Item 8. Financial Statements and Supplementary Data.

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Item 8. Financial Statements and Supplementary Data.

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Rollins, Inc. and Subsidiaries
(in thousands except share information)
December 31,20162015
ASSETS
Cash and cash equivalents$142,785$134,574
Trade receivables, net of allowance for doubtful accounts of $11,443 and $10,348, respectively88,49079,864
Financing receivables, short-term, net of allowance for doubtful accounts of $1,727 and $1,844, respectively15,96813,830
Materials and supplies13,72412,801
Other current assets29,20428,365
Total Current Assets290,171269,434
Equipment and property, net133,477121,356
Goodwill255,665249,939
Customer contracts, net117,46692,815
Other intangible assets, net44,31046,116
Financing receivables, long-term, net of allowance for doubtful accounts of $1,430 and $1,444 respectively16,74813,636
Deferred income taxes41,87740,665
Other assets16,82414,690
Total Assets916,538848,651
LIABILITIES
Accounts payable30,28424,919
Accrued insurance26,20124,874
Accrued compensation and related liabilities75,83973,607
Unearned revenue99,82096,192
Other current liabilities44,84733,394
Total current liabilities276,991252,986
Accrued insurance, less current portion32,02330,402
Accrued pension2,8809,735
Long-term accrued liabilities36,09931,499
Total Liabilities347,993324,622
Commitments and Contingencies——
STOCKHOLDERS’ EQUITY
Preferred stock, without par value; 500,000 authorized, zero shares issued——
Common stock, par value $1 per share; 375,000,000 shares authorized, 217,791,511 and 218,753,011 shares issued, respectively217,792218,753
Treasury Stock, par value $1 per share ; 0 and 200,000 shares, respectively—(200)
Paid-in-capital77,45269,762
Accumulated other comprehensive loss(70,075)(71,178)
Retained earnings343,376306,892
Total Stockholders’ Equity568,545524,029
Total Liabilities and Stockholders’ Equity$916,538$848,651

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 31,201620152014
REVENUES
Customer services$1,573,477$1,485,305$1,411,566
COSTS AND EXPENSES
Cost of services provided772,348735,976707,739
Depreciation and amortization50,90244,52243,509
Sales, general and administrative490,528463,742441,706
Gain on sales of assets, net(777)(1,953)(618)
Interest income(160)(160)(254)
1,312,8411,242,1271,192,082
INCOME BEFORE INCOME TAXES260,636243,178219,484
PROVISION FOR INCOME TAXES
Current96,51587,53673,380
Deferred(3,248)3,4938,440
93,26791,02981,820
NET INCOME$167,369$152,149$137,664
INCOME PER SHARE - BASIC$0.77$0.70$0.63
INCOME PER SHARE - DILUTED$0.77$0.70$0.63
Weighted average shares outstanding - basic218,244218,583218,695
Weighted average shares outstanding - diluted218,244218,583218,695
DIVIDENDS PAID PER SHARE$0.50$0.42$0.35

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 31,201620152014
NET INCOME$167,369$152,149$137,664
Other comprehensive earnings/(loss), net of tax
Pension and other postretirement benefit plans1,7059,070(25,575)
Foreign currency translation adjustments(602)(14,760)(8,142)
Other comprehensive earnings/(loss)1,103(5,690)(33,717)
Comprehensive earnings$168,472$146,459$103,947

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 StockTreasuryPaid-ComprehensiveRetained
SharesAmountSharesAmountIn-CapitalIncome (Loss)EarningsTotal
Balance at December 31, 2013218,797$218,797—$—$53,765$(31,771)$197,464$438,255
Net Income137,664137,664
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment—————(25,575)—(25,575)
Foreign Currency Translation Adjustments—————(8,142)—(8,142)
Cash Dividends——————(75,750)(75,750)
Common Stock Issued for Acquisitions58558529029015,831—(292)16,414
Common Stock Purchased (1)(920)(920)(590)(590)(15,831)—(12,004)(29,345)
Treasury Shares(100)(100)100100————
Stock Compensation439439——10,286—(146)10,579
Employee Stock Buybacks(318)(318)——(5,956)—106(6,168)
Excess Tax Benefit on Share-based payments————4,744——4,744
Balance at December 31, 2014218,483$218,483(200)$(200)$62,839$(65,488)$247,042$462,676
Net Income152,149152,149
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment—————9,070—9,070
Foreign Currency Translation Adjustments—————(14,760)—(14,760)
Cash Dividends——————(91,755)(91,755)
Common Stock Purchased (1)(19)(19)————(416)(435)
Stock Compensation597597——11,731—(218)12,110
Employee Stock Buybacks(308)(308)——(6,754)—90(6,972)
Excess Tax Benefit on Share-based payments————1,946——1,946
Balance at December 31, 2015218,753$218,753(200)$(200)$69,762$(71,178)$306,892$524,029
Net Income167,369167,369
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment—————1,705—1,705
Foreign Currency Translation Adjustments—————(602)—(602)
Cash Dividends——————(109,002)(109,002)
Common Stock Purchased (1)(836)(836)————(21,883)(22,719)
Treasury Shares(200)(200)200200————
Stock Compensation388388——12,027——12,415
Employee Stock Buybacks(313)(313)——(8,036)——(8,349)
Excess Tax Benefit on Share-based payments————3,699——3,699
Balance at December 31, 2016217,792$217,792—$—$77,452$(70,075)$343,376$568,545

