Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Rollins, Inc. and Subsidiaries

(in thousands except share information)
December 31,	2018			2017
ASSETS
Cash and cash equivalents	$	115,485		$	107,050
Trade receivables, net of allowance for doubtful accounts of $13,285 and $11,814, respectively		104,016			97,802
Financing receivables, short-term, net of allowance for doubtful accounts of $1,845 and $1,535, respectively		18,454			17,263
Materials and supplies		15,788			14,983
Other current assets		32,278			25,697
Total Current Assets		286,021			262,795
Equipment and property, net		136,885			134,088
Goodwill		368,481			346,514
Customer contracts, net		178,075			152,869
Trademarks and tradenames, net		54,140			49,998
Other intangible assets, net		11,043			11,550
Financing receivables, long-term, net of allowance for doubtful accounts of $1,536 and $1,357 respectively		28,227			20,414
Prepaid pension		5,274			17,595
Deferred income taxes		6,915			18,420
Other assets		19,063			19,420
Total Assets	$	1,094,124		$	1,033,663
LIABILITIES
Accounts payable	$	27,168		$	26,161
Accrued insurance		27,709			28,018
Accrued compensation and related liabilities		77,741			73,016
Unearned revenue		116,005			109,029
Other current liabilities		50,406			58,345
Total current liabilities		299,029			294,569
Accrued insurance, less current portion		33,867			34,245
Long-term accrued liabilities		49,320			50,925
Total Liabilities		382,216			379,739
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, 327,308,079 and 326,988,265 shares issued, respectively		327,308			326,988
Paid-in-capital		85,386			81,405
Accumulated other comprehensive loss		(71,078	)		(45,956	)
Retained earnings		370,292			291,487
Total Stockholders’ Equity		711,908			653,924
Total Liabilities and Stockholders’ Equity	$	1,094,124		$	1,033,663

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,	2018			2017			2016
REVENUES
Customer services	$	1,821,565		$	1,673,957		$	1,573,477
COSTS AND EXPENSES
Cost of services provided		894,437			819,943			772,348
Depreciation and amortization		66,792			56,580			50,902
Sales, general and administrative		550,698			503,433			490,528
Gain on sales of assets, net		(875	)		(242	)		(777	)
Interest income		(220	)		(259	)		(160	)
		1,510,832			1,379,455			1,312,841
INCOME BEFORE INCOME TAXES		310,733			294,502			260,636
PROVISION FOR INCOME TAXES
Current		71,442			96,742			96,515
Deferred		7,628			18,636			(3,248	)
		79,070			115,378			93,267
NET INCOME	$	231,663		$	179,124		$	167,369
INCOME PER SHARE - BASIC	$	0.71		$	0.55		$	0.51
INCOME PER SHARE - DILUTED	$	0.71		$	0.55		$	0.51
Weighted average shares outstanding - basic		327,291			326,982			327,366
Weighted average shares outstanding - diluted		327,291			326,982			327,366
DIVIDENDS PAID PER SHARE	$	0.47		$	0.37		$	0.33

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,	2018			2017		2016
NET INCOME	$	231,663		$	179,124	$	167,369
Other comprehensive earnings/(loss), net of tax
Pension and other postretirement benefit plans		(11,050	)		14,159		1,705
Foreign currency translation adjustments		(14,072	)		9,960		(602	)
Other comprehensive earnings/(loss)		(25,122	)		24,119		1,103
Comprehensive earnings	$	206,541		$	203,243	$	168,472

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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Rollins, Inc. and Subsidiaries

(In thousands)
																Accumulated
																Other
	Common Stock						Treasury						Paid-			Comprehensive			Retained
	Shares			Amount			Shares			Amount			In-Capital			Income (Loss)			Earnings			Total
Balance at December 31, 2015		328,130		$	328,130			(300	)	$	(300	)	$	69,762		$	(71,178	)	$	197,615		$	524,029
Net Income																				167,369			167,369
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)		(1,254	)		(1,254	)		—			—			—			—			(21,465	)		(22,719	)
Common Stock Retired		(300	)		(300	)		300			300			—			—			—
Stock Compensation		582			582			—			—			12,027			—			(194	)		12,415
Employee Stock Buybacks		(470	)		(470	)		—			—			(8,036	)		—			157			(8,349	)
Excess Tax Benefit on Share-based payments		—			—			—			—			3,699			—			—			3,699
Balance at December 31, 2016		326,688		$	326,688			—		$	—		$	77,452		$	(70,075	)	$	234,480		$	568,545
Net Income																				179,124			179,124
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment		—			—			—			—			—			14,159			—			14,159
Foreign Currency Translation Adjustments		—			—			—			—			—			9,960			—			9,960
Cash Dividends		—			—			—			—			—			—			(122,017	)		(122,017	)
Stock Compensation		651			651			—			—			11,965			—			(217	)		12,399
Employee Stock Buybacks		(351	)		(351	)		—			—			(8,012	)		—			117			(8,246	)
Balance at December 31, 2017		326,988		$	326,988			—		$	—		$	81,405		$	(45,956	)	$	291,487		$	653,924
Net Income																				231,663			231,663
Other Comprehensive Income, Net of Tax
Pension Liability Adjustment		—			—			—			—			—			(11,050	)		—			(11,050	)
Foreign Currency Translation Adjustments		—			—			—			—			—			(14,072	)		—			(14,072	)
Cash Dividends		—			—			—			—			—			—			(152,742	)		(152,742	)
Stock Compensation		605			605			—			—			13,323			—			(202	)		13,726
Employee Stock Buybacks		(285	)		(285	)		—			—			(9,342	)		—			86			(9,541	)
Balance at December 31, 2018		327,308		$	327,308			—		$	—		$	85,386		$	(71,078	)	$	370,292		$	711,908

