Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Presentation

This discussion should be read in conjunction with our audited financial statements and related notes included elsewhere in this document. The following discussion (as well as other discussions in this document) contains forward-looking statements. Please see “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of uncertainties, risks and assumptions associated with these statements.

The Company

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, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico. Services are performed through a contract that specifies the treatment and the pricing arrangement with the customer.

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

Overview

RESULTS OF OPERATIONS

														% Better/(worse) compared
		(in thousands)												to prior year
Years ended December 31,		2018				2017				2016				2018				2017
Revenues		$	1,821,565			$	1,673,957			$	1,573,477				8.8				6.4
Cost of services provided			894,437				819,943				772,348				(9.1	)			(6.2	)
Depreciation and amortization			66,792				56,580				50,902				(18.0	)			(11.2	)
Sales, general and administrative			550,698				503,433				490,528				(9.4	)			(2.6	)
Gain on sales of assets, net			(875	)			(242	)			(777	)			261.6				(68.9	)
Interest income, net			(220	)			(259	)			(160	)			(15.1	)			61.9
Income before income taxes			310,733				294,502				260,636				5.5				13.0
Provisions for income taxes			79,070				115,378				93,267				31.5				(23.7	)
Net income		$	231,663			$	179,124			$	167,369				29.3				7.0

General Operating Comments

2018 marked the Company’s 21st consecutive year of improved revenues and profits. Revenues for the year rose 8.8 percent to $1.822 billion compared to $1.674 billion for the prior year. Income before income taxes increased 5.5% to $310.7 million compared to $294.5 million the prior year. Net income increased 29.3% to $231.7 million, with earnings per diluted share of $0.71 compared to $179.1 million, or $0.55 per diluted share for the prior year.

All of the Company’s business lines experienced growth for the year, with residential pest control revenues up 9.1%, commercial pest control revenues up 6.0% and termite and ancillary services revenues up 12.8%, each compared to 2017.

Results of Operations—2018 Versus 2017

Overview

The Company’s revenues increased to $1.822 billion in 2018, an 8.8% increase compared to 2017. Gross margin decreased to 50.9% for 2018 from 51.0% in 2017. Sales, general and administrative expense were 30.2% of revenues in 2018 compared to 30.1% in 2017. The Company’s depreciation and amortization margin increased 0.3 percentage points to 3.7% in 2018 compared to 3.4% in 2017. Rollins’ net income of $231.7 million in 2018 was an increase of $52.5 million or 29.3% over $179.1 million in 2017. Net profit margin improved to 12.7% in 2018 from 10.7% in 2017. Rollins continued to expand our global brand recognition with acquisitions in the United States, Canada, Singapore, and Australia as well as expanding our Orkin international franchise program in numerous countries around the globe. The Company is now in 57 countries and continues to seek new international opportunities.

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Revenues

Revenues for the year ended December 31, 2018 were $1.822 billion, an increase of $147.6 million or 8.8% from 2017 revenues of $1.674 billion. Growth occurred across all service lines with our Canadian and Australian companies being hindered by unfavorable foreign currency exchange rates. Growth and pricing accounted for approximately 5.3% of our increase and our acquisitions contributed the remaining revenue growth. Commercial pest control represented approximately 39% of the Company’s revenue in 2018 and grew 6.0%. Acquisitions from foreign companies, which are primarily commercial, contributed to the increase, as well as increases in sales, an emphasis on closing leads, and better cancellation rates. Commercial pest control was negatively impacted by foreign currency exchange rates as our foreign companies are heavily commercial. Residential pest control, which represented approximately 42% of the Company’s revenue, increased 9.1% driven by an increase in sold units, lead closure, a better cancellation rate, and pricing, as well as increased TAEXX® homebuilder installations, and acquisitions. The Company’s termite business, which represented approximately 18% of the Company’s revenue, grew 12.8% in 2018 due to acquisitions, increases in termite baiting and pretreatments, and ancillary service sales (such as moisture control, insulation and deck and gutter work).