(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 31,201620152014
OPERATING ACTIVITIES
Net Income$167,369$152,149$137,664
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash charges49,89442,13942,277
Provision for deferred income taxes(3,248)3,4938,440
Stock based compensation expense12,41512,11010,579
Excess tax benefits from share-based payments(3,699)(1,946)(4,744)
Provision for bad debts11,25710,11311,197
Changes in assets and liabilities:
Trade accounts receivables and other accounts receivables(15,868)(12,494)(13,369)
Financing receivables(6,133)(3,630)(941)
Materials and supplies(671)814(1,525)
Other current assets(1,464)(2,144)(10,678)
Other non-current assets2111547,200
Accounts payable and accrued expenses11,182(2,039)15,273
Unearned revenue2,8422,8222,497
Accrued insurance2,9491261,274
Pension funding(3,256)(5,000)(5,250)
Long-term accrued liabilities2,745(311)(5,748)
Net cash provided by operating activities226,525196,356194,146
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired(46,308)(33,462)(63,335)
Capital expenditures(33,081)(39,495)(28,739)
Cash from sale of franchises699767565
Proceeds from sale of assets1,6632,7522,038
Investment tax credits185(504)—
Net cash used in investing activities(76,842)(69,942)(89,471)
FINANCING ACTIVITIES
Payment of dividends(109,002)(91,755)(75,750)
Cash paid for common stock purchased(31,068)(7,407)(35,513)
Excess tax benefits from share-based payments3,6991,9464,744
Net cash used in financing activities(136,371)(97,216)(106,519)
Effect of exchange rate changes on cash(5,101)(2,996)(8,000)
Net increase (decrease) in cash and cash equivalents8,21126,202(9,844)
Cash and cash equivalents at beginning of year134,574108,372118,216
Cash and cash equivalents at end of year$142,785$134,574$108,372
Supplemental disclosure of cash flow information
Cash paid for interest$13$—$—
Cash paid for income taxes, net$88,766$82,690$74,454

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 $3.0 million, $14.8 million, and ($41.7) million in 2016, 2015, and 2014, respectively.

Business Combinations —There were $11.4 million in non-cash acquisitions of assets in business combinations for the year ended December 31, 2016, $0.1 million in 2015 and $24.2 million for 2014. In 2015, the Company used 873,349 shares of Company stock at a price of $18.79 per share or $16.4 million in acquisitions of companies.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2016, 2015, and 2014, 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, Australia, and Europe with international franchises in Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, Canada, Australia, and Mexico. Services are performed through a contract that specifies 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 either serves customers, directly or through franchise operations, 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.

Rollins Australia (“Rollins Australia”), a wholly-owned subsidiary of the Company, acquired Allpest WA (“Allpest”), in February 2014. 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.

Rollins Wildlife Services, a wholly-owned subsidiary of the Company, acquired Critter Control on February 27, 2015. Critter Control was established by 1983 and has operations in 40 states and 2 Canadian provinces.

Rollins UK was formed as a wholly-owned subsidiary of the Company to acquire Safeguard Pest Control (“Safeguard”). Safeguard, which was acquired in June 2016, is a pest control company established in the United Kingdom in 1991 with a history of providing superior pest control, bird control, and specialist services to residential and commercial customers.

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, Australia, 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 24, 2017, there were no subsequent events that would affect the Company’s financial statements.

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.

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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 estimated 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.

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 7% of revenues for each of the years ended December 31, 2016 and 2015, and 8% for the year ended December 2014. Currency exchange translation and increases in $US revenues are the cause of the decreased percentage from 2014.

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, and initial franchise fees are treated as unearned revenue in the Statement of Financial Position until such time. Royalties from 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 2016, 2015, and 2014. 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.

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

Years ended December 31,201620152014
(in thousands)
Advertising$61,258$57,705$54,909
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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.

The Company’s $142.8 million of total cash at December 31, 2016, is primarily cash held at various banking institutions. Approximately $54.4 million is held in cash accounts at international bank institutions and the remaining $88.4 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times may exceed federally insured amounts.

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 no 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 31,20162015
(in thousands) (in US dollars)
Cash held in foreign bank accounts$54,424$34,816

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 benefit pension plan and the nonqualified deferred compensation plan at December 31, 2016 and 2015. See note 14 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, 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 31,201620152014
(in thousands)
Depreciation$24,725$19,354$16,627

Goodwill and Other Intangible Assets - In accordance with the 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, 2016. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or intangible assets with indefinite lives was indicated.

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Impairment of Long-Lived Assets - In accordance with the 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 the 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.

Three-for-two stock split-The Board of Directors at its quarterly meeting on January 27, 2015, authorized a three-for-two stock split by the issuance on March 10, 2015 of one additional common share for each two common shares held of record at February 10, 2015. All share and per share data appearing in the consolidated financial statements and related notes are restated for the three-for-two stock split.

Earnings Per Share - the 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.

The Company has periodically issued share-based payment awards that contain non-forfeitable rights to dividends and therefore are considered participating securities. See note 15 for further information on restricted stock granted to employees.

The basic and diluted calculations are the same as there were no stock options included in diluted earnings per share as we have no stock options outstanding. Basic and diluted earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the respective periods.

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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). All share and per share information in the following chart are restated for the stock split effective March 10, 2015:

Years Ended December 31,201620152014
Net income available to stockholders$167,369$152,149$137,664
Less: Dividends paid
Common Stock(107,880)(90,631)(74,704)
Restricted shares of common stock(1,122)(1,124)(1,046)
Undistributed earnings for the period$58,367$60,394$61,914
Allocation of undistributed earnings:
Common stock$57,722$59,611$61,001
Restricted shares of common stock645783913
Basic and diluted shares outstanding:
Common stock215,831215,749215,470
Restricted shares of common stock2,4132,8343,225
218,244218,583218,695
Basic and diluted earnings per share:
Common stock:
Distributed earnings$0.50$0.42$0.35
Undistributed earnings0.270.280.28
$0.77$0.70$0.63
Restricted shares of common stock
Distributed earnings$0.46$0.40$0.32
Undistributed earnings0.270.280.28
$0.73$0.68$0.60

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 the FASB ASC Topic 718 “Compensation – Stock Compensation.” Time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plan.