(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,	2018			2017			2016
OPERATING ACTIVITIES
Net Income	$	231,663		$	179,124		$	167,369
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash charges		64,675			55,533			49,894
Provision for deferred income taxes		7,628			18,636			(3,248	)
Stock based compensation expense		13,726			12,399			12,415
Excess tax benefits from share-based payments		—			—			(3,699	)
Provision for bad debts		13,606			10,455			11,257
Changes in assets and liabilities:
Trade accounts receivables and other accounts receivables		(12,549	)		(13,661	)		(15,868	)
Financing receivables		(10,784	)		(6,527	)		(6,133	)
Materials and supplies		(374	)		(837	)		(671	)
Other current assets		(7,121	)		1,448			(1,464	)
Other non-current assets		11,329			(5,137	)		(1,934	)
Accounts payable and accrued expenses		(23,820	)		(25,691	)		13,327
Unearned revenue		4,901			1,222			2,842
Accrued insurance		(686	)		4,039			2,949
Pension funding		—			—			(3,256	)
Long-term accrued liabilities		(5,922	)		4,367			2,745
Net cash provided by operating activities		286,272			235,370			226,525
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired		(76,769	)		(130,189	)		(46,308	)
Capital expenditures		(27,179	)		(24,680	)		(33,081	)
Cash from sale of franchises		343			519			699
Derivative Investments		297			(264	)		—
Proceeds from sale of assets		1,840			370			1,663
Investment tax credits		93			69			185
Net cash used in investing activities		(101,375	)		(154,175	)		(76,842	)
FINANCING ACTIVITIES
Payment of dividends		(152,742	)		(122,017	)		(109,002	)
Cash paid for common stock purchased		(9,541	)		(8,246	)		(31,068	)
Excess tax benefits from share-based payments		—			—			3,699
Net cash used in financing activities		(162,283	)		(130,263	)		(136,371	)
Effect of exchange rate changes on cash		(14,179	)		13,333			(5,101	)
Net increase (decrease) in cash and cash equivalents		8,435			(35,735	)		8,211
Cash and cash equivalents at beginning of year		107,050			142,785			134,574
Cash and cash equivalents at end of year	$	115,485		$	107,050		$	142,785
Supplemental disclosure of cash flow information
Cash paid for interest	$	25		$	—		$	13
Cash paid for income taxes, net	$	77,351		$	90,702		$	88,766

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

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Supplemental Disclosures of Non-Cash Items

Pension—Non-cash (increases)/decreases in the minimum pension liability which were credited to other comprehensive income were ($14.8) million, $19.0 million, and $3.0 million in 2018, 2017, and 2016, respectively.

Business Combinations —There were $18.1 million in non-cash acquisitions of assets in business combinations for the year ended December 31, 2018, $34.0 million in 2017 and $11.4 million for 2016.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2018, 2017, and 2016, 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.

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Critter Control, a wholly-owned subsidiary of the Company, was acquired by Rollins, Inc. on February 27, 2015. Critter Control was established in 1983 and is headquartered in Traverse City, Michigan. The business is primarily franchised, operating 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.

Northwest Pest Control, LLC, a wholly-owned subsidiary of the Company founded in 1951, was acquired by Rollins, Inc. in August 2017. Northwest specializes in residential and commercial termite control, pest control, mosquito control, wildlife services, lawn care, insulation, and HVAC services, focusing on the Southeast United States.

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.

On January 7, 2019, Rollins, Inc. (the “Company”) and certain of its affiliates entered into certain agreements providing for the acquisition (the “Acquisition”) of a pest control business as follows: (a) a Stock Purchase Agreement among the Company, Clark Pest Control of Stockton, Inc. (“Clark Pest Control”), JJT King, Inc., and the stockholders of Clark Pest Control pursuant to which the Company will acquire all of the issued and outstanding shares of Clark Pest Control, (b) a Real Estate Purchase Agreement between RCI-King, Inc., a wholly-owned subsidiary of the Company, and Clarkson California Properties pursuant to which an affiliate of the Company will acquire certain real estate used in Clark Pest Control’s business, and (c) an Asset Purchase Agreement between King Distribution, Inc., a wholly-owned subsidiary of the Company, and Geotech Supply Co., LLC pursuant to which an affiliate of the Company will acquire certain assets used in the business of distributing certain equipment and supplies related to the pest control business of Clark Pest Control. Subject to post-closing adjustments, the final purchase is expected to be in the area of $400 million including the real estate assets. The purchase price was negotiated at arm’s-length and the agreement contains customary representations, warranties, noncompetition agreements and holdback provisions.

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. 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 Company expects the acquisition to close during the first or second quarters of 2019.

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

Revenue Recognition—The Company’s Revenue recognition 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.

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Nature of Goods and Services and Performance Obligations

The Company contracts with its customers to provide the following goods and services, each of which is a distinct performance obligation:

Pest control services - Rollins provides pest control services to protect residential and commercial properties from common pests, including rodents and insects. Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations, and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered.

The Company’s revenue recognition policies are designed to recognize revenues upon satisfaction of the performance obligation 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. The Company defers recognition of advance payments and recognizes the revenue as the services are rendered. The Company classifies discounts related to the advance payments as a reduction in revenues.

Termite control services (including traditional and baiting) - Rollins provides both conventional and baiting termite protection services. Traditional termite protection uses “Termidor” liquid treatment and/or dry foam and Orkin foam to treat voids and spaces around the property, while baiting termite protection uses baits to disrupt the molting process termites require for growth and offers ongoing protection. Revenue from initial termite treatment services is recognized as services are provided.

Maintenance/monitoring/inspection - In connection with the initial service offerings, Rollins provides recurring maintenance, monitoring or inspection services to help protect consumer’s property for any future sign of termite activities after the original treatment. This recurring service is a service-type warranty under ASC 606 as it is routinely sold and purchased separately from the initial treatment services and is typically purchased or renewed annually.

Termite baiting revenues are recognized based on the transfer of control 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 performance obligation. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue that depicts the Company’s performance in transferring control of the service. The allocation of the purchase price to the two deliverables is based on the relative stand-alone 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 depicts the Company’s performance in transferring control of the service.

Revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term that depicts the Company’s performance in transferring control of the service; 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.

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Miscellaneous services (e.g., cleaning, etc.) - In certain agreements with customers, Rollins may offer other miscellaneous services, including restroom cleaning (e.g., eliminating foul odors, grease and grime which could attract pests), training (e.g., seminars covering good manufacturing practices and product stewardship), etc. Revenue from miscellaneous services is recognized when services are provided.

Products - Depending on customer demand, Rollins may separately sell pest control and/or termite protection products, such as traps. Revenue from product sales is recognized upon transfer of control of the asset.