The Company implemented its traditional price increase program in June 2018. Around 1% of the Company’s revenue increase is attributable to pricing actions. Approximately 80% of the Company’s pest control revenue was recurring in 2018, as well as 2017.

The Company’s foreign operations accounted for approximately 8% of total revenues for each of the years ended December 31, 2018 and 2017, respectively. The Company established new franchises in several international countries around the globe in 2018 for a total of 86 Orkin international franchises, two Canadian Critter Control franchises, and ten Orkin Australia franchises at December 31, 2018, compared to 81 Orkin international franchises, two Canadian Critter Control franchises and eleven Orkin Australia Franchises at December 31, 2017.

International and domestic franchising revenue was less than 1% of the Company’s revenues for 2018. Orkin had 133 and 128 franchises (domestic and international) at December 31, 2018 and 2017, respectively. The Company had 80 Critter Control franchises at December 31, 2018, down 9 from 2017. Critter Control Operations, Inc., a wholly-owned subsidiary of the Company, has begun the process of purchasing Critter Control franchises. Revenue from franchising was up 30.4% in 2018 compared to 2017 as we expand Orkin’s international footprint and recognition of initial franchise fees, partially offset by the decreases associated with acquired franchises from Critter Control.

Cost of Services Provided

For the twelve months ended December 31, 2018, cost of services provided increased $74.5 million or 9.1%, compared to the twelve months ended December 31, 2017. Gross margin for the year decreased to 50.9% for 2018 compared to 51.0% for 2017 due to unfavorable personnel related costs as we increased our 401k match to employees and experienced an increase in group insurance premiums in 2018 and an increase in payroll taxes and FICA taxes. Administrative Salaries were up due to increased office wages as well as an increase in restricted share amortization as we granted our long-term employees time-lapse restricted stock which is amortized over one year. The Company experienced higher fleet costs as gasoline prices per gallon rose and miles driven increased with acquisitions and additional work, which was partially offset by the usage of our routing and scheduling system. Leased vehicle costs increased as we added to our fleet and leased vehicle prices increased. Professional services and Maintenance and repairs increased due to outside consultants and maintenance contracts on various IT projects and equipment.

Depreciation and Amortization

For the twelve months ended December 31, 2018, depreciation and amortization increased $10.2 million, or 18.0% compared to the twelve months ended December 31, 2017. The dollar increase was primarily due to depreciation increasing $3.0 million or 10.9% as we depreciate acquired and purchased assets and depreciation from various IT related projects. Amortization of intangible assets increased $7.2 million or 24.8% for 2018 due to the additional amortization of customer contracts of several acquisitions over the last year including a full year of Northwest Pest Control, acquired late 2017, and the 2018 acquisition of OPC Services as well as several smaller foreign and domestic companies.

Sales, General and Administrative

For the twelve months ended December 31, 2018, sales, general and administrative (SG&A) expenses increased $47.3 million, or 9.4% compared to the twelve months ended December 31, 2017. SG&A increased to 30.2% of revenues for the year ended December 31, 2018 compared to 30.1% in 2017. The Company increased its 401k match to employees and granted a one-time vested stock grant during the year which increased personnel related costs and administrative salaries, respectively. Group insurance premiums were up for the year as well as payroll taxes. The company’s acquisitions and rising gasoline costs and lease expenses raised our fleet costs and the Company had increased use of outside professional services in IT projects as well as other projects.

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Gain on Sales of assets, Net

Gain on sales of assets, net increased to $0.9 million for the year ended December 31, 2018 compared to $0.2 million in 2017. The Company recognized gains from the sale of owned vehicles and owned property in 2018 and 2017.

Interest Income, Net

Interest income, net for each of the years ended December 31, 2018 and 2017 was $0.2 million and $0.3 million, respectively. Interest income for each year is due to interest received on cash balances in the Company’s various cash accounts.