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. The fair value of these awards is recognized as compensation expense, net of forfeitures, on a straight-line basis over six years.

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

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Franchising Program – Rollins’ wholly-owned subsidiary, Orkin, had 50, 51 and 55 domestic franchises as of December 31, 2016, 2015 and 2014, respectively. Transactions with Orkin’s domestic franchises involve sales of customer contracts to establish new Orkin franchises, initial franchise fees and royalties. The customer contracts and initial Orkin franchise fees are typically sold for a combination of cash and notes due over periods ranging up to five years. Notes receivable from Orkin franchises were $5.0 million at December 31, 2016 and $4.4 million at December 31, 2015. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

All Orkin domestic franchises have a guaranteed repurchase clause that the Orkin franchise may be repurchased by Orkin at a later date once it has been established; therefore, initial Orkin domestic franchise fees are deferred in accordance with the 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 Orkin franchise fees were $3.0 million, $2.9 million, and $3.0 million at December 31, 2016, 2015, and 2014, respectively.

Royalties from Orkin franchises are accrued and recognized in accordance with the FASB ASC Topic 952-605 “Franchisor Revenue Recognition,” as revenues are earned on a monthly basis. Revenue from Orkin franchises was $5.1 million for the year ended December 31, 2016 and $4.9 million and $4.5 million for the years ended December 31, 2015 and 2014, respectively.

As of December 31, 2016, 2015 and 2014, Orkin had 70, 48, and 37 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 Orkin franchises was $2.0 million, $1.5 million, and $1.2 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Rollins’ wholly-owned subsidiary, Rollins Wildlife Services, had 94 and 108 Critter Control franchises in the United States and Canada as of December 31, 2016 and 2015, respectively. Transactions with Critter Control franchises involve sales of territories to establish new franchises, initial franchise fees and royalties. The territories and initial franchise fees are typically sold for a combination of cash and notes. Notes receivable from franchises were $0.3 million and $0.4 million at December 31, 2016 and 2015, respectively. These notes are not guaranteed. The Company anticipates that should there be any losses from franchisees these losses would be recouped by removing the individual franchisee and re-selling the abandoned territory. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

Royalties from franchises are accrued and recognized in accordance with the FASB ASC Topic 952-605 “Franchisor Revenue Recognition,” as revenues are earned on a monthly basis.

New Accounting Standards

Recently adopted accounting standards

In May 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”). Under the guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. The new guidance is effective in 2017, however early adoption is permitted. We have elected to early adopt ASU 2015-07 retrospectively for the investments eligible for the NAV practical expedient.

In November 2015, the FASB issued ASU No. (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this update. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. We have elected to early adopt ASU 2015-17 retrospectively in the first quarter of 2016. As a result, we have presented all deferred tax assets and liabilities as noncurrent on our consolidated balance sheets, and have reclassified current deferred tax assets and liabilities on our consolidated balance sheet as of December 31, 2015. There was no net impact on our results of operations as a result of the adoption of ASU 2015-17.

Recently issued accounting standards to be adopted in 2017 or later

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB approved a one-year deferral of this standard, with a revised effective date for fiscal years beginning after December 15, 2017. Early adoption is permitted, although not prior to fiscal years beginning after December 15, 2016. The standard permits either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014 – 09 recognized at the date of adoption (which includes additional footnote disclosures). The new standard is effective for the Company in its fiscal year 2018 and permits the use of either the retrospective or a cumulative effect transition method. The Company is evaluating the new standard on its consolidated financial statements and related disclosures. The Company anticipates using the modified retrospective approach and intends to engage a consultant to assist the Company with implementation of this standard.

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In August 2015, the FASB issued ASU No. 2015-14 (Topic 606): Revenue from Contracts with Customers. ASU 2015-14 defers the effective date of Update 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in Update 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and 2 interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in Update 2014-09. The new standard is effective for the Company in its fiscal year 2018 and permits the use of either the retrospective or a cumulative effect transition method. The Company is evaluating the new standard on its consolidated financial statements and related disclosures. The Company anticipates using the modified retrospective approach and intends to engage a consultant to assist the Company with implementation of this standard.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2016, and interim periods within annual periods. Earlier adoption is permitted for any entity in any interim or annual reporting period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods. Earlier adoption is permitted for any entity in any interim or annual reporting period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The amendments in the update are effective for the Company’s financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard in this update is effective for the Company’s financial statements issued for fiscal years beginning in 2020. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.

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2.ACQUISITIONS

The Company has made 34, 12, and 21 acquisitions that are not material individually or in the aggregate to the Company’s consolidated financial statements during the years ended December 31, 2016, 2015, and 2014, respectively. The largest acquisitions made during these periods are as follows:

Rollins Australia, a wholly-owned subsidiary of the Company, acquired Allpest WA (“Allpest”), in February 2014. 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.

Acquisition of Wilco Enterprises, Inc. (sole holder of PermaTreat Exterminating Company, Inc. d/b/a PermaTreat Pest Control, Inc.) (“PermaTreat”) – The Company completed the acquisition of PermaTreat effective August 1, 2014. PermaTreat is a leading pest control company located in Central and Northern Virginia and was founded in 1967. The Company issued 873,349 shares of its $1 par value common stock valued at $18.79 per share to Joseph R. Wilson and Jack Broome.

The Company completed its acquisition of Critter Control on February 27, 2015. Critter Control was established by Kevin Clark in 1983 and is headquartered in Traverse City, Michigan. The business is currently 100% franchised, operating in 40 states and two Canadian provinces.

