thousands)
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated Benefit obligation at beginning of year	$	210,815		$	196,911
Service cost		112			100
Interest cost		8,551			9,622
Actuarial (gain) loss		(24,724	)		21,541
Benefits paid		(8,807	)		(17,359	)
Accumulated Benefit obligation at end of year		185,947			210,815
CHANGE IN PLAN ASSETS
Market value of plan assets at beginning of year		167,544			165,044
Actual return on plan assets		28,632			14,656
Employer contribution		5,000			5,203
Benefits paid		(8,807	)		(17,359	)
Fair value of plan assets at end of year		192,369			167,544
Funded status	$	6,422		$	(43,271	)

Amounts Recognized in the Statement of Financial Position consist of:
December 31,		2013			2012
(in thousands)
Noncurrent assets/(liabilities)	$	6,422		$	(43,271	)

Amounts Recognized in Accumulated Other Comprehensive Income consists of:
December 31,		2013			2012
(in thousands)
Net actuarial loss	$	56,742		$	102,419

The accumulated benefit obligation for the defined benefit pension plans were $185.9 million and $210.8 million at December 31, 2013 and 2012, respectively. Accumulated benefit obligation and projected benefit obligation are materially the same for the Plans. Pre-tax increases in the pension liability which were (charged, net of tax) credited to other comprehensive income/(loss) were $45.7 million, $(15.4) million and $(24.5) million in 2013, 2012 and 2011, respectively.

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The following weighted-average assumptions were used to determine the accumulated benefit obligation and net benefit cost:

December 31,
ACCUMULATED BENEFIT OBLIGATION
Discount rate	5.20	%	4.17	%	5.01	%
Rate of compensation increase	N/A		N/A		N/A

NET BENEFIT COST
Discount rate	4.17	%	5.01	%	5.51	%
Expected return on plan assets	7.00	%	7.00	%	7.00	%
Rate of compensation increase	N/A		N/A		N/A

The return on plan assets reflects the weighted-average of the expected long-term rates of return for the broad categories of investments held in the plan. The expected long-term rate of return is adjusted when there are fundamental changes in the expected returns on the plan investments.

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, for fiscal year’s 2013, 2012 and 2011 the Company utilized a yield curve analysis.

The components of net periodic benefit cost are summarized as follows:

Years ended December 31,	2013			2012			2011
(in thousands)
Service cost	$	112		$	100		$	158
Interest cost		8,551			9,622			9,879
Expected return on plan assets		(11,589	)		(12,106	)		(12,080	)
Amortization of net loss		3,910			3,606			1,800
Net periodic loss/(benefit)	$	984		$	1,222		$	(243	)

The benefit obligations recognized in other comprehensive income for the years ended December 31, 2013, 2012 and 2011 are summarized as follows:

(in thousands)	2013			2012			2011
Pretax (income)/loss	$	(41,767	)	$	18,991		$	26,297
Amortization of net loss		(3,910	)		(3,606	)		(1,800	)
Total recognized in other comprehensive income		(45,677	)		15,385			24,497
Total recognized in net periodic benefit (income)/cost and other comprehensive income	$	(44,693	)	$	16,607		$	24,254

The Company expects to amortize a net loss of $2.4 million in 2014. At December 31, 2013 and 2012, the Plan’s assets were comprised of listed common stocks and U.S. government and corporate securities, real estate and other. Included in the assets of the Plan were shares of Rollins, Inc. Common Stock with a market value of $37.1 million and $26.6 million at December 31, 2013 and 2012, respectively.

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The Plans’ weighted average asset allocation at December 31, 2013 and 2012 by asset category, along with the target allocation for 2014, are as follows:

	Target			Percentage of plan assets as of
	allocations for			December 31,
Asset category	2014			2013			2012
Cash and cash equivalents		0% - 5%			0.6	%		0.2	%
Equity securities - Rollins stock		0% - 30%			19.3	%		15.9	%
Domestic equity - all other		0% - 30%			21.5	%		13.0	%
Global equity		0.0	%		0.0	%		12.5	%
International equity		10% - 30%			25.3	%		13.6	%
Debt securities - core fixed income		15% - 50%			20.4	%		17.1	%
Tactical composite		0.0	%		0.0	%		12.5	%
Real estate		0% - 20%			6.7	%		7.7	%
Real return		0% - 20%			6.2	%		7.5	%
Other		0% - 20%			0.0	%		0.0	%
Total		100.0	%		100.0	%		100.0	%

For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plans utilize a number of investment approaches, including individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. The Company and management are considering making contributions to the pension plans of approximately $3.3 million during fiscal 2014.

