Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
Rollins, Inc. and Subsidiaries
(in thousands except share information)
December 31,20192018
ASSETS
Cash and cash equivalents$94,276$115,485
Trade receivables, net of allowance for doubtful accounts of $16,699 and $13,285, respectively122,766104,016
Financed receivables, short-term, net of allowance for doubtful accounts of $1,675 and $1,845, respectively22,26718,454
Materials and supplies19,47615,788
Other current assets51,00232,278
Total current assets309,787286,021
Equipment and property, net195,533136,885
Goodwill572,847368,481
Customer contracts, net273,720178,075
Trademarks and tradenames, net102,53954,140
Other intangible assets, net10,52511,043
Operating lease, right-of-use assets, net200,727—
Financed receivables, long-term, net of allowance for doubtful accounts of $1,284 and $1,536 respectively30,79228,227
Benefit plan assets21,565—
Prepaid pension—5,274
Deferred income taxes2,1806,915
Other assets24,16119,063
Total assets$1,744,376$1,094,124
LIABILITIES
Accounts payable$35,234$27,168
Accrued insurance30,44127,709
Accrued compensation and related liabilities81,94377,741
Unearned revenues122,825116,005
Operating lease liabilities-current66,117—
Current portion of long-term debt12,500—
Other current liabilities60,97550,406
Total current liabilities410,035299,029
Accrued insurance, less current portion34,92033,867
Operating lease liabilities, less current portion135,651—
Long-term debt279,000—
Deferred income tax liability9,927—
Long-term accrued liabilities59,09349,320
Total liabilities928,626382,216
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, without par value; 500,000 shares authorized, zero shares issued——
Common stock, par value $1 per share; 550,000,000 shares authorized, 327,430,846 and 327,308,079 shares issued and outstanding, respectively327,431327,308
Paid in capital89,41385,386
Accumulated other comprehensive loss(21,109)(71,078)
Retained earnings420,015370,292
Total stockholders' equity815,750711,908
Total liabilities and stockholders' equity$1,744,376$1,094,124

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 share information)
Years ended December 31,201920182017
REVENUES
Customer services$2,015,477$1,821,565$1,673,957
COSTS AND EXPENSES
Cost of services provided993,593894,437819,943
Depreciation and amortization81,11166,79256,580
Pension settlement loss49,898——
Sales, general and administrative623,379550,698503,433
Gain on sales of assets, net(581)(875)(242)
Interest expense/(income)6,917(220)(259)
TOTAL COSTS AND EXPENSES1,754,3171,510,8321,379,455
INCOME BEFORE INCOME TAXES261,160310,733294,502
PROVISION FOR INCOME TAXES
Current65,04171,44296,742
Deferred(7,228)7,62818,636
TOTAL PROVISION FOR INCOME TAXES57,81379,070115,378
NET INCOME203,347231,663179,124
INCOME PER SHARE - BASIC$0.62$0.71$0.55
INCOME PER SHARE - DILUTED$0.62$0.71$0.55
Weighted average shares outstanding - basic327,477327,291326,982
Weighted average shares outstanding - diluted327,477327,291326,982
DIVIDENDS PAID PER SHARE$0.47$0.47$0.37

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 31,201920182017
NET INCOME$203,347$231,663$179,124
OTHER COMPREHENSIVE EARNINGS/(LOSS)
Pension and other postretirement benefit plans, net of tax45,896(11,050)14,159
Foreign currency translation adjustments4,350(14,072)9,960
Interest rate swap, net of tax(277)——
Other comprehensive earnings/(loss)49,969(25,122)24,119
COMPREHENSIVE EARNINGS$253,316$206,541$203,243

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)
Common StockTreasuryAccumulated
SharesAmountSharesAmountPaid- In-CapitalOther Comprehensive Income (Loss)Retained EarningsTotal
Balance at December 31, 2016326,688$326,688—$—$77,452$(70,075)$234,480$568,545
Net Income—179,124179,124
Other comprehensive income
Pension liability adjustment, net of tax14,15914,159
Foreign currency translation adjustments9,9609,960
Cash dividends(122,017)(122,017)
Stock compensation65165111,965(217)12,399
Employee stock buybacks(351)(351)(8,012)117(8,246)
Balance at December 31, 2017326,988$326,988—$—$81,405$(45,956)$291,487$653,924
Net Income—231,663231,663
Other comprehensive income
Pension liability adjustment, net of tax(11,050)(11,050)
Foreign currency translation adjustments(14,072)(14,072)
Cash dividends(152,742)(152,742)
Stock compensation60560513,323(202)13,726
Employee stock buybacks(285)(285)(9,342)86(9,541)
Balance at December 31, 2018327,308$327,308—$—$85,386$(71,078)$370,292$711,908
Impact of adoption of ASC 842212212
Net Income—203,347203,347
Other comprehensive income
Pension settlement loss, net of tax46,02246,022
Pension liability adjustment, net of tax(126)(126)
Foreign currency translation adjustments4,3504,350
Interest rate swaps, net of tax(277)(277)
Cash dividends(153,836)(153,836)
Stock compensation38738713,77214,159
Employee stock buybacks(264)(264)(9,745)(10,009)
Balance at December 31, 2019327,431$327,431—$—$89,413$(21,109)$420,015$815,750