Taxes

The Company’s 2018 net income was positively affected by the TCJA which was signed in to law on December 22, 2017. The estimated positive impact of the enactment of the TCJA was a $38.4 million decrease to tax expense, which was a direct increase to net income. 2017 had an $11.6 million increase in tax as follows: $8.0 million from transition tax on foreign earnings, $2.9 million from the revaluation of deferred tax assets, and $0.7 million from reductions in tax benefits on stock compensation. This resulted in a $0.05 per diluted share decrease in net income for the 2018 fiscal year.

Results of Operations—2017 Versus 2016

Overview

The Company’s revenues increased to $1.674 billion in 2017, a 6.4% increase compared to 2016. Gross margin increased to 51.0% for 2017 from 50.9% in 2016. Sales, general and administrative expense were 30.1% of revenues in 2017 compared to 31.2% in 2016. The Company’s depreciation and amortization margin increased 0.2 percentage points to 3.4% in 2017 compared to 3.2% in 2016. Rollins’ net income of $179.1 million in 2017 was an increase of $11.7 million or 7.0% over $167.4 million in 2016. Net profit margin improved to 10.7% in 2017 from 10.6% in 2016. Rollins continued to expand our global brand recognition with acquisitions in the United States and Canada as well as expanding our Orkin international franchise program in numerous countries around the globe. The Company was in 53 countries at the end of 2017 and continues to seek new international opportunities.

Revenues

Revenues for the year ended December 31, 2017 were $1.674 billion, an increase of $100.5 million or 6.4% from 2016 revenues of $1.573 billion. Growth occurred across all service lines and brands with our Canadian and Australian companies being hindered by unfavorable foreign currency exchange rates. Organic growth and pricing accounted for approximately 4.5% of our increase and our acquisitions contributed the remaining revenue growth. Commercial pest control represented approximately 40% of the Company’s revenue in 2017 and grew 5.1% due to increases in sales, an emphasis on closing leads, increased bed bug revenue, and acquisitions. Commercial pest control was negatively impacted by foreign currency exchange as Orkin Canada and Rollins Australia are heavily commercial. Residential pest control, which represented approximately 42% of the Company’s revenue, increased 6.4% driven by an increase in lead closure, pricing, as well as increased TAEXX® homebuilder installations, and acquisitions. The Company’s termite business, which represented approximately 18% of the Company’s revenue, grew 9.7% in 2017 due to acquisitions, increases in drywood fumigations and ancillary service sales (such as moisture control and insulation).

The Company implemented its traditional price increase program in June 2017. Less than 2% of the Company’s revenue increase is attributable to pricing actions. Approximately 80% of the Company’s pest control revenue was recurring in 2017 as well as 2016.

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The Company’s foreign operations accounted for approximately 8% and 7% of total revenues for the years ended December 31, 2017 and 2016, respectively. The Company established new franchises in several international countries around the globe in 2017 for a total of 81 Orkin international franchises, two Canadian Critter Control franchises, and eleven Australian franchises operated by Murray Pest Control and Scientific Pest Management at December 31, 2017, compared to 70 Orkin international franchises, two Canadian Critter Control franchises and seven Australian Franchises at December 31, 2016.

International and domestic franchising revenue was less than 1% of the Company’s revenues for 2017. Orkin had 128 and 120 franchises (domestic and international) at December 31, 2017 and 2016, respectively. The Company had 89 Critter Control franchises at December 31, 2017, down 5 from 2016. Critter Control Operations, Inc., a wholly-owned subsidiary of the Company, has begun the process of purchasing Critter Control franchises. Revenue from franchises was down 2.9% in 2017 compared to 2016 as we acquire franchises from Critter Control.

Cost of Services Provided

For the twelve months ended December 31, 2017 cost of services provided increased $47.6 million or 6.2%, compared to the twelve months ended December 31, 2016. Gross margin for the year increased to 51.0% for 2017 compared to 50.9% for 2016 due to favorable service salary cost as we utilize BOSS, our CRM and operating system and VRM to improve our customer routing and scheduling to maximize efficiencies. We had lower administrative salaries as we maximize our efficiencies and lower insurance and claims as we saw reductions in our actuarial calculations on future losses and lower vehicle loss expenses. The favorable margins were partially offset by higher fleet costs as gasoline prices rose and leased vehicle costs as we replace our fleet and materials and supplies as we increase termite treatments. We experienced good cost controls across most spending categories during 2017 compared to 2016.