Some of our assets, primarily our private equity and real estate, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For the December 31, 2013 plan asset reporting, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager statements combined with discussions focusing on underlying fundamentals and significant events. Additionally, these investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with ASU No. 2011-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness_._

Fair Value Measurements

The Company’s overall investment strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, with a wide diversification of asset types, fund strategies and fund managers. Equity securities primarily include investments in large-cap and small-cap companies domiciled domestically and internationally. Fixed-income securities include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Other types of investments include real estate funds and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits. The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plans utilize a number of investment approaches, including but not limited to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation.

Some of our assets, primarily our private equity, real estate and hedge funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments. For the December 31, 2013 plan asset reporting, publicly traded asset pricing was used where possible. For assets without readily determinable values, estimates were derived from investment manager discussions focusing on underlying fundamentals and significant events.

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The following table presents our plan assets using the fair value hierarchy as of December 31, 2013. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See note 7 for a brief description of the three levels under the fair value hierarchy.

(in thousands)		Total		Level 1		Level 2		Level 3
(1)	Cash and Cash Equivalents	$	1,067	$	1,067	$	—	$	—
(2)	Fixed Income Securities		39,273		—		39,273		—
	Domestic Equity Securities
	Rollins, Inc. Stock		37,067		37,067		—		—
	Other Securities		41,357		41,357		—		—
(3)	International Equity Securities		48,780		—		48,780		—
(4)	Real Estate		12,831		—		—		12,831
(5)	Real Return		11,994		—		11,994		—
	Total	$	192,369	$	79,491	$	100,047	$	12,831

The following table presents our plan assets using the fair value hierarchy as of December 31, 2012. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

(in thousands)		Total		Level 1		Level 2		Level 3
(1)	Cash and Cash Equivalents	$	289	$	289	$	—	$	—
(2)	Fixed Income Securities		28,624		—		28,624		—
	Domestic Equity Securities				—		—		—
	Rollins, Inc. Stock		26,644		26,644		—		—
	Other Securities		21,779		21,779		—		—
	Global Equity Securities		20,990		20,990		—		—
(3)	International Equity Securities		22,758		10,805		11,953		—
(6)	Tactical Composite		21,026		—		21,026		—
(4)	Real Estate		12,890		—		—		12,890
(5)	Real Return		12,544		—		12,544		—
	Total	$	167,544	$	80,507	$	74,147	$	12,890

	(1)	Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds.

	(2)	Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.

	(3)	Some International equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets.

	(4)	Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data.

	(5)	Real Return funds invest in global equities, commodities and inflation protected core bonds that are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.

	(6)	Tactical Composite funds invest in stocks, bonds and cash, both domestic and international. These assets are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2013.

					Net			Net
	Balance at		Net Realized		Purchases,			Transfers		Balance at
	December 31,		and Unrealized		Issuances and			In to/(Out of)		December 31,
(in thousands)	2012		Gains/(Losses)		Settlements			Level 3		2013
Real Estate	$	12,890	$	1,061	$	(1,120	)	$	—	$	12,831
Total	$	12,890	$	1,061	$	(1,120	)	$	—	$	12,831

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2012.

					Net		Net
	Balance at		Net Realized		Purchases,		Transfers		Balance at
	December 31,		and Unrealized		Issuances and		In to/(Out of)		December 31,
(in thousands)	2011		Gains/(Losses)		Settlements		Level 3		2012
Real Estate	$	7,092	$	997	$	4,801	$	—	$	12,890
Total	$	7,092	$	997	$	4,801	$	—	$	12,890

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The estimated future benefit payments over the next ten years are as follows:

(in thousands)
2014	$	9,877
2015		10,364
2016		10,794
2017		11,251
2018		11,724
Thereafter		63,089
Total	$	117,099

Defined Contribution 401(k) Plan

The Company sponsors a defined contribution 401(k) Plan that is available to a majority of the Company’s full-time employees the first of the calendar quarter following completion of three months of service. The Plan is available to non full-time employees the first day of the calendar quarter following one year of service upon completion of 1,000 hours in that year. The Plan provides for a matching contribution of fifty cents ($.50) for each one dollar ($1.00) of a participant’s contributions to the Plan that do not exceed 6 percent of his or her eligible compensation (which includes commissions, overtime and bonuses). The charge to expense for the Company match was approximately $8.2 million for the year ended December 31, 2013 and $7.7 million and $7.0 million for the years ended December 31, 2012 and 2011. At December 31, 2013, 2012 and 2011 approximately, 34.9%, 32.5% and 35.5%, respectively of the plan assets consisted of Rollins, Inc. Common Stock. Total administrative fees paid by the Company for the Plan were approximately $54 thousand in 2013, $53 thousand in 2012 and $42 thousand in 2011.