Equipment rental (or lease) - Depending on customer demand, Rollins may lease certain pest control and/or termite protection equipment. Revenue from equipment rentals are recognized over the period of the rental/lease. Revenue from equipment rentals represent less than 1.0% of the Company’s revenues for each reported period.

Right to access intellectual property (Franchise) - The right to access Rollins’ intellectual property is an essential part of Orkin’s franchising agreements. These agreements provide the franchisee (the customer) a license to use the Rollins’ name and trademark when advertising and selling services to end customers in their normal course of business. Orkin Franchise agreements contain a clause allowing Orkin to purchase certain assets of the franchisee. This is only an offer for Orkin to re-purchase the assets originally provided by Orkin to the franchisee and is not a performance obligation or a form of consideration. International and domestic franchising revenue was less than 1.0% of the Company’s annual revenues.

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. The Company amortizes the initial franchise fee over the initial franchise term. Deferred Orkin franchise fees were $1.6 million at December 31, 2018 and $3.4 million December 31, 2017.

Royalties from Orkin franchises are accrued and recognized as revenues are earned on a monthly basis. Revenue from Orkin franchises was $8.8 million for the year ended December 31, 2018 and $5.4 million and $3.0 million for the years ended December 31, 2017 and 2016, respectively.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. We record unearned revenue when revenue is recognized subsequent to billing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. The balance of long-term accounts receivable, net of allowance for doubtful accounts, was $28.2 million as of December 31, 2018 and $20.4 million at December 31, 2017 and is included in financed receivables as a long-term asset on our consolidated statements of financial position.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts can be found on Schedule II-Valuation and Qualifying Accounts.

Unearned revenue is comprised mainly of unearned revenue related to the Company’s termite baiting offering, conventional renewals, and year-in-advance pest control services for which we have been paid in advance and earn the revenue when we transfer control of the product or service.

Refer to Note 12 - Unearned Revenue for further information, including changes in unearned revenue for the year.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers or to provide customers with financing.

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Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. All revenues are reported net of sales taxes.

The Company’s foreign operations accounted for approximately 8% of revenues for each of the years ended December 31, 2018 and 2017.

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 2018, 2017, and 2016. 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,	2018		2017		2016
(in thousands)
Advertising	$	69,875	$	66,115	$	61,258

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 $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 for the foreseeable future.

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At December 31,	2018		2017
(in thousands) (in US dollars)
Cash held in foreign bank accounts	$	53,613	$	57,790

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 reported as in earnings. 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 non-qualified deferred compensation plan at December 31, 2018 and 2017. See Note 16 for further details.

Materials and Supplies— Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method.

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 determines 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, 10 to 40 years; and furniture, fixtures, and operating equipment, 2 to 10 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,	2018		2017		2016
(in thousands)
Depreciation	$	30,364	$	27,381	$	24,725

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 or 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 analysis as of September 30, 2018. 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 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.

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 October 23, 2018, authorized a three-for-two stock split by the issuance on December 10, 2018 of one additional common share for each two common shares held of record at November 9, 2018. 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 17 for further information on restricted stock granted to employees.

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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.

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 December 10, 2018:

Years Ended December 31,	2018			2017			2016
Net income available to stockholders	$	231,663		$	179,124		$	167,369
Less: Dividends paid
Common Stock		(151,458	)		(120,930	)		(107,880	)
Restricted shares of common stock		(1,284	)		(1,087	)		(1,122	)
Undistributed earnings for the period	$	78,921		$	57,107		$	58,367
Allocation of undistributed earnings:
Common stock	$	78,255		$	56,567		$	57,722
Restricted shares of common stock		666			540			645
Basic and diluted shares outstanding:
Common stock		324,529			323,890			323,745
Restricted shares of common stock		2,762			3,091			3,619
		327,291			326,981			327,366
Basic and diluted earnings per share:
Common stock:
Distributed earnings	$	0.47		$	0.37		$	0.33
Undistributed earnings		0.24			0.18			0.18
	$	0.71		$	0.55		$	0.51
Restricted shares of common stock
Distributed earnings	$	0.47		$	0.35		$	0.31
Undistributed earnings		0.24			0.18			0.18
	$	0.71		$	0.53		$	0.49

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 47, 47 and 50 domestic franchises as of December 31, 2018, 2017 and 2016, 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 $6.5 million at December 31, 2018 and $5.9 million at December 31, 2017. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

The Company amortizes the initial franchise fee over the initial franchise term. Deferred Orkin franchise fees of $1.6 million at December 31, 2018 and $3.4 million December 31, 2017.

Royalties from Orkin franchises are accrued and recognized as revenues are earned on a monthly basis. Revenue from Orkin franchises was $8.8 million for the year ended December 31, 2018 and $5.4 million and $5.1 million for the years ended December 31, 2017 and 2016, respectively.

As of December 31, 2018, 2017 and 2016, Orkin had 86, 81, and 70 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 $4.9 million, $2.5 million, and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Rollins’ wholly-owned subsidiary, Critter Control, had 80 and 89 franchises in the United States and Canada as of December 31, 2018 and 2017, 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 Critter Control franchises were $0.6 million and $0.2 million at December 31, 2018 and 2017, 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.

Recent Accounting Guidance

Recently adopted accounting standards

In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board issued their converged standard on revenue recognition Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. The FASB issued ASU 2015-14 in August 2015 which resulted in a deferral of the original effective date of ASU 2014-09. During 2016, the FASB issued four ASUs that address implementation issues and correct or improve certain aspects of the new revenue recognition guidance, including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These ASUs do not change the core principles in the revenue recognition guidance outlined above. ASU No. 2014-09 and the related ASUs referenced above are effective for Rollins, Inc. beginning January 1, 2018. The Company has completed its detailed review of all global revenue arrangements in accordance with these ASUs and the adoption of these ASUs January 1, 2018 has had no impact on its consolidated financial statements.

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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 adopted this ASU on January 1, 2018 it had no impact on its consolidated financial statements.

Recently issued accounting standards to be adopted in 2019 or later

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), which requires a lessee to recognize right-of-use assets (ROUs) and liabilities on the balance sheet for leases with lease terms greater than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of income.

ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. An entity may elect to adopt the new standard using either 1) a modified retrospective approach with restated comparative period financial statements or 2) a prospective approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the date of adoption. We anticipate adopting this standard on January 1, 2019, using the prospective approach. Consequently, the reporting for the comparative periods presented in the financial statements in which the new leases standard has been adopted will continue to be presented in accordance with current GAAP (Topic 840, Leases).