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 31,201920182017
OPERATING ACTIVITIES
Net Income$203,347$231,663$179,124
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash charges79,54464,67555,533
Pension settlement loss49,898——
Provision for deferred income taxes(7,228)7,62818,636
Stock based compensation expense14,15913,72612,399
Provision for bad debts15,14513,60610,455
Changes in assets and liabilities:
Trade accounts receivables and other accounts receivables(20,151)(12,549)(13,661)
Financing receivables(9,080)(10,784)(6,527)
Materials and supplies(2,151)(374)(837)
Other current assets(14,009)(7,121)1,448
Other non-current assets6,08111,329(5,137)
Accounts payable and accrued expenses(9,925)(23,820)(25,691)
Unearned revenue5,4244,9011,222
Accrued insurance1,915(686)4,039
Pension funding(144)——
Long-term accrued liabilities(3,637)(5,922)4,367
Net cash provided by operating activities309,188286,272235,370
INVESTING ACTIVITIES
Cash used for acquisitions of companies, net of cash acquired(430,558)(76,769)(130,189)
Capital expenditures(27,146)(27,179)(24,680)
Cash from sale of franchises617343519
Derivative Investments104297(264)
Proceeds from sale of assets1,7581,840370
Investment tax credits1189369
Net cash used in investing activities(455,107)(101,375)(154,175)
FINANCING ACTIVITIES
Borrowings under term loan250,000——
Borrowings under revolving commitment190,000——
Repayments of long term debt(148,500)——
Payment of dividends(153,836)(152,742)(122,017)
Cash paid for common stock purchased(10,009)(9,541)(8,246)
Net cash provided by/(used in) financing activities127,655(162,283)(130,263)
Effect of exchange rate changes on cash(2,945)(14,179)13,333
Net increase (decrease) in cash and cash equivalents(21,209)8,435(35,735)
Cash and cash equivalents at beginning of year115,485107,050142,785
Cash and cash equivalents at end of year$94,276$115,485$107,050
Supplemental disclosure of cash flow information
Cash paid for interest$6,452$25$—
Cash paid for income taxes, net$75,812$77,351$90,702
Non-cash additions to operating lease right-of-use assets$75,782$—$—

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 decreases/(increases) in the minimum pension liability which were charged/(credited) to other comprehensive income were $75.4 million, ($14.8) million, and $19.0 million in 2019, 2018, and 2017, respectively.

Business Combinations —There were $34.2 million in non-cash acquisitions of assets in business combinations for the year ended December 31, 2019, $18.1 million in 2018 and $34.0 million for 2017.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2019, 2018, and 2017, 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 the United States, Canada, Australia, Europe, and Asia with international franchises in Mexico, Canada, Central and South America, the Caribbean, the Middle East, Asia, Europe, Africa, and Australia. 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, Mexico, Central and South America, the Caribbean, the Middle East, Asia, Europe, and Africa 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 one Canadian province.

Rollins UK was formed as a wholly-owned subsidiary of the Company to acquire Safeguard Pest Control (“Safeguard”) in June 2016. Safeguard 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.

On April 30, 2019, the Company acquired Clark Pest Control of Stockton, Inc. (“Clark Pest Control”) located in Lodi, CA. At the time of the acquisition, Clark Pest Control was a leading pest management company in California and the nation’s 8th largest pest management company according to PCT 100 rankings. Clark Pest Control services its customers from 26 service locations in 2 states. Clark Pest Control recorded revenues of approximately $139.2 million for the fiscal year ended December 31, 2018. The Company’s consolidated statements of income include the results of operations of Clark Pest Control for the period beginning April 30, 2019 through December 31, 2019.

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, Europe, Asia, Mexico, Central and South America, the Caribbean, the Middle East, and Africa. 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 the Company’s 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.

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.

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.

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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 traditional 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 transaction 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.

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.

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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 $1.7 million and $1.6 million for the year ending December 31, 2019 and 2018, respectively.

Royalties from Orkin franchises are accrued and recognized as revenues are earned on a monthly basis. Revenue from Orkin franchises was $8.7 million for the year ended December 31, 2019 and $8.8 million and $5.4 million for the years ended December 31, 2018 and 2017, 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. Unearned revenue mainly relates 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. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. Refer to Note 3 - Revenue for further information, including changes in unearned revenue for the year.

The Company extends terms to certain customers on higher dollar termite and ancillary work, as well as to certain franchisees for initial funding on the sale of franchises. These financed receivables are segregated from our trade receivables. The amounts that are due within one year from the balance sheet dates are classified as short-term financed receivables, and are shown, net of allowance for doubtful accounts, at $22.3 million as of December 31, 2019 and $18.5 million at December 31, 2018. The balances of long-term financed receivables, net of allowance for doubtful accounts, were $30.8 million as of December 31, 2019 and $28.2 million at December 31, 2018 and are included in long-term assets on our consolidated statements of financial position. See Note 6 – Financing Receivables for further information.

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.

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.

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, 2019 and 2018.

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 2019, 2018, and 2017. 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. See Recent Accounting Guidance for discussion of the new FASB, ASU 2016-13 which provides updated guidance on measuring expected credit losses to be implemented in 2020.

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

Years ended December 31,201920182017
(in thousands)
Advertising$81,174$69,875$66,115

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 $94.3 million of total cash at December 31, 2019, is primarily cash held at various banking institutions. Approximately $74.1 million is held in cash accounts at international bank institutions and the remaining $20.2 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.

Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future.

At December 31,20192018
(in thousands) (in US dollars)
Cash held in foreign bank accounts$74,094$53,613

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.

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, 2019 and 2018. See Note 16 for further details.

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

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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 31,201920182017
(in thousands)
Depreciation$36,646$30,364$27,381

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, 2019. 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.