Nonqualified Deferred Compensation Plan

The Deferred Compensation Plan provides that participants may defer up to 50% of their base salary and up to 85% of their annual bonus with respect to any given plan year, subject to a $2 thousand per plan year minimum. The Company may make discretionary contributions to participant accounts. The Company credited accounts of participants of long service to the Company with certain discretionary amounts (“Pension Plan Benefit Restoration Contributions”) in lieu of benefits that previously accrued under the Company's Retirement Income Plan up to a maximum of $245 thousand. The Company made Pension Plan Benefit Restoration Contributions under the Deferred Compensation Plan for five years. The first contribution was made in January 2007 for those participants who were employed for all of the 2006 plan year. Only employees with five full years of vested service on June 30, 2005 qualified for Pension Plan Benefit Restoration Contributions. Under the Deferred Compensation Plan, salary and bonus deferrals and Pension Plan Benefit Restoration Contributions are fully vested. Any discretionary contributions are subject to vesting in accordance with the matching contribution vesting schedule set forth in the Rollins 401(k) Plan in which a participant participates. The Company made its last contributions associated with this plan during the first quarter of 2011.

Accounts will be credited with hypothetical earnings, and/or debited with hypothetical losses, based on the performance of certain "Measurement Funds." Account values are calculated as if the funds from deferrals and Company credits had been converted into shares or other ownership units of selected Measurement Funds by purchasing (or selling, where relevant) such shares or units at the current purchase price of the relevant Measurement Fund at the time of the participant's selection. Deferred Compensation Plan benefits are unsecured general obligations of the Company to the participants, and these obligations rank in parity with the Company's other unsecured and unsubordinated indebtedness. The Company has established a "rabbi trust," which it uses to voluntarily set aside amounts to indirectly fund any obligations under the Deferred Compensation Plan. To the extent that the Company's obligations under the Deferred Compensation Plan exceed assets available under the trust, the Company would be required to seek additional funding sources to fund its liability under the Deferred Compensation Plan.

Generally, the Deferred Compensation Plan provides for distributions of any deferred amounts upon the earliest to occur of a participant's death, disability, retirement or other termination of employment (a "Termination Event"). However, for any deferrals of salary and bonus (but not Company contributions), participants would be entitled to designate a distribution date which is prior to a Termination Event. Generally, the Deferred Compensation Plan allows a participant to elect to receive distributions under the Deferred Compensation Plan in installments or lump-sum payments.

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The estimated life insurance premium payments over the next five years are as follows:

(in thousands)
2014	$	121
2015		467
2016		1,693
2017		1,500
2018		1,661
Total	$	5,442

Total expense/(income) related to deferred compensation was $159 thousand, $338 thousand and $218 thousand in 2013, 2012, and 2011, respectively. The Company had $13.7 million and $11.3 million in deferred compensation assets as of December 31, 2013 and 2012, respectively, included within other assets on the Company’s consolidated statements of financial position and $12.8 million and $11.1 million in deferred compensation liability as of December 31, 2013 and 2012, respectively, located within long-term accrued liabilities on the Company’s consolidated statements of financial position. The amounts of assets were marked to fair value.

14.	STOCK-BASED COMPENSATION

Stock Compensation Plans

Stock options and time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plan.

Stock Options

The Company’s stock options generally vest over a five-year period and expire ten years from the issuance date. For the year ended December 31, 2013, the Company issued approximately 1 thousand shares of common stock upon exercise of stock options by employees and issued 32 thousand shares in 2012.

In order to estimate the fair value of stock options, the Company used the Black-Scholes option valuation model, which was developed for use in estimating the fair value of publicly traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions and these assumptions can vary over time.

Option activity under the Company’s stock option plan as of December 31, 2013, 2012 and 2011 and changes during the year ended December 31, 2013 were as follows:

(in thousands except per share data)			Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at December 31, 2010	136		$	4.66	1.59	$	2,056
Exercised	(103	)		4.48
Outstanding at December 31, 2011	33			5.26	0.93		553
Exercised	(32	)		5.25
Outstanding at December 31, 2012	1		$	5.52	0.08	$	17
Exercised	(1	)		5.52
Outstanding at December 31, 2013	—		$	—	—	$	—
Exercisable at December 31, 2013	—		$	—	—	$	—

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on that day. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

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The aggregate intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011 was less than $0.1 million, $0.5 million and $1.7 million, respectively. Exercise of options during the years ended December 31, 2013, 2012 and 2011 resulted in cash receipts of less than $10 thousand, less than $1 thousand, and $0.1 million, respectively.

Time Lapse Restricted Shares and Restricted Stock Units

TLRSs provide for the issuance of a share of the Company’s Common Stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. TLRSs vest in 20 percent increments starting with the second anniversary of the grant, over six years from the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed.

The Company issued time lapse restricted shares of 0.5 million, 0.8 million and 0.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.

The Company issues new shares from its authorized but unissued share pool. At December 31, 2013, approximately 4.0 million shares of the Company’s common stock were reserved for issuance. In accordance with FASB ASC Topic 718, “Compensation – Stock Compensation,” the Company recognizes the fair value of the award on a straight line basis over the service periods of each award. The Company estimates restricted share forfeiture rates based on its historical experience.