Depreciation and Amortization

For the twelve months ended December 31, 2017, depreciation and amortization increased $5.7 million, or 11.2% compared to the twelve months ended December 31, 2016. The dollar increase was primarily due to depreciation increasing $2.7 million or 10.7% as we continue to depreciate our CRM software BOSS, while amortization of intangible assets increased $3.0 million or 11.5% for 2017 due to the additional amortization of customer contracts of Northwest Pest Control, as well as several other acquisitions over the last year.

Sales, General and Administrative

For the twelve months ended December 31, 2017, sales, general and administrative (SG&A) expenses increased $12.9 million, or 2.6% compared to the twelve months ended December 31, 2016. SG&A decreased to 30.1% of revenues for the year ended December 31, 2017 compared to 31.2% in 2016. The Company had a one-time tax event to dissolve its subsidiary, Kinro Investment Inc. in 2016. This increased SG&A expense $9.1 million or 0.6 percentage points due to the one-time tax event that was offset as a credit in income tax expense. Administrative salaries were relatively flat to prior year as we reduced the number of temporary personnel working on the BOSS system. Personnel related costs were marginally lower as we experienced leveling of our premiums. Gains in these areas were partially offset by higher sales salaries, fleet expense, and contractor expenses for various projects as well as the aforementioned 2016 foreign tax withholding expense.

Gain on Sales of assets, Net

Gain on sales of assets, net decreased to $0.2 million for the year ended December 31, 2017 compared to $0.8 million in 2016. The Company recognized gains from the sale of owned vehicles and owned property in 2017 and 2016.

Interest Income, Net

Interest income, net for each of the years ended December 31, 2017 and 2016 was $0.3 million and $0.2 million, respectively. Interest income for each year is due to interest received on cash balances in the Company’s various cash accounts.

Taxes

The Company’s effective tax rate increased to 39.2% in 2017 compared to 35.8% in 2016, due primarily to the effects of the TCJA in 2017, a one-time tax event in 2016 and differences in state and foreign income taxes. The estimated impact of the enactment of the TCJA was an $11.6 million increase to tax expense, which was a direct decrease to net income. The $11.6 million increase in tax was as follows: $8.0 million from transition tax on foreign earnings, $2.9 million from the revaluation of deferred tax assets, and $0.7 million from reductions in tax benefits on stock compensation. The increase due to the TCJA was partially offset by a reduction related to the implementation of ASU 2016-09 that was a $4.0 million benefit.

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Liquidity and Capital Resources

Cash and Cash Flow

Cash from operating activities is the principal source of cash generation for our businesses.

The most significant source of cash in Rollins’ cash flow from operations is customer-related activities, the largest of which is collecting cash resulting from services sales. The most significant operating use of cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services.

The Company’s cash and cash equivalents at December 31, 2018, 2017, and 2016 were $115.5 million, $107.1 million, and $142.8 million, respectively.

		2018				2017				2016
Net cash provided by operating activities		$	286,272			$	235,370			$	226,525
Net cash used in investing activities			(101,375	)			(154,175	)			(76,842	)
Net cash used in financing activities			(162,283	)			(130,263	)			(136,371	)
Effect of exchange rate on cash			(14,179	)			13,333				(5,101	)
Net increase(decrease) in cash and cash equivalents		$	8,435			$	(35,735	)		$	8,211

Cash Provided by Operating Activities

The Company’s operations generated cash of $286.3 million for the year ended December 31, 2018 primarily from net income of $231.7 million, compared with cash provided by operating activities of $235.4 million in 2017 and $226.5 million in 2016. The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities, available borrowings under its $175.0 million credit facility, and access to additional financing as needed, will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future.