Rollins UK was formed as a wholly-owned subsidiary of the Company to acquire Safeguard Pest Control (“Safeguard”). Safeguard, which was acquired in June 2016, is a pest control company established in the United Kingdom in 1991 with a history of providing superior pest control, bird control, and specialist services to residential and commercial customers.

Total cash purchase price for the Company’s acquisitions in 2016 and 2015 were $46.3 million and $33.5 million, respectively.

The fair values of major classes of assets acquired and liabilities assumed along with the contingent consideration liability recorded during the valuation period of acquisition is included in the reconciliation of the total consideration as follows (in thousands):

December 31,20162015
Accounts receivable, net$3,334$1,711
Materials and supplies35371
Equipment and property4,525948
Goodwill8,613196
Customer contracts49,36512,398
Other intangible assets1,28520,092
Current liabilities(10,809)(2,329)
Other assets and liabilities, net(2,739)460
Total consideration paid53,92733,547
Less: Contingent consideration liability(7,619)(85)
Total cash purchase price$46,308$33,462
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. The Credit Agreement was amended on October 30, 2014 to extend the maturity date to October 31, 2018 and add three optional one year extensions. On October 27, 2015 the Company exercised a one year extension option to extend the maturity date to October 31, 2019. As of December 31, 2016, no borrowings were outstanding under the line of credit or under the swingline subfacility. The Company maintains approximately $35.0 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, 2019, subject to up to two optional extensions 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, 2015, 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 was in compliance with applicable debt covenants at December 31, 2016 and expects to maintain compliance throughout 2017.

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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 31,20162015
(in thousands)
Gross Trade Receivables$99,933$90,212
Allowance for Doubtful Accounts(11,443)(10,348)
Net Trade Receivables$88,490$79,864

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 a potential obligor to have good credit worthiness with low risk before entering into a contract. Depending upon the individual’s credit score the Company may accept with 100% financing or require a significant down payment or turndown the contract. Delinquencies of accounts are monitored each month. Financing receivables include installment receivable amounts which are due subsequent to one year from the balance sheet dates.

At December 31,20162015
(in thousands)
Gross Financing Receivables, short-term$17,695$15,674
Gross Financing Receivables, long-term18,17815,080
Allowance for Doubtful Accounts(3,157)(3,288)
Net Financing Receivables$32,716$27,466

Total financing receivables, net were $32.7 million and $27.5 million at December 31, 2016 and December 31, 2015, respectively. Financing receivables are generally 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 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 3.2% and 3.0% for the twelve months ended December 31, 2016 and December 31, 2015, respectively. Due to the low percentage of charge-off receivables and the high credit worthiness of the potential obligor, Management considers 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, 2016 and 2015, there were ten and seven accounts that are greater than 180 days past due, respectively, which have been fully reserved.

Included in financing receivables are notes receivable from franchise owners. The majority of 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 has historically been well above the receivable due from the franchise owner. Also included in notes receivables are franchise notes from other brands which are not guaranteed and do not have the same historical valuation.

The carrying amount of notes receivable approximates fair value as the interest rates approximate market rates for these types of contracts. Long-term installment receivables, net were $16.7 million and $13.6 million at December 31, 2016 and 2015, respectively.

Rollins’ wholly-owned subsidiary, Rollins Wildlife Services, had 94 and 108 Critter Control franchises in the United States and Canada as of December 31, 2016 and 2015, respectively. Transactions with franchises involve sales of territories to establish new franchises, initial franchise fees and royalties. The territories and initial franchise fees are typically sold for a combination of cash and notes. Notes receivable from franchises were $0.3 million and $0.4 million at December 31, 2016 and 2015, respectively. These notes are not guaranteed. The Company anticipates that should there be any losses from franchisees these losses would be recouped by removing the individual franchisee and re-selling the abandoned territory. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

Royalties from franchises are accrued and recognized in accordance with the FASB ASC Topic 952-605 “Franchisor Revenue Recognition,” as revenues are earned on a monthly basis.

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.

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

At December 31,20162015
(in thousands)
Balance, beginning of period$3,288$3,150
Additions to allowance890965
Deductions, net of recoveries(1,021)(827)
Balance, end of period$3,157$3,288
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The following is a summary of the past due financing receivables:

December 31,20162015
(in thousands)
30-59 days past due$1,384$721
60-89 days past due347531
90 days or more past due937757
Total$2,668$2,009

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

December 31,20162015
Current92.5%93.5%
30-59 days past due3.9%2.3%
60-89 days past due1.0%1.7%
90 days or more past due2.6%2.5%
Total100.0%100.0%
6.EQUIPMENT AND PROPERTY

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

December 31,20162015
(in thousands)
Buildings$50,119$49,282
Operating Equipment82,19683,591
Furniture and Fixtures16,25515,168
Computer Equipment and Systems150,661116,823
299,231264,864
Less—Accumulated Depreciation(190,279)(167,998)
108,95296,866
Land24,52524,490
Net equipment and property$133,477$121,356

Included in equipment and property, net at December 31, 2016 and 2015, are fixed assets held in foreign countries of $4.6 million, and $3.4 million, respectively.

Total depreciation expense was approximately $24.7 million in 2016, $19.4 million in 2015 and $16.6 million in 2014.

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 14.

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.

The following table presents our nonqualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2016.

TotalLevel 1Level 2Level 3
Cash and cash equivalents$188$188$—$—
Total$188$188$—$—

The following table presents our nonqualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2015.