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.

Accrued Insurance—The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and vehicle liability. Risks above specified limits are managed through either high deductible insurance or a non-affiliated group captive insurance member arrangement. 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 as a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events.

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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.

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

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A reconciliation of weighted average shares outstanding along with the earnings per share attributable to restricted shares of common stock (participating securities) is as follows (in thousands except per share data). All share and per share information in the following chart are restated for the stock split effective December 10, 2018:

Years Ended December 31,201920182017
Net income available to stockholders$203,347$231,663$179,124
Less: Dividends paid
Common Stock(152,793)(151,458)(120,930)
Restricted shares of common stock(1,042)(1,284)(1,087)
Undistributed earnings for the period$49,512$78,921$57,107
Allocation of undistributed earnings:
Common stock49,14478,25556,567
Restricted shares of common stock368666540
Basic and diluted shares outstanding:
Common stock325,046324,529323,891
Restricted shares of common stock2,4312,7623,091
Basic and diluted shares outstanding (in shares)327,477327,291326,982
Basic and diluted earnings per share:
Common stock:
Distributed earnings$0.47$0.47$0.37
Undistributed earnings0.150.24$0.18
$0.62$0.71$0.55
Restricted shares of common stock
Distributed earnings$0.43$0.47$0.35
Undistributed earnings0.150.240.18
$0.58$0.71$0.53

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, minimum pension liability adjustments and cash flow hedge of interest rate risks.

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Franchising Program – Rollins’ wholly-owned subsidiary, Orkin, had 50, 47 and 47 domestic franchises as of December 31, 2019, 2018 and 2017, 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 $6.7 million at December 31, 2019 and $6.5 million at December 31, 2018. The Company amortizes the initial domestic franchise fees over the initial franchise term. Deferred domestic Orkin franchise fees were $1.7 million at December 31, 2019 and $1.6 million December 31, 2018. These notes receivable are included as financing receivables and the deferred franchise fees are included in other current liabilities in the accompanying Consolidated Statements of Financial Position. The Company’s maximum exposure to loss (notes receivable from franchises less deferred franchise fees) relating to Orkin’s domestic franchises was $5.0 million, $4.9 million, and $2.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019, 2018 and 2017, Orkin had 97, 86, and 81 international franchises, respectively. Orkin’s international franchise program began with its first international franchise in 2000 and since has expanded to Mexico, Central and South America, the Caribbean, the Middle East, Asia, Europe, and Africa.

Royalties from Orkin franchises (domestic and international) are accrued and recognized as revenues and are earned on a monthly basis. Revenue from Orkin franchises was $8.7 million for the year ended December 31, 2019 and $8.8 million and $5.4 million for the years ended December 31, 2018 and 2017, respectively.

Rollins’ wholly-owned subsidiary, Critter Control, had 84, 80 and 89 franchises in the United States and Canada as of December 31, 2019, 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 $0.9 million and $0.6 million at December 31, 2019 and 2018, respectively. These notes are not guaranteed. The Company anticipates that should there be any losses from franchisees, these losses would be recouped by terminating the franchisee and re-selling the territory. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.

Combined domestic and international revenues from Orkin, Critter Control and Australia franchises were $17.1 million for the year ended December 31, 2019 and $14.7 million and $9.7 million for the years ended December 31, 2018 and 2017, respectively. Total franchising revenues were less than 1.0% of the Company’s annual revenues.

Right to access intellectual property (Franchise) - The right to access Orkin’s and Critter Control’s intellectual property is an essential part of Orkin and Critter Control franchising agreements, respectively. These agreements provide the franchisee a license to use the brand name and trademark when advertising and selling services to end customers in their normal course of business. Orkin and Critter Control franchise agreements contain a clause allowing the respective franchisor to purchase certain assets of the franchisee at the conclusion of their franchise agreement or upon termination. This is only an option for the franchisor to re-purchase the assets selected by the franchisor and is not a performance obligation or a form of consideration.

Recent Accounting Guidance

Recently adopted accounting standards

The Company adopted ASU 2016-02, Leases (ASC 842), on January 1, 2019 using the modified retrospective approach and did not restate comparative periods as permitted by ASU 2018-11, Leases (Topic 842): Targeted Improvements. We have elected the transition package of practical expedients, which permitted us not to reassess our prior conclusions regarding 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. Upon adoption, the Company recognized operating lease right-of-use assets and liabilities of $195.7 million and $195.5 million, and a $0.2 million adjustment to beginning retained earnings.

The Company adopted ASU 2018-02, “Income Statement—Reporting Comprehensive Income (ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Reform Act”). The Company adopted ASU 2018-02 effective January 1, 2019 and elected not to recognize a cumulative-effect adjustment.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (ASC 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 was adopted by the Company in 2019. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

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Recently issued accounting standards to be adopted in 2020 or later

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 the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. Based on our current receivables and forecasts of future macroeconomic conditions, we estimate that the allowance for credit losses reported in our consolidated balance sheet will decrease by an immaterial amount at adoption. We will record the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings.

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 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The updated accounting guidance modifies the disclosure requirements on fair value measurements by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements. The standard in this update is effective for the Company’s financial statements issued for fiscal years beginning in 2020. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

2. ACQUISITIONS

The Company has made 30 and 38 acquisitions during the years ended December 31, 2019, and 2018, respectively, some of which have been disclosed on various press releases and related Current Reports on Form 8-K.