The Company’s made no contributions to the Rollins, Inc. and its wholly-owned subsidiaries’ defined benefit retirement plans (the “Plans”) during the year ended December 31, 2018. The Plans were fully-funded with a prepaid balance. No contributions were made in 2017 and $3.3 million was made during 2016, respectively, as a result of the Plans’ funding status. The Company’s management is not expecting to make a contribution during fiscal year 2019. In the opinion of management, additional Plan contributions, if any, will not have a material effect on the Company’s financial position, results of operations or liquidity.

The Company has initiated the process to transition its Pension Plan to an Insurance provider. The timeline will take approximately 6-9 months from December 31, 2018. The Company’s Pension Plan is currently more than 100% funded.

Cash Used in Investing Activities

The Company used $101.4 million on investing activities for the year ended December 31, 2018, compared to $154.2 million and $76.8 million during 2017 and 2016, respectively, and of that, invested approximately $27.2 million in capital expenditures during 2018 compared to $24.7 million and $33.1 million during 2017 and 2016, respectively. Capital expenditures for the year consisted primarily of property purchases, equipment replacements and technology related projects. The Company expects to invest between $25 million and $30 million in 2019 in capital expenditures. During 2018, the Company and its subsidiaries acquired several small to mid-sized companies for a total of $76.8 million compared to $130.2 million and $46.3 million in acquisitions during 2017 and 2016, respectively. The expenditures for the Company’s acquisitions were funded with cash on hand. The Company continues to seek new acquisitions.

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Cash Used in Financing Activities

The Company used cash of $162.3 million on financing activities for the year ended December 31, 2018, compared to $130.3 million and $136.4 million during 2017 and 2016, respectively. A total of $152.7 million was paid in cash dividends ($0.47 per share) during the year ended December 31, 2018 including a special dividend paid in December 2018 of $0.09 per share, compared to $122.0 million in cash dividends paid ($0.37 per share) during the year ended December 31, 2017, including a special dividend paid in December 2017 of $0.07 per share and $109.0 million paid in cash dividends ($0.33 per share) during the year ended December 31, 2016, including a special dividend paid in December 2016 of $0.07 per share.

The Company did not purchase shares on the open market during the years ended December 31, 2018 and 2017 while using $22.7 million to repurchase 1.3 million shares of its common stock at a weighted average price of $18.13 per share during 2016. There remain 7.6 million shares, adjusted for the December 10, 2018 three-for-two stock split, authorized to be repurchased under prior Board approval. The Company repurchased $9.5 million, $8.2 million, and $8.4 million of common stock for the years ended December 31, 2018, 2017 and 2016, respectively, from employees for the payment of taxes on vesting restricted shares.

The Company’s $115.5 million of total cash at December 31, 2018 is primarily cash held at various banking institutions. Approximately $53.6 million is held in cash accounts at international bank institutions and the remaining $61.9 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.

The Company expects to close on the acquisition of Clark Pest Control of Stockton, Inc. during the first or second quarters of 2019. The Company intends to fund purchase of the acquisition with a combination of cash on hand, use of its revolving credit agreement and a new term loan. The Closing of the acquisition is subject to the satisfaction of customary conditions, including the truth and accuracy of the representations and warranties of the sellers, the performance of the obligations of the sellers and the receipt of regulatory clearance.

For Information regarding our Revolving Credit Agreement see Note 4 – Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).

Litigation

For discussion on the Company’s legal contingencies, see 15 – Commitments and Contingencies to the accompanying financial statements.

Off Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments

Other than the operating leases disclosed in the table that follows, the Company has no material off balance sheet arrangements.

The impact that the Company’s contractual obligations as of December 31, 2018 are expected to have on our liquidity and cash flow in future periods is as follows:

		Payments due by period
						Less than												More than
Contractual obligations (in thousands)		Total				1 year				1-3 years				4-5 years				5 years
Business combinations related liabilities		$	31,380			$	21,474			$	8,441			$	1,465			$	—
Non-cancelable operating leases			97,612				28,751				32,487				20,140				16,234
Unrecognized tax positions (1)			3,747				3,747				—				—				—
Total (2)		$	132,739			$	53,972			$	40,928			$	21,605			$	16,234

	(1)	These amounts represent expected payments with interest for unrecognized tax benefits as of December 31, 2018.