TotalLevel 1Level 2Level 3
Cash and cash equivalents$140$140$—$—
Total$140$140$—$—

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, 2016 the Deferred Compensation Plan had 70 life insurance policies with a net face value of $42.4 million. The cash surrender value of these life insurance policies had a net realizable value of $15.7 million and $13.9 million at December 31, 2016 and 2015, respectively. The total deferred compensation plan assets, recorded in other assets on the Company’s consolidated statements of financial position, were $15.9 million and $14.0 million at December 31, 2016 and 2015, 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 $255.7 million as of December 31, 2016 and $249.9 million as of December 31, 2015. Goodwill increased for the year ended December 31, 2016 due primarily to acquisitions, partially offset by currency conversion of foreign goodwill. The carrying amount of goodwill in foreign countries was $42.7 million as of December 31, 2016 and $36.9 million as of December 31, 2015. The changes in the carrying amount of goodwill for the twelve months ended December 31, 2016 and 2015 are as follows:

(in thousands)
Goodwill at December 31, 2014$255,563
Goodwill acquired and finalization of allocation of purchase price on previous acquisitions196
Goodwill adjustments due to currency translation(5,820)
Goodwill at December 31, 2015$249,939
Goodwill acquired8,613
Goodwill adjustments due to currency translation(2,887)
Goodwill at December 31, 2016$255,665
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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 the 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 7 to 20 years dependent upon customer type. The carrying amount and accumulated amortization for customer contracts were as follows:

December 31,20162015
(in thousands)
Customer contracts$251,194$214,201
Less: Accumulated amortization(133,728)(121,386)
Customer contracts, net$117,466$92,815

The carrying amount of customer contracts in foreign countries was $29.7 million as of December 31, 2016 and $14.9 million as of December 31, 2015.

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 31,20162015
(in thousands)
Other intangible assets$56,937$56,491
Less: Accumulated amortization(12,627)(10,375)
Other intangible assets, net$44,310$46,116

The carrying amount of other intangible assets in foreign countries was $3.8 million as of December 31, 2016 and $4.2 million as of December 31, 2015.

Included in the table above are trademarks and trade names of $32.7 million and $32.8 million at December 31, 2016 and 2015, respectively. Also included in the table above are non-amortizable, indefinite lived intangible assets of $29.7 million at December 31, 2016 and 2015, respectively.

The carrying amount of customer contracts and other intangible assets, net were as follows:

December 31,20162015
(in thousands)
Customer contracts, net$117,466$92,815
Other intangible assets, net44,31046,116
Customer contracts and other intangible assets, net$161,776$138,931

Total amortization expense was approximately $26.2 million in 2016, $25.2 million in 2015 and $26.9 million in 2014.

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)
2017$26,630
201823,219
201920,339
202015,937
2021$13,774
10.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. To manage this risk, the Company enters into derivative financial instruments from time to time. Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments from time to time to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

Hedges of Foreign Exchange Risk

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

The Company does not currently designate any of these foreign exchange forwards under hedge accounting, but rather reflects the changes in fair value immediately in earnings. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a net loss of $0.4 million for the twelve months ended December 31, 2016. As of December 31, 2016, the Company had no outstanding derivatives.

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The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of December 31, 2016 and December 31, 2015 (in thousands):

Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated
as Hedging Instruments for the Twelve Months Ended December 31, 2016 and 2015
Location of Gain orAmount of Gain or (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments(Loss) Recognized in IncomeTwelve Months Ended December 31,
20162015
Sell AUD/Buy USD Fwd ContractOther Inc/(Exp)$(24)$—
Sell CAD/Buy USD Fwd ContractOther Inc/(Exp)(406)—
Total$(430)$—
11.INCOME TAXES

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

For the years ended December 31,201620152014
(in thousands)
Current:
Federal$69,102$68,667$59,053
State12,94911,3359,936
Foreign14,4647,5344,391
Total current tax96,51587,53673,380
Deferred:
Federal(5,991)1,2866,123
State2,8922,0782,159
Foreign(149)129158
Total deferred tax(3,248)3,4938,440
Total income tax provision$93,267$91,029$81,820

The primary factors causing income tax expense to be different than the federal statutory rate for 2016, 2015, and 2014 are as follows:

For the years ended December 31,201620152014
(in thousands)
Income tax at statutory rate$91,222$85,112$76,820
State income tax expense (net of federal benefit)8,8768,3777,429
Foreign tax expense/(benefit)9,857(1,729)(1,760)
Foreign tax credit(19,155)(2,816)(205)
Other2,4672,085(464)
Total income tax provision$93,267$91,029$81,820

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 35.8% on income before income taxes for the year ended December 31, 2016. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes and the increase of available foreign tax credit.

For 2015 and 2014 the effective tax rate was 37.4% and 37.3%, respectively. The effective income tax rate differs from the annual federal statutory tax rate primarily because of state and foreign income taxes and the release of certain deferred tax liabilities.

During 2016, 2015 and 2014, the Company paid income taxes of $88.8 million, $82.7 million and $74.5 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 at December 31, 2016 and 2015 are as follows:

December 31,20162015
(in thousands)
Deferred tax assets:
Termite accrual$1,848$1,968
Insurance and contingencies26,56024,991
Unearned revenues14,61015,026
Compensation and benefits15,79815,288
State and foreign operating loss carryforwards12,81710,629
Bad debt reserve4,8424,779
Foreign Tax Credit18,2132,554
Other1,8041,579
Net Pension Liability1,1093,768
Valuation allowance(6,507)(3,969)
Total deferred tax assets91,09476,613
Deferred tax liabilities:
Depreciation and amortization(21,217)(10,985)
Intangibles and other(28,000)(24,963)
Total deferred tax liabilities(49,217)(35,948)
Net deferred tax assets$41,877$40,665
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Analysis of the valuation allowance:

December 31,20162015
(in thousands)
Valuation allowance at beginning of year$3,969$3,415
Increase in valuation allowance2,538554
Valuation allowance at end of year$6,507$3,969

As of December 31, 2016, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $191.3 million, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2017 and 2029. Management believes that it is unlikely to be able to utilize approximately $29.6 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 $2.5 million due to the foreign net operating losses.