Acquisition of Clark Pest Control:

The Company completed the acquisition of Clark Pest Control on April 30, 2019. Clark Pest Control is a leading pest management company in California and was the nation’s 8th largest pest management company according to PCT 100 rankings at the time of the acquisition, making it the largest Rollins acquisition since the Company acquired HomeTeam Pest Defense in 2008. Clark Pest Control services its customers from 26 service locations in 2 states. Clark Pest Control recorded revenues of approximately $139.2 million for the fiscal year ended December 31, 2018. The Company’s consolidated statements of income include the results of operations of Clark Pest Control for the period beginning April 30, 2019 through December 31, 2019.

The Company engaged an independent valuation firm to determine the allocation of the purchase price to goodwill and identifiable intangible assets. The valuation resulted in the allocation of $191.9 million to goodwill, $112.7 million to customer contracts, and $49.8 million to other intangible assets, principally tradenames. The finite-lived intangible assets, principally customer contracts, are being amortized over periods principally ranging from 5 to 10 years on a straight-lined basis.

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The fair values of Clark Pest Control's assets and liabilities, at the date of acquisition, were as follows:

(in thousands)at April 30, 2019
Assets and liabilities:
Trade accounts receivables$6,974
Materials and supplies900
Other current assets5,367
Equipment and property, net65,535
Goodwill191,853
Customer contracts112,700
Trademarks & tradenames49,300
Non-compete agreements500
Accounts payable(1,929)
Accrued compensation and related liabilities(5,678)
Unearned revenues(879)
Contingent Consideration, short-term(6,777)
Other current liabilities(5,452)
Other long term liabilities(9,352)
Accrued insurance, less current portion(1,870)
Contingent Consideration, long-term(5,923)
Total$395,269

The unaudited pro forma financial information presented below gives effect to the Clark Pest Control acquisition as if it had occurred as of the beginning of our fiscal year 2018. The information presented below is for illustrative purposes only and is not necessarily indicative of results that would have been achieved if the acquisition had actually occurred as of the beginning of such years or results which may be achieved in the future.

12 Months Ended
December 31,
(in thousands, except per share amounts)20192018
Revenues:
Customer Services$2,060,280$1,960,741
Costs And Expenses1,798,9841,640,120
Income Before Income Taxes261,296320,621
Provision For Income Taxes57,81379,070
Net Income$203,483$241,551
Net Income Per Share - Basic And Diluted$0.62$0.74
Dividends Paid Per Share$0.47$0.47
Weighted average participating shares outstanding - basic and diluted327,477327,291
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Total cash purchase price for the Company’s acquisitions in 2019 and 2018 were $430.6 million and $76.8 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 31,20192018
Accounts receivable$7,728$3,558
Materials and supplies1,378556
Equipment and property68,7047,374
Goodwill204,16225,605
Customer contracts136,34462,228
Other intangible assets50,6506,936
Current liabilities(18,195)(21,536)
Other assets and liabilities, net(7,513)(3,089)
Total consideration paid443,25881,632
Less: Contingent consideration liability(12,700)(4,863)
Total cash purchase price$430,558$76,769

3. REVENUE

Adoption of ASC 606, “Revenue from Contracts with Customers”. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. 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.

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:

Years ended December 31,201920182017
(in thousands)
United States$1,862,698$1,677,116$1,541,336
Other Countries152,779144,449132,621
Total Revenues$2,015,477$1,821,565$1,673,957

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

Years ended December 31,201920182017
(in thousands)
Residential revenue$861,636$773,932$705,787
Commercial revenue770,342707,386666,523
Termite completions, bait monitoring and renewals371,258332,573294,982
Other revenues12,2417,6746,665
Total Revenues$2,015,477$1,821,565$1,673,957
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Deferred revenue recognized for the year ended December 31, 2019 and 2018 was $165.0 million and $156.6 million, respectively. Changes in unearned revenue were as follows:

At December 31,20192018
(in thousands)
Balance at beginning of year$127,075$117,614
Deferral of unearned revenue174,404166,053
Recognition of unearned revenue(164,972)(156,592)
Balance at end of year$136,507$127,075

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, 2019 or December 31, 2018.

At December 31, 2019 and December 31, 2018, the Company had long-term unearned revenue of $13.7 million and $11.1 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.

4. DEBT

The Company entered into a new Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured Revolving Commitment of up to $175.0 million, which includes a $75.0 million letter of credit subfacility and a $25.0 million swingline subfacility and an unsecured variable rate $250.0 million Term Loan with SunTrust Bank and Bank of America, N.A. Both the Revolving Commitment and the Term Loan have five-year durations commencing on April 29, 2019. In addition, the agreement has provisions to extend the duration beyond the Revolving Commitment Termination date as well as optional prepayments rights at any time and from time to time to prepay any borrowing, in whole or in part, without premium or penalty. As of December 31, 2019, the Revolving Commitment had outstanding borrowings of $101.5 million and the Term Loan had outstanding borrowings of $190.0 million. As of December 31, 2018, there were no outstanding borrowings. The $291.5 million outstanding borrowings value approximated the fair value at December 31, 2019 based upon interest rates available to the Company as evidenced by debt of other companies with similar credit characteristics. Our effective interest rate on the debt outstanding as of December 31, 2019 was 2.66%. The effective interest rate is comprised of the 1-month LIBOR plus a margin of 87.5 basis points as determined by our leverage ratio calculation.

The aggregate annual maturities of long-term debt were as follows:

(in thousands)Revolving CommitmentTerm LoanTotal
2020$—$12,500$12,500
2021—17,18817,188
2022—18,75018,750
2023—23,43723,437
2024101,500118,125219,625
Total$101,500$190,000$291,500

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.