The new standard provides certain practical expedients in transition. We have elected the transition package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct cost. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption. Accordingly, the Company does not recognize right of use assets or lease liabilities, for existing short-term leases of those assets in transition.

The Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets. The recognition and measurement of expenses and cash flows will not be materially impacted by the new standard. Upon adoption, the Company expects to recognize operating lease ROUs and liabilities of between $175.0 million and $195.0 million. The new standard has enhanced disclosure requirements, including additional disclosures regarding the nature of an entity’s leases, significant judgments and assumptions made when applying the standard, and the amounts recognized in the financial statements. The disclosure requirements will have a material impact on our financial statements.

In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

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 the current 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 the current 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. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), which provides new guidance intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This ASU is effective for the Company beginning in fiscal year 2020. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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2. ACQUISITIONS

The Company has made 38 and 23 acquisitions during the years ended December 31, 2018, and 2017, respectively, that are not material individually or in the aggregate to the Company’s consolidated financial statements. The largest acquisition made during these periods is as follows:

The Company completed the acquisition of Northwest Pest Control effective August 1, 2017. Northwest was established in 1951 and services approximately 120,000 customers in Georgia, South Carolina, Tennessee, Alabama, and North Carolina. Northwest Pest Control is the 17th largest pest control operator in the country, making it the largest Rollins acquisition since the Company acquired HomeTeam Pest Defense in 2008.

Total cash purchase price for the Company’s acquisitions in 2018 and 2017 were $76.8 million and $130.2 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,	2018			2017
Accounts receivable	$	3,558		$	3,836
Materials and supplies		556			312
Equipment and property		7,374			3,027
Goodwill		25,605			87,261
Customer contracts		62,228			60,695
Other intangible assets		6,936			20,086
Current liabilities		(21,536	)		(30,344	)
Other assets and liabilities, net		(3,089	)		1,209
Total consideration paid		81,632			146,082
Less: Contingent consideration liability		(4,863	)		(15,893	)
Total cash purchase price	$	76,769		$	130,189

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3. REVENUE

Adoption of ASC 606, “Revenue from Contracts with Customers”. On January 1, 2018, and the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605.

There was no material impact on the Company’s financial statements as a result of adopting ASC 606 for the twelve months ended December 31, 2018, 2017 and 2016.

The following tables present our revenues disaggregated by revenue source (in thousands, unaudited).

Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or in a country other than the United States accounted for more than 10% of the sales for the periods listed on the following table. Revenue, classified by the major geographic areas in which our customers are located, was as follows:

	(in thousands)
	2018		2017		2016
United States	$	1,677,116	$	1,541,336	$	1,455,196
Other countries		144,449		132,621		118,281
Total Revenues	$	1,821,565	$	1,673,957	$	1,573,477

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

	(in thousands)
	2018		2017		2016
Residential revenue	$	773,932	$	705,787	$	663,776
Commercial revenue		707,386		666,523		634,767
Termite completions, bait monitoring, and renewals		332,573		294,982		269,431
Other revenues		7,674		6,665		5,503
Total Revenues	$	1,821,565	$	1,673,957	$	1,573,477

4. 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, 2018, no borrowings were outstanding under the line of credit or under the swingline subfacility. The Company maintains approximately $32.9 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, 2018, the additional rate allocated was .75%.

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

The Company remained in compliance with applicable debt covenants at December 31, 2018 and expects to maintain compliance throughout 2019.

5. 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,	2018			2017
(in thousands)
Gross trade receivables	$	117,301		$	109,616
Allowance for doubtful accounts		(13,285	)		(11,814	)
Net trade receivables	$	104,016		$	97,802

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

6. 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,	2018			2017
(in thousands)
Gross financing receivables, short-term	$	20,299		$	18,798
Gross financing receivables, long-term		29,763			21,771
Allowance for doubtful accounts		(3,381	)		(2,892	)
Net financing receivables	$	46,681		$	37,677

Total financing receivables, net were $46.7 million and $37.7 million at December 31, 2018 and December 31, 2017, 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 3.8% and 4.3% for the twelve months ended December 31, 2018 and December 31, 2017, respectively. Due to the low percentage of charge-off receivables and the high credit worthiness of the potential obligor, the entire Rollins, Inc. financing receivables portfolio has a low credit risk.

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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, 2018, there were six accounts that are greater than 180 days past due, 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 $28.2 million and $20.4 million at December 31, 2018 and 2017, respectively.

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

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

At December 31,	2018			2017
(in thousands)
Balance, beginning of period	$	2,892		$	3,157
Additions to allowance		2,161			1,424
Deductions, net of recoveries		(1,672	)		(1,689	)
Balance, end of period	$	3,381		$	2,892

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

December 31,	2018		2017
(in thousands)
30-59 days past due	$	1,566	$	1,167
60-89 days past due		777		385
90 days or more past due		1,407		995
Total	$	3,750	$	2,547

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

December 31,
Current	92.4	%	93.7	%
30-59 days past due	3.2	%	2.9	%
60-89 days past due	1.5	%	0.9	%
90 days or more past due	2.9	%	2.5	%
Total	100.0	%	100.0	%

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7. EQUIPMENT AND PROPERTY

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

December 31,	2018			2017
(in thousands)
Buildings	$	53,339		$	51,023
Operating equipment		103,429			91,430
Furniture and fixtures		18,476			17,672
Computer equipment and systems		177,441			163,220
		352,685			323,345
Less: accumulated depreciation		(240,320	)		(213,809	)
		112,365			109,536
Land		24,520			24,552
Net equipment and property	$	136,885		$	134,088

Included in equipment and property, net at December 31, 2018 and 2017, are fixed assets held in foreign countries of $7.6 million, and $4.9 million, respectively.

Total depreciation expense was approximately $30.4 million in 2018, $27.4 million in 2017 and $24.7 million in 2016.

8. 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 16.

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 non-qualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2018.

(in thousands)		Total				Level 1				Level 2				Level 3
Cash and cash equivalents		$	148			$	148			$	—			$	—
Total		$	148			$	148			$	—			$	—

The following table presents our non-qualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2017.