Earnings from continuing operations before income tax include foreign income of $6.4 million in 2016, $17.0 million in 2015 and $16.2 million in 2014. 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.

The total amount of unrecognized tax benefits at December 31, 2016 that, if recognized, would affect the effective tax rate is $0.0 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

December 31,20162015
(in thousands)
Balance at Beginning of Year$2,554$—
Additions for tax positions of prior years—2,554
Balance at End of Year$2,554$2,554

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 addition, the Company has subsidiaries in various state and international jurisdictions that are currently under audit for years ranging from 2010 through 2014. 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 2012.

It is reasonably possible that the amount of unrecognized tax benefits will increase in the next 12 months.

The Company’s policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.4 million and $0.9 million as of December 31, 2016 and December 31, 2015, respectively. The Company recognized interest and penalties of $0.1 million, $0.2 million, and $0.1 million in 2016, 2015, and 2014, respectively.

12.ACCRUAL FOR TERMITE CONTRACTS

In accordance with the 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 31,20162015
(in thousands)
Beginning balance$5,085$4,875
Current year provision3,1904,384
Settlements, claims, and expenditures(3,475)(4,174)
Ending balance$4,800$5,085

The accrual for termite contracts is included in other current liabilities, $2.7 million and $2.3 million at December 31, 2016 and 2015, respectively and long-term accrued liabilities, $2.1 million and $2.8 million at December 31, 2016 and 2015, respectively on the Company’s consolidated statements of financial position.

13.COMMITMENTS AND CONTINGENCIES

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

For the years ended December 31,201620152014
(in thousands)
Rental Expense$66,774$60,508$54,487

Future commitments under operating leases are as summarized:

(in thousands)Operating leases
2017$31,595
201821,627
201917,521
202014,738
202111,444
Thereafter27,151
Total minimum obligation$124,076

In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries’ services caused damage. In addition, the Company defends employment related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters.

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On December 2, 2014, Plaintiff Killian Pest Control sued Rollins, Inc. and its subsidiary HomeTeam Pest Defense alleging that HomeTeam’s exclusive use of its “tubes in the walls” system violates the federal Sherman Antitrust Act, and California’s Cartwright Act and Business and Professions Code. Plaintiffs seek a declaratory judgment that the alleged misconduct violates the Sherman and Cartwright Acts, and the Business and Professions Code; a permanent injunction against continuing alleged violations; and monetary damages. The lawsuit is pending in the United States District Court, Northern District of California. Because discovery remains open and there are unresolved questions of fact and law, the Company cannot currently estimate the loss, if any, and intends to defend this matter vigorously.

On December 2, 2014, Plaintiff Jose Luis Garnica, on behalf of himself and a class of similarly situated customers, sued Rollins, Inc. and its subsidiary HomeTeam Pest Defense alleging that HomeTeam’s exclusive use of its “tubes in the walls” system violates the federal Sherman Antitrust Act. A second Plaintiff, Cora Potter, subsequently was added. Plaintiffs seek a declaratory judgment that the alleged misconduct violates the Sherman Act; a permanent injunction against continuing violations; and monetary damages. On February 3, 2017, the Court issued an order denying Plaintiffs’ Motion for Class Certification. At a hearing on February 9, 2017, the Court granted Plaintiffs leave to seek certification of a class of customers limited to their own geographic market, the Bakersfield, California area. The lawsuit is pending in the United States District Court, Northern District of California. Because discovery remains open and there are unresolved questions of fact and law, the Company cannot currently estimate the loss, if any, and intends to defend this matter vigorously.

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.

14.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 provide 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 $3.3 million, $5.0 million and $5.3 million to the Plans during the years ended December 31, 2016, 2015 and 2014 respectively.

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 2014, the Plan was amended to allow certain vested 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 $22,000, or an annuity starting date of December 1, 2014. In total $6.3 million was paid by the Plan during the year ended December 31, 2014, under this program. The Plan did not offer any options for the years ended December 31, 2016 and 2015.

The Company 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 the 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.

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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 31,20162015
(in thousands)
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated Benefit obligation at beginning of year$200,375$221,721
Service cost7186
Interest cost9,3318,915
Actuarial (gain) loss6,079(20,283)
Benefits paid(18,634)(10,064)
Accumulated Benefit obligation at end of year197,222200,375
CHANGE IN PLAN ASSETS
Market value of plan assets at beginning of year190,640192,163
Actual return on plan assets19,0803,541
Employer contribution3,2565,000
Benefits paid(18,634)(10,064)
Fair value of plan assets at end of year194,342190,640
Funded status$(2,880)$(9,735)
Amounts Recognized in the Statement of Financial Position consist of:
December 31,20162015
(in thousands)
Noncurrent liabilities$(2,880)$(9,735)
Amounts Recognized in Accumulated Other Comprehensive Income consists of:
December 31,20162015
(in thousands)
Net actuarial loss$80,622$83,667

The accumulated benefit obligation for the defined benefit pension plans were $197.2 million and $200.4 million at December 31, 2016 and 2015, respectively. Accumulated benefit obligation and projected benefit obligation are materially the same for the Plans. Pre-tax (increases)/decreases in the pension liability which were (charged, net of tax) credited to other comprehensive income/ (loss) were $3.0 million, $14.8 million, and $(41.7) million in 2016, 2015, and 2014, respectively.

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

December 31,201620152014
ACCUMULATED BENEFIT OBLIGATION
Discount rate4.45%4.70%4.15%
Rate of compensation increaseN/AN/AN/A
NET BENEFIT COST
Discount rate4.70%4.15%5.20%
Expected return on plan assets7.00%7.00%7.00%
Rate of compensation increaseN/AN/AN/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 2016, 2015, and 2014 the Company utilized a yield curve analysis.