In order to comply with applicable debt covenants, the Company is required to maintain at all times a Leverage Ratio of not greater than 3.00:1.00. The Leverage ratio is calculated as of the last day of the fiscal quarter most recently ended. The Company remained in compliance with applicable debt covenants at December 31, 2019 and expects to maintain compliance throughout 2020.

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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.

At December 31,20192018
(in thousands)
Gross trade receivables$139,465$117,301
Allowance for doubtful accounts(16,699)(13,285)
Net trade receivables$122,766$104,016

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.

Schedule of financed receivables including installment receivable amounts which are due subsequent to one year

At December 31,20192018
(in thousands)
Gross financing receivables, short-term$23,942$20,299
Gross financing receivables, long-term32,07629,763
Allowance for doubtful accounts(2,959)(3,381)
Net financing receivables$53,059$46,681

Total financing receivables, net were $53.1 million and $46.7 million at December 31, 2019 and December 31, 2018, 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 5.0% and 3.8% for the twelve months ended December 31, 2019 and December 31, 2018, respectively. Due to the low percentage of charge-off receivables and the high credit worthiness of the potential obligor, the entire Rollins, Inc. financing receivables portfolio has a low credit risk.

The Company offers 90 days same-as-cash financing to some customers based on their credit worthiness. Interest is not recognized until the 91st day at which time it is recognized retrospectively back to the first day if the contract has not been paid in full. In certain circumstances, such as when delinquency is deemed to be of an administrative nature, accounts may still accrue interest when they reach 180 days past due. As of December 31, 2019, there were seven accounts that were 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 Systems, LLC, 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 $30.8 million and $28.2 million at December 31, 2019 and 2018, respectively.

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Rollins establishes an allowance for doubtful accounts to ensure 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 31,20192018
(in thousands)
Balance, beginning of period$3,381$2,892
Additions to allowance2,1792,161
Deductions, net of recoveries(2,601)(1,672)
Balance, end of period$2,959$3,381

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

At December 31,20192018
(in thousands)
30-59 days past due$1,427$1,566
60-89 days past due751777
90 days or more past due1,4121,407
Total$3,590$3,750

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

At December 31,20192018
Current93.7%92.5%
30-59 days past due2.5%3.1%
60-89 days past due1.3%1.6%
90 days or more past due2.5%2.8%
Total100.0%100.0%

7. EQUIPMENT AND PROPERTY

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

December 31,20192018
(in thousands)
Buildings$95,525$53,339
Operating equipment120,826103,429
Furniture and fixtures19,57918,476
Computer equipment and systems193,795177,441
429,725352,685
Less: accumulated depreciation(267,370)(240,320)
162,355112,365
Land33,17824,520
Net equipment and property$195,533$136,885

Included in equipment and property, net at December 31, 2019 and 2018, are fixed assets held in foreign countries of $7.7 million, and $7.6 million, respectively.

Total depreciation expense was approximately $36.6 million in 2019, $30.4 million in 2018 and $27.4 million in 2017.

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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.

At December 31, 2019 and 2018 respectively, the Company had $49.1 million and $30.9 million of acquisition holdback and earnout liabilities with the former owners of acquired companies. The earnout liabilities were discounted to reflect the expected probability of payout, and both earnout and holdback liabilities were discounted to their net present value on the Company’s books and are considered level 3 liabilities.

The table below presents a summary of the changes in fair value for these liabilities.

(in thousands)
Acquisition holdback and earnout liabilities at December 31, 2017$28,848
New acquisitions and revaluations15,124
Payouts(13,193)
Interest on outstanding liabilities1,082
Charge offset, forfeit and other(935)
Acquisition holdback and earnout liabilities at December 31, 201830,926
New acquisitions and revaluations34,003
Payouts(15,994)
Interest on outstanding liabilities1,973
Charge offset, forfeit and other(1,776)
Acquisition holdback and earnout liabilities at December 31, 2019$49,132

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 $572.8 million at December 31, 2019 and $368.5 million as of December 31, 2018. Goodwill increased for the year ended December 31, 2019 due to acquisitions and currency conversion of foreign goodwill. The carrying amount of goodwill in foreign countries was $55.8 million as of December 31, 2019 and $54.9 million as of December 31, 2018.

The changes in the carrying amount of goodwill for the twelve months ended December 31, 2019 and 2018 were as follows:

(in thousands)
Goodwill at December 31, 2017$346,514
Goodwill acquired25,605
Goodwill adjustments due to currency translation(3,638)
Goodwill at December 31, 2018368,481
Goodwill acquired204,162
Goodwill adjustments due to currency translation204
Goodwill at December 31, 2019$572,847
47

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 31,20192018
(in thousands)
Customer contracts$470,781$339,864
Less: accumulated amortization(197,061)(161,789)
Customer contracts, net$273,720$178,075

The carrying amount of customer contracts in foreign countries was $33.5 million as of December 31, 2019 and $37.1 million as of December 31, 2018.

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 $94.5 million and $40.5 million as of December 31, 2019 and 2018, respectively.

The carrying amount and accumulated amortization for trademarks and tradenames were as follows:

December 31,20192018
(in thousands)
Trademarks and tradenames$107,579$58,471
Less: accumulated amortization(5,040)(4,331)
Trademarks and tradenames, net$102,539$54,140

The carrying amount of trademarks and tradenames in foreign countries was $3.4 million as of December 31, 2019 and $3.7 million as of December 31, 2018.