	(2)	Minimum pension funding requirements are not included as funding will not be required.

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Critical Accounting Policies

The Company views critical accounting policies to be those policies that are very important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, complex or subjective judgments. The circumstances that make these judgments difficult or complex relate to the need for management to make estimates about the effect of matters that are inherently uncertain. We believe our critical accounting policies to be as follows:

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 cost 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. Accruals for termite contracts are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

Accrued Insurance—The Company retains, 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 retained loss 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 with 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. The Company continues to be proactive in risk management to develop and maintain ongoing programs to reduce claims. Initiatives that have been implemented include pre-employment screening and an annual motor vehicle report required on all its drivers, post-offer physicals for new employees, pre-hire, random and post-accident drug testing, increased driver training and a post-injury nurse triage program for employees.

Revenue Recognition— the Company’s Revenue recognition policy is to recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which are distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

More on the Company’s revenue recognition policy can be found in the Company’s Notes to the Consolidated Financial Statements, Note 1., Summary of Significant Accounting Policies with the heading Revenue Recognition.

Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 liabilities 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.

Defined benefit pension plans — In 2005, the Company ceased all future benefit accruals under the Rollins, Inc. defined benefit plan, although the Company remains obligated to provide employees benefits earned through June 2005. The Company also includes the Waltham Services, LLC Hourly Employee Pension Plan to the Company’s financial statements. Waltham Services, LLC Hourly Employees Pension Plan was amended, effective September 1, 2018, to freeze future benefit accruals for all participants. 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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The Company chooses an expected rate of return on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views of our investment adviser. Differences between the expected long-term return on plan assets and the actual return are amortized over future years. Therefore, the net deferral of past asset gains or losses ultimately affects future pension expense. The Company’s assumption for the expected return on plan assets is 7.0% which is unchanged from the prior year.

In regards to the Rollins, Inc. Defined Benefit plan the company utilizes a termination liability approach. This approach reflects the estimated impact of the distribution of benefits due to a standard termination. Plan liabilities will be settled through the purchase of annuities from an insurance provider or through the distribution of lump sum payments to eligible participants that elect to receive such a form of payment. Discount rates of 3.90% per year for participants in pay status and 4.11% per year for participants with deferred benefits were selected by the Plan Sponsor to determine the benefit obligation resulting from plan termination annuity purchases. The discount rates reflect the single effective interest rate that produces the same present value as that produced when the expected future cash flows for participants expected to elect an annuity are discounted with the FTSE Yield Curve (formerly Citigroup) as of the measurement date. To determine the benefit obligation resulting from plan termination lump sum payments, the expected future cash flows for lump sum eligible participants, determined with the IRC 417(e) Mortality Table for 2019, were discounted with the IRC 417(e) segment interest rates for the month of November 2018 (3.43%, 4.46%, and 4.88%). Only 50% of active, 30% of deferred vested, and 25% of retired participants that will be eligible to receive a lump sum distribution of their pension benefit upon plan termination, are assumed to elect this form of payment.

The discount rate of 4.00% as of December 31, 2017 was updated as of December 31, 2018 to:

	i)	3.90%, based on current market conditions, for participants in pay status expected to elect a plan termination annuity,
	ii)	4.11%, based on current market conditions, for active and terminated participants with deferred benefits expected to elect a plan termination annuity,
	iii)	The IRC 417(e) interest rates for the month of November 2018 (3.43%, 4.46%, and 4.88), based on plan provisions, for all lump sum eligible expected to elect a plan termination lump sum.

Waltham Services, LLC Hourly Employees Pension Plan utilizes a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the life of the plans is forecast and then compared to a portfolio of corporate bonds that will mature at the same time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate bonds. The discount rate was 4.05% as of December 31, 2018 compared to 4.05% in 2017 and 4.35% in 2016. A lower discount rate increases the present value of benefit obligation.