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

Years ended December 31,201620152014
(in thousands)
Service cost$71$86$74
Interest cost9,3318,9159,427
Expected return on plan assets(13,219)(12,788)(12,431)
Amortization of net loss3,2633,7612,439
Net periodic benefit$(554)$(26)$(491)

The benefit obligations recognized in other comprehensive income for the years ended December 31, 2016, 2015, and 2014 are summarized as follows:

(in thousands)201620152014
Pretax loss/(income)$218$(11,035)$44,159
Amortization of net loss(3,263)(3,761)(2,439)
Total recognized in other comprehensive income(3,045)(14,796)41,720
Total recognized in net periodic benefit (income)/cost and other comprehensive income$(3,599)$(14,822)$41,229

The Company expects to amortize a net loss of $3.2 million in 2017. At December 31, 2016 and 2015, 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 $42.1 million and $40.5 million at December 31, 2016 and 2015, respectively.

The Plans’ weighted average asset allocation at December 31, 2016 and 2015 by asset category, along with the target allocation for 2016, are as follows:

Target allocations forPercentage of plan assets as of December 31,
Asset category201720162015
Cash and cash equivalents0.0%—5.0%3.5%1.9%
Equity securities - Rollins stock0.0%—40.0%20.7%20.5%
Domestic equity - all other0.0%—40.0%21.7%21.2%
International equity0.0%—30.0%21.0%22.2%
Debt securities - core fixed income15.0%—50.0%23.5%24.0%
Real estate0.0%—20.0%6.4%6.6%
Alternative/Opportunistic/Special0.0%—20.0%3.2%3.6%
Total100.0%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 $5.5 million during fiscal 2017.

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, 2016 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 NAV 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_._

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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.

The following table presents our plan assets using the fair value hierarchy as of December 31, 2016. 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 2016, we elected to early adopt the provisions of ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or Its Equivalent)”. This ASU removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured at the net asset value per share practical expedient. In addition, it also limits disclosure investments for which the entity has elected to measure the fair value using the practical expedient. The guidance, which required retrospective application, resulted in the reclassification of $18.8 million and $19.4 million of Pension Plan Assets from Level 3 categorization as of December 31, 2016 and 2015, respectively.

(in thousands)TotalLevel 1Level 2NAV
(1) Cash and Cash Equivalents$6,834$6,834$—$—
(2) Fixed Income Securities45,673—45,673—
Domestic Equity Securities
Rollins, Inc. Stock42,12042,120——
Other Securities40,17811,61428,564—
(3) International Equity Securities40,767—40,767—
(4) Real Estate12,527——12,527
(5) Alternative/Opportunistic/Special6,243——6,243
Total$194,342$60,568$115,004$18,770

The following table presents our plan assets using the fair value hierarchy as of December 31, 2015. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

(in thousands)TotalLevel 1Level 2NAV
(1) Cash and Cash Equivalents$3,543$3,543$—$—
(2) Fixed Income Securities45,712—45,712—
Domestic Equity Securities
Rollins, Inc. Stock40,51040,510——
Other Securities39,07012,00827,062—
(3) International Equity Securities42,373—42,373—
(4) Real Estate12,565——12,565
(5) Alternative/Opportunistic/Special6,867——6,867
Total$190,640$56,061$115,147$19,432
(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.
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(3)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)Alternative/Opportunistic/Special funds can invest across the capital structure in both liquid and illiquid securities that are valued using a market approach based on the quoted market prices of identical instruments, or if no market price is available, instruments will be held at their fair market value (which may be cost) as reasonably determined by the investment manager, independent dealers, or pricing services.

There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.

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

(in thousands)
2017$11,181
201811,699
201912,048
202012,413
202112,692
Thereafter66,417
Total$126,450

Defined Contribution 401(k) Savings Plan

The Company sponsors a defined contribution 401(k) Savings Plan that is available to a majority of the Company’s full-time employees the first day 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 $11.0 million for the year ended December 31, 2016 and $10.2 million and $8.5 million for the years ended December 31, 2015 and 2014, respectively. At December 31, 2016, 2015, and 2014 approximately, 36.4%, 33.5%, and 29.3%, respectively of the plan assets consisted of Rollins, Inc. Common Stock. Total administrative fees paid by the Company for the Plan were less than $0.1 million for each of the years ended December 31, 2016, 2015 and 2014.

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.

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.

At December 31, 2016 the Deferred Compensation Plan had 70 life insurance policies with a net face value of $42.4 million. The cash surrender value of these life insurance policies were worth $15.7 million and $13.9 million at December 31, 2016 and 2015, respectively.

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

(in thousands)
2017$567
20181,579
20191,390
20201,482
20211,466
Total$6,484

Total expense related to deferred compensation was $230 thousand, $231 thousand and $207 thousand in 2016, 2015, and 2014, respectively. The Company had $15.9 million and $14.0 million in deferred compensation assets as of December 31, 2016 and 2015, respectively, included within other assets on the Company’s consolidated statements of financial position and $15.7 million and $14.1 million in deferred compensation liability as of December 31, 2016 and 2015, 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.

15.STOCK-BASED COMPENSATION

Stock Compensation Plans

Time Lapse Restricted Shares and Restricted Stock Units

Time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plan. The Company recognizes compensation expense for the unvested portion of awards outstanding over the remainder of the service period. The compensation cost recorded for these awards is based on their closing stock price at the grant date less the cost of estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods to reflect actual forfeitures. Cash flows related to share-based payment awards to employees that result in tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) are classified as a financing activity in the accompanying consolidated statements of cash flows.