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:

December 31,20192018
(in thousands)
Other intangible assets$22,023$22,742
Less: accumulated amortization(11,498)(11,699)
Other intangible assets, net$10,525$11,043

The carrying amount of other intangible assets in foreign countries was $1.2 million as of December 31, 2019 and $1.6 million as of December 31, 2018.

Included in the table above are non-amortizable, indefinite lived Internet domain names of $2.2 million at December 31, 2019 and 2018, respectively.

Total amortization expense was approximately $44.5 million in 2019, $36.4 million in 2018 and $29.2 million in 2017.

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)
2020$44,850
202142,638
202241,086
202336,451
202431,460
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11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain interest rate risks on our outstanding debt and foreign currency risks arising from our international business operations and global economic conditions. The Company enters into certain derivative financial instruments to lock in certain interest rates, as well as to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate swap arrangements to manage or hedge its interest rate risk. Notwithstanding the terms of the swaps, the Company is ultimately obligated for all amounts due and payable under the Revolving Commitment and the Term Loan (“Credit Facility”). The Company does not use such instruments for speculative or trading purposes.

On June 19, 2019, the Company entered into a floating-to-fixed interest rate swap for an aggregate notional amount of $80.0 million in order to hedge a portion of the Company’s floating rate indebtedness under the Credit Facility. The Company designated the swap as a cash flow hedge. The swap requires us to pay a fixed rate of 1.94% per annum on the notional amount. The cash flows from the swap began June 30, 2019 and ends on December 31, 2021. As of December 31, 2019, $0.3 million had been recorded as an Accumulated Loss in Other Comprehensive Income (“AOCI”). Realized gains and losses in connection with each required interest payment are reclassified from AOCI to interest expense during the period of the cash flows. During 2019, $0.1 million was recorded as interest income to offset the floating rate interest expense on our Credit Facility. On a quarterly basis, management evaluates any swap agreement to determine its effectiveness or ineffectiveness and records the change in fair value as an adjustment to AOCI. Management intends that the swap remains effective. No swaps existed at December 31, 2018.

Hedges of Foreign Exchange Risk

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. We use foreign currency derivatives, specifically vanilla foreign currency forward contracts (“FX Forwards”), to manage our exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. FX Forwards involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The FX Forwards are typically settled in US dollars for their fair value at or close to their settlement date. We do not currently designate any of these FX Forwards under hedge accounting, but rather reflect the changes in fair value immediately in earnings. We do not use such instruments for speculative or trading purposes, but rather use them to manage our exposure to foreign exchange rates. Changes in the fair value of FX Forwards recorded in other income/expense and were equal to a net loss of $0.4 million for the twelve months ended December 31, 2019 and a net gain of $0.5 million in 2018. The fair value of the Company’s FX Forwards was recorded in Other Current Liabilities as a net obligation of $0.2 million at December 31, 2019 and in Other Assets of $0.1 million at December 31, 2018.

As of December 31, 2019, the Company had the following outstanding FX Forwards (in thousands except for number of instruments):

(in thousands except for number of instruments)Number of InstrumentsSell NotionalBuy Notional
FX Forward Contracts
Sell AUD/Buy USD Fwd Contract$7$1,050$726
Sell CAD/Buy USD Fwd Contract1620,00015,218
Total$23$—$15,944

The financial statement impact related to these derivative instruments was insignificant for the years ended December 31, 2019, 2018, and 2017.

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12. INCOME TAXES

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

For the years ended December 31,201920182017
(in thousands)
Current:
Federal$43,593$49,911$76,178
State15,33713,60213,406
Foreign6,1117,9297,158
Total current tax65,04171,44296,742
Deferred:
Federal(5,217)6,09117,249
State(1,518)1,9571,610
Foreign(493)(420)(223)
Total deferred tax(7,228)7,62818,636
Total income tax provision$57,813$79,070$115,378

The primary factors causing income tax expense to be different than the federal statutory rate for 2019, 2018 and 2017 are as follows:

For the years ended December 31,201920182017
(in thousands)
Income tax at statutory rate$54,845$65,254$103,075
State income tax expense (net of federal benefit)10,18212,9849,979
Foreign tax expense/(benefit)9331,186(1,613)
Foreign tax credit(242)(234)(221)
Repatriation tax under TCJA(844)1,2337,956
Pension settlement(10,537)——
Restricted Stock Adjustment(2,973)(4,420)(4,064)
Other6,4493,067266
Total income tax provision$57,813$79,070$115,378

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 the 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: $8.0 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 of 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.

The Provision for Income Taxes resulted in an effective tax rate of 22.1% on Income Before Income Taxes for the year ended December 31, 2019. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes and beneficial adjustments related to the pension settlement.

For 2018 the effective tax rate was 25.4%. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes, tax benefits associated with restricted stock and adjustments due to the TCJA.