(in thousands)		Total				Level 1				Level 2				Level 3
Cash and cash equivalents		$	95			$	95			$	—			$	—
Total		$	95			$	95			$	—			$	—

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

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The Company has contingent considerations from acquisitions that approximate fair value and are Level 3.

At December 31, 2018 the Deferred Compensation Plan had 70 life insurance policies with a net face value of $43.4 million. The cash surrender value of these life insurance policies had a net realizable value of $18.3 million and $18.3 million at December 31, 2018 and 2017, respectively. The total deferred compensation plan assets, recorded in other assets on the Company’s consolidated statements of financial position, were $18.4 million and $18.4 million at December 31, 2018 and 2017, respectively.

9. 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 $368.5 million at December 31, 2018 and $346.5 million as of December 31, 2017. Goodwill increased for the year ended December 31, 2018 due primarily to acquisitions, partially offset by currency conversion of foreign goodwill. The carrying amount of goodwill in foreign countries was $54.9 million as of December 31, 2018 and $46.3 million as of December 31, 2017. The changes in the carrying amount of goodwill for the twelve months ended December 31, 2018 and 2017 are as follows:

(in thousands)
Goodwill at December 31, 2016	$	255,665
Goodwill acquired		87,261
Goodwill adjustments due to currency translation		3,588
Goodwill at December 31, 2017	$	346,514
Goodwill acquired		25,605
Goodwill adjustments due to currency translation		(3,638	)
Goodwill at December 31, 2018	$	368,481

10. CUSTOMER CONTRACTS, TRADENAMES AND TRADEMARKS, 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,	2018			2017
(in thousands)
Customer contracts	$	339,864		$	290,628
Less: accumulated amortization		(161,789	)		(137,759	)
Customer contracts, net	$	178,075		$	152,869

The carrying amount of customer contracts in foreign countries was $37.1 million as of December 31, 2018 and $29.8 million as of December 31, 2017.

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Trademarks and tradenames are amortized on a straight-line basis over the period of its useful life. The Company has determined the assets have useful lives between 7 and 20 years with non-amortizable, indefinite lived Tradenames of $40.5 million and $30.0 million as of December 31, 2018 and 2017, respectively. The carrying amount and accumulated amortization for trademarks and tradenames were as follows:

At December 31,	2018			2017
(in thousands)
Trademarks and tradenames	$	58,471		$	53,549
Less: accumulated amortization		(4,331	)		(3,551	)
Trademarks and tradenames, net	$	54,140		$	49,998

The carrying amount of trademarks and tradenames in foreign countries was $3.7 million as of December 31, 2018 and $1.7 million as of December 31, 2017.

Other intangible assets include non-compete agreements and patents. 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,	2018			2017
(in thousands)
Other intangible assets	$	22,742		$	22,231
Less: accumulated amortization		(11,699	)		(10,681	)
Other intangible assets, net	$	11,043		$	11,550

The carrying amount of other intangible assets in foreign countries was $1.6 million as of December 31, 2018 and $1.7 million as of December 31, 2017.

Included in the table above are non-amortizable, indefinite lived Internet domain names of $2.2 million at December 31, 2018 and 2017, respectively.

Total amortization expense was approximately $36.4 million in 2018, $29.2 million in 2017 and $26.2 million in 2016.

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)
2019	$	34,697
2020		30,287
2021		28,111
2022		26,604
2023		21,995

11. 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.

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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 gain of $0.5 million for the twelve months ended December 31, 2018 and a net loss of $0.3 million in 2017. As of December 31, 2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (in thousands except for number of instruments):

Non- Designated Derivatives Summary

(in thousands except for number of instruments)		Sell Notional		Buy Notional
FX Forward Contracts
Sell AUD/Buy USD Fwd Contract	8	$	1,000	$	724
Sell CAD/Buy USD Fwd Contract	10	$	6,550	$	4,940
Total	18		—	$	5,664

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of December 31, 2018 and December 31, 2017 (in thousands):

	Tabular Disclosure of Fair Values of Derivative Instruments
	Derivative Asset				Derivative Liabilities
	Fair Value as of:
	December 31,		December 31,		December 31,			December 31,
	2018		2017		2018			2017
Derivatives Not Designated as Hedging Instruments
FX Forward Contracts
Balance Sheet Location	Other Assets		Other Assets		Other Current Liabilities			Other Current Liabilities
Sell AUD/Buy USD Fwd Contract	$	18	$	—	$	(1	)	$	(9	)
Sell CAD/Buy USD Fwd Contract	$	121	$	—	$	(4	)	$	(61	)
Total	$	139	$	—	$	(5	)	$	(70	)

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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, 2018 and December 31, 2017 (in thousands):

Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated as Hedging Instruments for the Twelve Months Ended December 31, 2018 and 2017

Derivatives Not Designated as Hedging Instruments		Amount of Gain or (Loss) Recognized in Income Twelve Months Ended December 31,
		2018		2017
Sell AUD/Buy USD Fwd Contract	Other Inc/(Exp)	$	67	$	(29	)
Sell CAD/Buy USD Fwd Contract	Other Inc/(Exp)		423		(304	)
Total		$	490	$	(333	)

NOTE 12. UNEARNED REVENUE

Changes in unearned revenue were as follows:

December 31,	2018			2017
(in thousands)
Balance at beginning of year	$	117,614		$	106,323
Deferral of unearned revenue		166,053			151,139
Recognition of unearned revenue		(156,592	)		(139,848	)
Balance at December 31,	$	127,075		$	117,614

Deferred revenue recognized for the year ended December 31, 2018 and 2017 was $156.6 million and $128.7 million, respectively.

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes both unearned revenue and revenue that will be billed and recognized in future periods. The Company has no material contracted not recognized revenue as of December 31, 2018 or December 31, 2017.

At December 31, 2018 and December 31, 2017, the Company had long-term unearned revenue of $11.1 million and $8.6 million, respectively. Unearned short-term revenue is recognized over the next 12 month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2025.