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, 0.7 million, and 0.6 million for the years ended December 31, 2016, 2015, and 2014, respectively.

The Company issues new shares from its authorized but unissued share pool. At December 31, 2016, approximately 4.7 million shares of the Company’s common stock were reserved for issuance. In accordance with the 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 31,201620152014
Time Lapse Restricted Stock:
Pre-tax compensation expense$12,415$12,110$10,579
Tax benefit(4,805)(4,687)(4,094)
Restricted stock expense, net of tax$7,610$7,423$6,485

As of December 31, 2016 and 2015, $29.9 million and $31.3 million, respectively, of total unrecognized compensation cost related to time-lapse restricted shares are expected to be recognized over a weighted average period of approximately 3.8 years at December 31, 2016 and December 31, 2015, respectively.

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The following table summarizes information on unvested restricted stock units outstanding as of December 31, 2016, 2015 and 2014:

Number of Shares (in thousands)Weighted-Average Grant-Date Fair Value
Unvested Restricted Stock Grants
Unvested as of December 31, 20133,680$12.50
Forfeited(178)14.27
Vested(1,018)10.31
Granted61619.16
Unvested as of December 31, 20143,10014.45
Forfeited(85)15.71
Vested(946)12.04
Granted68222.43
Unvested as of December 31, 20152,75117.21
Forfeited(114)19.54
Vested(879)14.49
Granted50326.45
Unvested as of December 31, 20162,261$20.21
16.ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

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

Pension Liability AdjustmentForeign Currency TranslationTotal
Balance at December 31, 2014$(59,975)$(5,513)$(65,488)
Change during 2015:
Before-tax amount14,796(14,760)36
Tax benefit(5,726)—(5,726)
9,070(14,760)(5,690)
Balance at December 31, 2015(50,905)(20,273)(71,178)
Change during 2016
Before-tax amount3,045(602)2,443
Tax benefit(1,340)—(1,340)
1,705(602)1,103
Balance at December 31, 2016$(49,200)$(20,875)$(70,075)
17.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 each of the years ended December 31, 2016, 2015, and 2014.

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 $1.0 million for each of the years ended December 31, 2016, 2015, and 2014, respectively.

In 2014, P.I.A. LLC, a company owned by the Chairman of the Board of Directors, R. Randall Rollins, purchased a Lear Model 35A jet and entered into a lease arrangement with the Company for Company use of the aircraft for business purposes. The lease is terminable by either party on 30 days’ notice. The Company pays $100.00 per month rent for the leased aircraft, and pays all variable costs and expenses associated with the leased aircraft, such as the costs for fuel, maintenance, storage and pilots. The Company has the priority right to use of the aircraft on business days, and Mr. Rollins has the right to use the aircraft for personal use through the terms of an Aircraft Time Sharing Agreement with the Company. During the years ended December 31, 2016 and 2015, the Company paid approximately $0.5 million and $0.7 million in rent and operating costs for the aircraft respectively. During 2016, the Company accounted for 100 percent of the use of the aircraft. All transactions were approved by the Company’s Nominating and Governance Committee of the Board of Directors.

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18.UNAUDITED QUARTERLY DATA
(in thousands except per share data)FirstSecondThirdFourth
2016
Revenues$352,736$411,133$423,994$385,614
Gross profit (Revenues less cost of services provided)$174,934$215,190$218,386$192,619
Net income$31,928$47,783$49,651$38,007
Income per share:
Income per share—Basic$0.15$0.22$0.23$0.17
Income per share—Diluted$0.15$0.22$0.23$0.17
2015
Revenues$330,909$392,150$399,746$362,500
Gross profit (Revenues less cost of services provided)$162,866$201,941$204,257$180,265
Net income$30,281$45,073$45,046$31,749
Income per share:
Income per share—Basic$0.14$0.21$0.21$0.15
Income per share—Diluted$0.14$0.21$0.21$0.15
19.CASH DIVIDEND

On October 25, 2016, the Board of Directors declared a special year-end dividend of $0.10 per share payable December 9, 2016 to stockholders of record at the close of business November 10, 2016. The Board of Directors, at its quarterly meeting on January 24, 2017, approved a 15.0% increase in the Company’s quarterly dividend. The increased regular quarterly dividend of $0.115 per share will be payable March 10, 2017 to stockholders of record at the close of business February 10, 2017.

20.THREE-FOR-TWO STOCK SPLIT

On January 27, 2015, the Board of Directors at its quarterly meeting authorized a three-for-two stock split of the Company’s common shares by the issuance on March 10, 2015 of one additional common share for each two common shares held of record at February 10, 2015. The stock split increased the Company’s outstanding shares from 145,783,052 to 218,674,578 shares.

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Below are the effects of the stock split on the Company’s Stockholders’ equity:

(in thousands)December 31, 2014 (pre-split)AdjustmentDecember 31, 2014 (post-split)
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, 218,482,907 shares issued(1)145,72272,761218,483
Treasury Stock, par value $1 per share; 200,000 and 0 shares, respectively(200)—(200)
Paid-in-capital62,839—62,839
Accumulated other comprehensive loss(65,488)—(65,488)
Retained earnings319,803(72,761)247,042
Total stockholders’ equity$462,676$—$462,676

(1) Shares issued increased as follows: 2014 - 72,760,969; 2013 - 72,932,222

Below are the effects of the stock split on the Company’s earnings per share:

December 31, 2014December 31, 2014
(in thousands, except per share amounts)(pre-split)Adjustment(post-split)
Net Income$137,664$—$137,664
Basic Earnings Per Share$0.94$(0.31)$0.63
Diluted Earnings Per Share$0.94$(0.31)$0.63
Shares used for computation:
Basic145,79672,899218,695
Diluted145,79672,899218,695
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