As set forth in Note 16 to the Company’s financial statements, included among the asset categories for the Plan’s investments are real estate, and alternative investments comprised of investments in real estate and hedge funds. These investments are categorized as investments at net asset value (“NAV”) and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with Accounting Standards Update (“ASU”) No. 2009-12 “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_._

As of December 31, 2018, the defined benefit plans were fully-funded and the recorded change within accumulated other comprehensive income increased stockholders’ equity by $14.8 million before tax and $11.0 million after tax.

Recent Accounting Guidance

See Note 1 - Summary of Significant Accounting policies of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for further discussion.

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Forward-Looking Statements

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements regarding (i) management's belief that the Company competes favorably with competitors; (ii) the expectation for the Company's corporate tax rate for 2018; (iii) the Company's maintenance of sufficient supplies to fulfill its immediate needs and to alleviate potential short-term shortages in such supplies; (iv) any environmental remediation costs estimated to be incurred are not material to the Company's financial condition or operating results, (v) the adequacy of the Company's facilities to meet its future needs; (vi) the outcome of litigation, as discussed in the Legal Proceedings section and elsewhere and the Company's belief that such litigation will not have a material adverse effect on the Company's financial condition, results of operations or liquidity; (vii) the belief that the Company has adequate liquid assets, funding sources and insurance accruals to satisfy any claims; (viii) the Company's expectation to continue its payment of cash dividends; (ix) plans regarding acquisitions and franchise expansion; (x) the adequacy of the Company's resources and borrowings to fund operations, obligations, and expansions; (xi) management's belief that the Company is not expected to make a contribution to the Pension Plans or amortize net loss in 2019, and that the Company expects to transition its Pension Plan to an Insurance provider approximately 6-9 months from December 31, 2018; (xii) the Company's projected 2019 capital expenditures; (xiii) the plans to grow the business in foreign markets through reinvestment of foreign deposits and future earnings and through acquisitions of unrelated companies with no expectation of repatriation of cash from the Company’s foreign subsidiaries; (xiv) the Company's expectation to maintain compliance with the covenants contained in its Revolving Credit Agreement throughout 2019; (xv) the impact and amount of the Company's contractual obligations; (xvi) management's expectations regarding termite claims and factors that impact future costs from those claims; (xvii) the expected cost of termite renewals; (xviii) the expected collectability of accounts receivable; (xix) the expected tax consequences and the impact of the TCJA; (xx) expectations and plans regarding any losses from franchisees; (xxi) the impact of recent accounting pronouncements; (xxii) and interest rate risks and foreign exchange currency risk on the Company's financial position, results of operations and liquidity; (xxiii) the ability of the Company to utilize all of its foreign net operating losses and the possibility that the Company's unrecognized tax benefits will increase in the next 12 months; (xxiv) expectation that the Company’s proposed acquisition of Clark will close in the first or second quarter of 2019, be funded with a combination of cash on hand, proceeds from its revolving credit agreement and a new term loan and receive appropriate regulatory approvals, including the expiration of the applicable waiting period under the HSR Act; (xxv) the Company’s intention to complete the Clark acquisition as soon as practicable following receipt of regulatory clearance from the FTC; and (xxvi) expectation that subject to post-closing adjustments, the final purchase of the proposed Clark acquisition is expected to be in the area of $400 million, including the real estate assets. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks, timing and uncertainties including, without limitation, the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; market risk; changes in industry practices or technologies; the degree of success of the Company's termite process reforms and pest control selling and treatment methods; the Company's ability to identify and integrate potential acquisitions; climate and weather trends; competitive factors and pricing practices; potential increases in labor costs; changes in various government laws and regulations, including environmental regulations; the timing to consummate the proposed Clark acquisition; the risk that the regulatory clearance required for the proposed Clark acquisition may be delayed, not obtained or obtained subject to conditions that are not anticipated; and the risk that a condition to the closing of the proposed Clark acquisition may not be satisfied. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.