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13. INCOME TAXES

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

For the years ended December 31,	2018			2017			2016
(in thousands)
Current:
Federal	$	49,911		$	76,178		$	69,102
State		13,602			13,406			12,949
Foreign		7,929			7,158			14,464
Total current tax		71,442			96,742			96,515
Deferred:
Federal		6,091			17,249			(5,991	)
State		1,957			1,610			2,892
Foreign		(420	)		(223	)		(149	)
Total deferred tax		7,628			18,636			(3,248	)
Total income tax provision	$	79,070		$	115,378		$	93,267

The primary factors causing income tax expense to be different than the federal statutory rate for 2018, 2017 and 2016 are as follows:

For the years ended December 31,	2018			2017			2016
(in thousands)
Income tax at statutory rate	$	65,254		$	103,075		$	91,222
State income tax expense (net of federal benefit)		12,984			9,979			8,876
Foreign tax expense/(benefit)		1,186			(1,613	)		9,857
Foreign tax		(234	)		(221	)		(19,155	)
Repatriation tax under TCJA		1,233			7,956			—
Other		(1,353	)		(3,798	)		2,467
Total income tax provision	$	79,070		$	115,378		$	93,267

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

On December 22, 2017 the Tax Cuts and Jobs Act (TCJA) was signed into law. The TCJA reduced the corporate tax rate from 35% to 21% and made numerous other tax law changes. In 2017, the SEC issued Staff Accounting Bulletin No. 118 which permitted the recording of provisional amounts related to the impact of the TCJA during a measurement period not to exceed one year. A provisional amount based on reasonable estimates was made with respect to the tax implications associated with the deemed repatriated earnings on foreign subsidiaries based on the initial analysis of the TCJA. Certain tax effects of the TCJA were recognized in year ended December 31, 2017 resulting in the recording of $11.6 million of additional tax expense. The additional tax of $11.6 million related to the following components: $8 million related to the imposition of a tax on deemed repatriated earnings of foreign subsidiaries due to implementation of a territorial tax system, $2.9 million related to re-measurement of deferred tax assets to the 21% tax rate, and $0.7 million related to reductions in tax benefits on stock compensation. During 2018 the Company completed the analysis the earnings and profits of foreign investments. This resulted in the recognition at year ended December 31, 2018 of an additional $1.2 million related to the imposition of a tax on deemed repatriated earnings of foreign subsidiaries. The Company has elected to include the global intangible low-taxed income (GILTI) as part of tax expense in the year incurred.

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The Provision for Income Taxes resulted in an effective tax rate of 25.4% on Income Before Income Taxes for the year ended December 31, 2018. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes and adjustments due to the TCJA.

For 2017 and 2016 the effective tax rate was 39.2% and 35.8%, respectively. The effective income tax rate differs from the annual federal statutory tax rate primarily because of state and foreign income taxes, adjustments due to the TCJA partially offset by tax benefits associated with restricted stock, and the increase of available foreign tax credits.

During 2018, 2017 and 2016, the Company paid income taxes of $77.3 million, $90.7 million and $88.8 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, 2018 and 2017 are as follows:

December 31,	2018			2017
(in thousands)
Deferred tax assets:
Termite accrual	$	812		$	1,241
Insurance and contingencies		18,136			18,374
Unearned revenues		11,091			11,152
Compensation and benefits		11,238			11,157
State and foreign operating loss carryforwards		5,346			7,035
Bad debt reserve		3,687			3,203
Foreign tax credit		6,664			7,842
Other		2,060			1,861
Valuation allowance		(76	)		(24	)
Total deferred tax assets		58,958			61,841
Deferred tax liabilities:
Depreciation and amortization		(21,237	)		(18,453	)
Net Pension liability		(1,340	)		(3,709	)
Intangibles and other		(29,467	)		(21,259	)
Total deferred tax liabilities		(52,043	)		(43,421	)
Net deferred tax assets		6,915			18,420

Analysis of the valuation allowance:

December 31,	2018		2017
(in thousands)
Valuation allowance at beginning of year	$	24	$	6,507
Change in valuation allowance		52		(6,483	)
Valuation allowance at end of year	$	76	$	24

As of December 31, 2018, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $111.6 million, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2019 and 2031. Management believes that it is unlikely to be able to utilize approximately $0.4 million of foreign net operating losses before they expire and has included a valuation allowance for the effect of these unrealizable operating loss carryforwards. The valuation allowance increased by $0.1 million due to foreign net operating leases.

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Earnings from continuing operations before income tax included foreign income of $22.7 million in 2018, $22.1 million in 2017 and $6.4 million in 2016. 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, 2018 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,	2018			2017
(in thousands)
Balance at Beginning of Year	$	3,148		$	2,554
Additions/(reductions) for tax positions of prior years		(594	)		594
Balance at End of Year	$	2,554		$	3,148

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 2012 through 2015. 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 decrease 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 $1.0 million and $0.9 million as of December 31, 2018 and December 31, 2017, respectively. During 2018 the Company recognized interest and penalties of $0.1 million.

14. 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,	2018			2017
(in thousands)
Beginning balance	$	4,885		$	4,800
Current year provision		2,392			3,611
Settlements, claims, and expenditures		(4,058	)		(3,526	)
Ending balance	$	3,219		$	4,885

The accrual for termite contracts is included in other current liabilities, $2.2 million and $2.9 million at December 31, 2018 and 2017, respectively and long-term accrued liabilities, $1.0 million and $2.0 million at December 31, 2018 and 2017, respectively on the Company’s consolidated statements of financial position.

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15. 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,	2018		2017		2016
(in thousands)
Rental Expense	$	79,631	$	72,030	$	66,774

Future commitments under operating leases are as summarized:

(in thousands)	Operating leases
2019	$	28,751
2020		18,024
2021		14,463
2022		11,142
2023		8,998
Thereafter		16,234
Total minimum obligation	$	97,612

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

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

16. 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 no contribution for the years ended December 31, 2018 and 2017 and $3.3 million to the Plans during the year 2016.

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 2016, 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 $35,000, or an annuity starting date of December 1, 2016. In total $8.8 million was paid by the Plan during the year ended December 31, 2016, under this program. The Plan did not offer any options for the years ended December 31, 2018 and 2017.

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The Company includes the Waltham Services, LLC Hourly Employee Pension Plan in the Company’s financial statements. The Waltham Services, LLC Hourly Employee 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.