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For 2017 the effective tax rate was 39.2%. 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 2019, 2018 and 2017, the Company paid income taxes of $75.8 million, $77.3 million and $90.7 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, 2019 and 2018 are as follows:

December 31,20192018
(in thousands)
Deferred tax assets:
Termite accrual$786$812
Insurance and contingencies18,46418,136
Unearned revenues11,50611,091
Compensation and benefits11,98311,238
State and foreign operating loss carryforwards3,9395,346
Bad debt reserve4,3123,687
Foreign tax credit3,9726,664
Other2,4392,060
Valuation allowance(83)(76)
Total deferred tax assets57,31858,958
Deferred tax liabilities:
Depreciation and amortization(24,981)(21,237)
Net pension liability(5,279)(1,340)
Intangibles and other(34,805)(29,466)
Total deferred tax liabilities(65,065)(52,043)
Net deferred taxes
Deferred tax assets$2,180$6,915
Deferred tax liabilities$(9,927)$—

Analysis of the valuation allowance:

December 31,20192018
(in thousands)
Valuation allowance at beginning of year$76$24
Increase in valuation allowance752
Valuation allowance at end of year$83$76

As of December 31, 2019, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $85.3 million, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2020 and 2032. 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 $0.04 million due to foreign net operating losses.

Earnings from continuing operations before income tax included foreign income of $26.7 million in 2019, $22.7 million in 2018 and $22.1 million in 2017. The Company’s international business is expanding, and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisition of unrelated companies. Repatriation of cash from the Company’s foreign subsidiaries is not part of the Company’s current business plan.

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The total amount of unrecognized tax benefits at December 31, 2019 that, if recognized, would affect the effective tax rate is $0.8 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

December 31,20192018
(in thousands)
Unrecognized tax benefits at beginning of year$2,554$3,148
Additions for tax positions of prior years844—
Reductions for tax positions of prior years(2,554)(594)
Unrecognized tax benefits at end of year$844$2,554

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. In addition, the Company has subsidiaries in various state and international jurisdictions that are currently under audit for years ranging from 2012 through 2018. 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 $0.03 million and $1.0 million as of December 31, 2019 and 2018, respectively. During 2019 the Company recognized interest and penalties of $0.1 million.

13. 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:

At December 31,20192018
(in thousands)
Accrual for termite claims at beginning of year$3,219$4,885
Current year provision3,0142,392
Settlements, claims, and expenditures(3,094)(4,058)
Accrual for termite claims at end of year$3,139$3,219

The accrual for termite contracts is included in other current liabilities, $2.3 million and $2.2 million at December 31, 2019 and 2018, respectively and long-term accrued liabilities, $0.8 million and $1.0 million at December 31, 2019 and 2018, respectively on the Company’s consolidated statements of financial position.

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14. LEASES

The Company leases certain buildings, vehicles, and equipment in order to reduce the risk associated with ownership. The Company elected the practical expedient approach permitted under ASC 842 not to include short-term leases with a duration of 12 months or less on the balance sheet. As of December 31, 2019 and 2018, all leases were classified as operating leases. Building leases generally carry terms of 5 to 10 years with annual rent escalations at fixed amounts per the lease. Vehicle leases generally carry a fixed term of one year with renewal options to extend the lease on a monthly basis resulting in lease terms up to 5 years depending on the class of vehicle. The exercise of renewal options is at the Company’s sole discretion. It is reasonably certain that the Company will exercise the renewal options on its vehicle leases. The measurement of right-of-use assets and liabilities for vehicle leases includes the fixed payments associated with such renewal periods. We separate lease and non-lease components of contracts. Our lease agreements do not contain any material variable payments, residual value guarantees, early termination penalties or restrictive covenants. As of December 31, 2019, the Company had no additional future obligations for leases that had not yet commenced.

The Company uses the rate implicit in the lease when available; however, most of our leases do not provide a readily determinable implicit rate. Accordingly, we estimate our incremental borrowing rate based on information available at lease commencement.

(dollars in thousands)
Lease ClassificationFinancial Statement ClassificationYear Ended December 31, 2019
Short-term lease costCost of services provided, Sales, general, and administrative expenses$351
Operating lease costCost of services provided, Sales, general, and administrative expenses77,412
Total lease expense$77,763
Other Information:
Weighted-average remaining lease term - operating leases3.90Yrs
Weighted-average discount rate - operating leases3.94%
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$76,404
Operating lease right-of-use assets, net$200,727
Operating lease liabilities-current$66,117
Operating lease liabilities, less current portion$135,651

Lease Commitments

Future minimum lease payments, including assumed exercise of renewal options at December 31, 2019 were as follows:

(in thousands)Operating Leases
2020$72,916
202158,344
202239,790
202321,550
202410,158
Thereafter16,623
Total future minimum lease payments219,381
Less: Amount representing interest17,613
Total future minimum lease payments, net of interest$201,768
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15. COMMITMENTS AND CONTINGENCIES

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, which may include claims on a representative or class action basis alleging wage and hour law violations. 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 maintained 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 a contribution of $0.1 million to the Plans for the year ended December 31, 2019 and no contribution for the years ended December 31, 2018 and 2017.

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 September 2019, the Company settled its fully-funded pension plan through a combination of lump sum payments to participants, payments to the Pension Benefit Guaranty Corporation, and the purchase of a group annuity contract. With the completed funding of the plan payout settlements, the Company had approximately $31.8 million of pension assets remaining. The remaining assets were the result of the funded status of the plan, higher take rate of lump sum payment election by participants and optimal pricing of the group annuity contract. The Company has evaluated the ERISA allowable opportunities for utilization of the excess pension assets including funding other employee benefits. The Company used $11.0 million of the $31.8 million to fund its 401(k) match obligation during the year ended December 31, 2019, and plans to continue funding future benefit plan obligations with a possible reversion of any remaining pension assets to the Company per ERISA regulations. The Company recognized a $49.9 million non-cash pension settlement expense from this transition, which is the accounting treatment of the accumulated sum of unrealized losses due to change in actuarial assumptions over the life of the plan. Net of tax, the expense was $26.6 million. As of December 31, 2019, the Company had approximately $21.6 million remaining of benefit plan assets.