The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense ($ in thousands):

Years ended December 31,	2013			2012			2011
Time Lapse Restricted Stock:
Pre-tax compensation expense	$	10,427		$	9,494		$	7,555
Tax benefit		(4,014	)		(3,655	)		(2,909	)
Restricted stock expense, net of tax	$	6,413		$	5,839		$	4,636

As of December 31, 2013 and 2012, $30.7 million and $30.9 million, respectively, of total unrecognized compensation cost related to time-lapse restricted shares is expected to be recognized over a weighted average period of approximately 3.8 years at December 31, 2013 and approximately 4.1 years at 2012 and 2011, respectively.

The following table summarizes information on unvested restricted stock units outstanding as of December 31, 2013, 2012 and 2011:

			Weighted-Average Grant-Date Fair Value
Unvested Restricted Stock Grants
Unvested as of December 31, 2010	2,664		$	11.09
Forfeited	(74	)		12.90
Vested	(574	)		10.08
Granted	670			19.30
Unvested as of December 31, 2011	2,686			13.30
Forfeited	(92	)		16.41
Vested	(627	)		10.87
Granted	776			22.69
Unvested as of December 31, 2012	2,743			16.41
Forfeited	(56	)		17.52
Vested	(697	)		13.34
Granted	463			24.29
Unvested as of December 31, 2013	2,454		$	18.75

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15.	ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

Accumulated other comprehensive income/(loss) consist of the following (in thousands):

	Pension Liability Adjustment			Foreign Currency Translation			Total
Balance at December 31, 2011	$	(52,969	)	$	4,879		$	(48,090	)
Change during 2012:
Before-tax amount		(15,385	)		1,062			(14,323	)
Tax benefit		5,852			(406	)		5,446
		(9,533	)		656			(8,877	)
Balance at December 31, 2012		(62,502	)		5,535			(56,967	)
Change during 2013
Before-tax amount		45,677			(4,720	)		40,957
Tax benefit		(17,575	)		1,814			(15,761	)
		28,102			(2,906	)		25,196
Balance at December 31, 2013	$	(34,400	)	$	2,629		$	(31,771	)

16.	RELATED PARTY TRANSACTIONS

The Company provides certain administrative services to RPC, Inc. (“RPC”) (a company of which Mr. R. Randall Rollins is also Chairman and which is otherwise affiliated with the Company). The service agreements between RPC and the Company provide for the provision of services on a cost reimbursement basis and are terminable on six months notice. The services covered by these agreements include administration of certain employee benefit programs, and other administrative services. Charges to RPC (or to corporations which are subsidiaries of RPC) for such services and rent totaled approximately $0.1 million for the years ended December 31, 2013, 2012 and 2011.

The Company rents office, hanger and storage space to LOR, Inc. (“LOR”) (a company controlled by R. Randall Rollins and Gary W. Rollins). Charges to LOR (or corporations which are subsidiaries of LOR) for rent totaled $1.1 million, $1.1 and $1.0 for the years ended December 31, 2013, 2012 and 2011, respectively.

All transactions were approved by the Company’s Nominating and Governance Committee of the Board of Directors.

17.	UNAUDITED QUARTERLY DATA

(in thousands except per share data)	First		Second		Third		Fourth
2013
Revenues	$	299,714	$	350,798	$	362,155	$	324,707
Gross profit (Revenues less cost of services provided)	$	144,108	$	176,437	$	181,020	$	157,350
Net income	$	23,179	$	35,994	$	36,200	$	27,957
Income per share:
Income per share—Basic	$	0.16	$	0.25	$	0.25	$	0.19
Income per share—Diluted	$	0.16	$	0.25	$	0.25	$	0.19

2012
Revenues	$	289,465	$	334,872	$	340,179	$	306,393
Gross profit (Revenues less cost of services provided)	$	141,383	$	168,879	$	169,701	$	143,368
Net income	$	23,080	$	33,127	$	32,211	$	22,914
Income per share:
Income per share—Basic	$	0.16	$	0.23	$	0.22	$	0.16
Income per share—Diluted	$	0.16	$	0.23	$	0.22	$	0.16

18.	CASH DIVIDEND

On October 22, 2013, the Board of Directors declared a special year-end dividend of $0.09 per share payable December 10, 2013 to stockholders of record at the close of business November 08, 2013. The Board of Directors, at its quarterly meeting on January 28, 2014, approved a 16.7% increase in the Company’s quarterly dividend. The increased regular quarterly dividend of $0.105 per share will be payable March 10, 2014 to stockholders of record at the close of business February 10, 2014. 2014 marked the twelfth consecutive year Rollins, Inc.’s board of directors has increased the Company’s dividend a minimum of 12% or greater.

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