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,	2018			2017
(in thousands)
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated benefit obligation at beginning of year	$	202,310		$	197,222
Service cost		37			58
Interest cost		7,926			8,493
Actuarial loss		11,175			6,762
Benefits paid		(13,023	)		(10,225	)
Accumulated Benefit obligation at end of year		208,425			202,310
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year		219,905			194,342
Actual return on plan assets		6,817			35,788
Benefits paid		(13,023	)		(10,225	)
Fair value of plan assets at end of year		213,699			219,905
Funded status	$	5,274		$	17,595

Amounts Recognized in the Statement of Financial Position consist of:

December 31,	2018		2017
(in thousands)
Noncurrent assets	$	5,274	$	17,595

Amounts Recognized in Accumulated Other Comprehensive Income consists of:

December 31,	2018		2017
(in thousands)
Net actuarial loss	$	76,362	$	61,598

The accumulated benefit obligation for the defined benefit pension plans were $203.4 million and $202.3 million at December 31, 2018 and December 31, 2017, 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 ($14.8) million, $19.0 million, and $3.0 million in 2018, 2017, and 2016, respectively.

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

December 31,
ACCUMULATED BENEFIT OBLIGATION
Discount rate	*/4.00	%	4.00	%	4.45	%
Rate of compensation increase	N/A		N/A		N/A
NET BENEFIT COST
Discount rate	4.05	%	4.45	%	4.70	%
Expected return on plan assets	7.00	%	7.00	%	7.00	%
Rate of compensation increase	N/A		N/A		N/A

In 2018, the Company used a termination liability approach in calculating the 2018 discount rate for the Rollins, Inc. Pension plan. The following assumptions were used 1) 3.90%, based on current market conditions, for participants in pay status expected to elect a plan termination annuity; 2) 4.11%, based on current market conditions, for active and terminated participants with deferred benefits expected to elect a plan termination annuity; 3) 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. The Waltham Services, LLC Hourly Employee Pension Plan applied 4.05% discount rate based on yield curve analysis.

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, the Company utilized a termination liability approach for fiscal year 2018 and a yield curve analysis for fiscal year’s 2017, and 2016.

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

Years ended December 31,	2018			2017			2016
(in thousands)
Service cost	$	37		$	58		$	71
Interest cost		7,926			8,493			9,331
Expected return on plan assets		(13,775	)		(13,368	)		(13,219	)
Amortization of net loss		3,292			3,322			3,263
Preliminary net periodic benefit cost/(income)	$	(2,520	)	$	(1,495	)	$	(554	)
Settlement expense		—			53			—
Net periodic benefit cost	$	(2,520	)	$	(1,442	)	$	(554	)

The benefit obligations recognized in other comprehensive income for the years ended December 31, 2018, 2017, and 2016 are summarized as follows:

(in thousands)	2018			2017			2016
Pretax (income)/loss	$	18,056		$	(15,650	)	$	218
Amortization of net loss		(3,292	)		(3,322	)		(3,263	)
Total recognized in other comprehensive income		14,764			(18,972	)		(3,045	)
Total recognized in net periodic benefit (income)/cost and other comprehensive income	$	12,244		$	(20,414	)	$	(3,599	)

At December 31, 2018 and 2017, 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 $1.6 million and $32.0 million at December 31, 2018 and 2017, respectively.

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The Plans’ weighted average asset allocation at December 31, 2018 and 2017 by asset category, along with the target allocation for 2018, are as follows:


	Target allocations for					Percentage of plan assets as of December 31,
Asset category	2019					2018			2017
Cash and cash equivalents	0.0	%	—	5.0	%		3.5	%		2.4	%
Equity securities - Rollins stock	0.0	%	—	40.0	%		0.4	%		14.7	%
Domestic equity - all other	0.0	%	—	40.0	%		0.7	%		21.8	%
International equity	0.0	%	—	30.0	%		0.2	%		16.4	%
Debt securities - core fixed income	15.0	%	—	100.0	%		91.1	%		35.2	%
Real estate	0.0	%	—	20.0	%		2.0	%		6.5	%
Alternative/Opportunistic/Special	0.0	%	—	20.0	%		2.1	%		3.0	%
Total							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 not considering making contributions to the pension plans during fiscal 2019.

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, 2018 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_._

Fair Value Measurements

Given the funded status of the Rollins, Inc. Plan, the Company has modified the overall investment strategy to mitigate risk related to volatility with asset types by transitioning to a higher percentage of fixed income securities. As such, the Company's overall investment strategy is to achieve a mix of approximately 50 percent of investments to match long-term pension obligations and 50 percent for near term benefits payments, with a diversification of assets types, fund strategies and fund managers. With the modification of investment strategy, the Company has transitioned the majority of its assets to Fixed-income securities. Fixed-income securities include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries. Equity securities primarily include investments in large-cap and small-cap companies domiciled domestically and internationally. 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.

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The Company has initiated the process to transition its Pension Plan to an Insurance provider and does not expect to amortize a net loss in 2019. The timeline will take approximately 6-9 months from December 31, 2018. The Company’s Pension Plan is currently more than 100% funded. 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%).

The following table presents our plan assets using the fair value hierarchy as of December 31, 2018. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See Note 8 for a brief description of the three levels under the fair value hierarchy.

(in thousands)	Total		Level 1		Level 2		NAV
(1) Cash and cash equivalents	$	7,438	$	7,438		—		—
(2) Fixed income securities		194,739		170,249		474		24,490
Domestic equity securities
Rollins, Inc. stock		1,582		1,582		—		—
Other securities		789		—		789		—
(3) International equity securities		363		—		363		—
(4) Real estate		4,204		—		—		4,204
(5) Alternative/opportunistic/special		4,574		—		—		4,574
Total	$	213,689	$	203,285	$	1,626	$	8,778

The following table presents our plan assets using the fair value hierarchy as of December 31, 2017. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

(in thousands)	Total		Level 1		Level 2		NAV
(1) Cash and cash equivalents	$	5,432	$	5,432		—		—
(2) Fixed income securities		77,214		—		77,214		—
Domestic equity securities
Rollins, Inc. stock		32,049		32,049		—		—
Other securities		48,511		16,243		32,268		—
(3) International equity securities		36,156		—		36,156		—
(4) Real estate		14,074		—		—		14,074
(5) Alternative/opportunistic/special		6,469		—		—		6,469
Total	$	219,905	$	53,724	$	145,638	$	20,543

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

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

	(3)	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 2018 or 2017.

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

(in thousands)
2019	$	209,699
2020		67
2021		74
2022		83
2023		88
Thereafter		639
Total	$	210,650

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 1000 hours in that year. The Plan changed to provide for a matching contribution of one dollar ($1.00) for each one dollar ($1.00) of a participants contributions to the Plan that do not exceed 3 percent of his or her eligible compensation (which include commissions, overtime, and bonuses) and fifty cents ($0.50) for each one dollar ($1.00) of a participant’s contributions to the Plan over the initial 3 percent that do not exceed 6 percent of his or her eligible compensation (which includes commissions, overtime and bonuses), up from a matching contribution of fifty cents ($0.50) for each one dollar ($1.00) of a participants contributions to the Plan that do not exceed 6 percent of his or her eligible compensation (which include commissions, overtime and bonuses) in 2017 and 2016. The charge to expense for the Company match was approximately $21.1 million for the year ended December 31, 2018 and $12.1 million and $11.0 million for the years ended December 31, 2017 and 2016, respectively. At December 31, 2018, 2017, and 2016 approximately, 41.7%, 38.8%, and 36.4%, 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, 2018, 2017 and 2016.

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.

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At December 31, 2018, the Deferred Compensation Plan had 70 life insurance policies with a net face value of $42.6 million. The cash surrender value of these life insurance policies were worth $17.3 million and $18.3 million at December 31, 2018 and 2017, respectively.

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

(in thousands)
2019	$	172
2020		0
2021		417
2022		590
2023		206
Total	$	1,385

Total expense related to deferred compensation was $180 thousand, $241 thousand, and $230 thousand in 2018, 2017, and 2016, respectively. The Company had $18.4 million and $18.4 million in deferred compensation assets as of December 31, 2018 and 2017, respectively, included within other assets on the Company’s consolidated statements of financial position and $17.5 million and $18.4 million in deferred compensation liability as of December 31, 2018 and 2017, 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.

17. 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.

In April 2018, the Company granted a one-time issuance of TLRSs on a tiered Company tenure basis to U.S. based employees. The one-time grant vests 100 percent on the first anniversary date of the granted shares. The total shares granted were less than 0.1 million shares. During the year, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the one-time restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed.

All share and per share information has been adjusted for the three-for-two stock split effective December 10, 2018.

The Company issued time lapse restricted shares of 0.6, 0.7, and 0.8 million for the years ended December 31, 2018, 2017, and 2016, respectively.

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The Company issues new shares from its authorized but unissued share pool. At December 31, 2018, approximately 5.9 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,	2018			2017			2016
Time lapse restricted stock:
Pre-tax compensation expense	$	13,726		$	12,399		$	12,415
Tax benefit		(3,486	)		(4,799	)		(4,805	)
Restricted stock expense, net of tax	$	10,240		$	7,600		$	7,610

As of December 31, 2018 and 2017, $39.2 million and $32.9 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 4.1 years and 3.9 years at December 31, 2018 and December 31, 2017, respectively.

The following table summarizes information on unvested restricted stock units outstanding as of December 31, 2018, 2017 and 2016:

			Weighted-Average Grant-Date Fair Value
Unvested Restricted Stock Grants
Unvested as of December 31, 2015	4,126		$	11.47
Forfeited	(171	)		13.03
Vested	(1,318	)		9.66
Granted	755			17.63
Unvested as of December 31, 2016	3,392			13.47
Forfeited	(51	)		14.92
Vested	(1,018	)		11.47
Granted	703			22.97
Unvested as of December 31, 2017	3,026			16.33
Forfeited	(35	)		19.05
Vested	(910	)		13.24
Granted	643			32.25
Unvested as of December 31, 2018	2,724		$	21.08

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18. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

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

	Pension Liability Adjustment			Foreign Currency Translation			Total
Balance at December 31, 2016	$	(49,200	)	$	(20,875	)	$	(70,075	)
Change during 2017:
Before-tax amount		18,980			9,960			28,940
Tax benefit		(4,821	)		—			(4,821	)
		14,159			9.960			24,119
Balance at December 31, 2017		(35,041	)		(10,915	)		(45,956	)
Change during 2018:
Before-tax amount		(14,812	)		(14,072	)		(28,884	)
Tax expense		3,762			—			3,762
		(11,050	)		(14,072	)		(25,122	)
Balance at December 31, 2018	$	(46,091	)	$	(24,987	)	$	(71,078	)

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19. 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 6 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, 2018, 2017, and 2016.

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 $0.9 million for the year ended December 31, 2018 and $1.0 million for each of the years ended December 31, 2017, 2016, respectively.

In 2014, P.I.A. LLC, a company owned by the Chairman of the Board of Directors, Mr. 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 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, 2018 and 2017, the Company paid approximately $0.7 million, $0.8 million, and $0.5 million in rent and operating costs for the aircraft respectively. During 2018, 2017 and 2016, respectively, 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.

20. UNAUDITED QUARTERLY DATA

(in thousands except per share data)	First		Second		Third		Fourth
2018
Revenues	$	408,742	$	480,461	$	487,739	$	444,623
Gross profit (Revenues less cost of services provided)	$	202,599	$	249,689	$	251,452	$	223,389
Net income	$	48,525	$	65,542	$	66,628	$	50,968
Income per share:
Income per share—Basic	$	0.15	$	0.20	$	0.20	$	0.16
Income per share—Diluted	$	0.15	$	0.20	$	0.20	$	0.16
2017
Revenues	$	375,247	$	433,555	$	450,442	$	414,713
Gross profit (Revenues less cost of services provided)	$	186,084	$	229,075	$	231,661	$	207,194
Net income	$	40,270	$	53,689	$	51,430	$	33,735
Income per share:
Income per share—Basic	$	0.12	$	0.17	$	0.16	$	0.10
Income per share—Diluted	$	0.12	$	0.17	$	0.16	$	0.10

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21. CASH DIVIDEND

On January 22, 2019, the Board of Directors approved a 12.5% increase in the Company’s quarterly cash dividend per common share to $0.105 payable March 11, 2019 to stockholders of record at the close of business February 11, 2019. On October 23, 2018, the Board of Directors declared its regular $0.09 per share as well as a special year-end dividend of $0.09 per share both payable December 10, 2018 to stockholders of record at the close of business November 9, 2018. The Company expects to continue to pay cash dividends to the common stockholders, subject to the earnings and financial condition of the Company and other relevant factors.

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