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.

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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 31,20192018
(in thousands)
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated benefit obligation at beginning of year$208,425$202,310
Service cost—37
Interest cost4,8047,926
Actuarial (gain)/loss(4,156)11,175
Benefits paid(8,000)(13,023)
Settlement(198,255)—
Accumulated Benefit obligation at end of year2,818208,425
CHANGE IN PLAN ASSETS
Fair value of assets at beginning of year213,699219,905
Settlement(198,255)—
Actual return on assets27,0646,817
Employer contributions144—
Rollins 401(k) funding(11,049)—
Benefits paid(8,000)(13,023)
Fair value of plan assets at end of year23,603213,699
Funded status$20,785$5,274
Amounts Recognized in the Statement of Financial Position consist of:
December 31,20192018
(in thousands)
Assets:
Benefit plan assets$21,565$—
Prepaid pension—5,274
Liabilities:
Long-term accrued liabilities$780$—
Amounts Recognized in the Accumulated Other Comprehensive Income consist of:
December 31,20192018
(in thousands)
Net Actuarial Loss$912$76,362

The accumulated benefit obligation for the defined benefit pension plans were $2.8 million and $208.4 million at December 31, 2019 and 2018, respectively. Accumulated benefit obligation and projected benefit obligation are materially the same for the Plans. In 2019 and 2017, pension liability pre-tax decreases of $75.4 million and $19.0 million, respectively, were credited, net of tax, to other comprehensive income. In 2018, the pre-tax increase of $14.8 million in the pension liability was charged, net of tax against other comprehensive income.

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

December 31,201920182017
ACCUMULATED BENEFIT OBLIGATION
Discount rate3.65%4.00%*4.00%
Rate of compensation increaseN/AN/AN/A
NET BENEFIT COST
Discount rate4.70%4.05%4.45%
Expected return on plan assets7.00%7.00%7.00%
Rate of compensation increaseN/AN/AN/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.
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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 yield curve analysis for the Waltham Services, LLC Hourly Employee Pension Plan for fiscal year’s 2019, 2018 and 2017. For the Rollins, Inc. Defined Benefit Plan, the Company utilized a termination liability approach for fiscal year 2018 and settled the plan in 2019.

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

Years ended December 31,201920182017
(in thousands)
Service cost$—$37$58
Interest cost4,8057,9268,493
Expected return on plan assets(6,149)(13,775)(13,368)
Amortization of net loss2,3963,2923,322
Preliminary net periodic benefit cost/(income)1,052(2,520)(1,495)
Settlement expense46,419—53
Net periodic benefit cost/(income)47,471(2,520)(1,442)

The benefit obligations recognized in other comprehensive income for the years ended December 31, 2019, 2018, and 2017 are summarized as follows :

Years ended December 31,201920182017
(in thousands)
Pretax (income)/loss$(26,634)$18,056$(15,597)
Amortization of net loss(2,396)(3,292)(3,322)
Settlement expense(46,419)—(53)
Total recognized in other comprehensive income$(75,449)$14,764$(18,972)

At December 31, 2019 and 2018, 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 $1.6 million at December 31, 2018. No shares of Rollins, Inc. Common Stock were held by the Plan at December 31, 2019.

The Plans' weighted average asset allocation at December 31, 2019 and 2018 by asset category, along with the target allocation for 2018, are as follows:

Target Allocations forPercentage of plan assets as of December 31,
Asset category202020192018
Cash and cash equivalents0.0%-100.0%72.3%3.5%
Equity securities - Rollins stock0.0%-40.0%0.0%0.4%
Domestic equity - all other0.0%-40.0%3.8%0.7%
International equity0.0%-30.0%1.9%0.2%
Debt securities - core fixed income0.0%-100.0%2.1%91.1%
Real estate0.0%-20.0%9.5%2.0%
Alternative/Opportunistic/Special0.0%-20.0%10.4%2.1%
Total0.0%-100.0%100.0%100.0%
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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 remaining pension plan during fiscal 2020.

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.

The following table presents our plan assets using the fair value hierarchy as of December 31, 2019. 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)Level 1Level 2NAVTotal
(1) Cash and cash equivalents$17,071$—$—$17,071
(2) Fixed income securities—499—499
Domestic equity securities—899—899
(3) International equity securities—437—437
(4) Real estate——2,2352,235
(5) Alternative/opportunistic/special——2,4622,462
Total$17,071$1,835$4,697$23,603
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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.

Combined Rollins and Waltham Defined Benefit Plans
(in thousands)Level 1Level 2NAVTotal
(1) Cash and cash equivalents$7,438$—$—$7,438
(2) Fixed income securities170,24947424,026194,749
Domestic equity securities
Rollins, Inc. stock1,582——1,582
Other securities—789—789
(3) International equity securities—363—363
(4) Real estate——4,2044,204
(5) Alternative/opportunistic/special——4,5744,574
Total$179,269$1,626$32,804$213,699
(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 2019 or 2018.

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

(in thousands)
2020$69
202176
202284
202390
2024110
Thereafter694
Total$1,123

Defined Contribution 401(k) Savings Plan

The Company sponsors a defined contribution 401(k) Savings Plan that is available to a majority of the Company’s full-time employees the first day of the calendar quarter following completion of three months of service. The Plan is available to non-full-time employees the first day of the calendar quarter following one year of service upon completion of 1,000 hours in that year. The Plan changed for 2018 and beyond to provide for a matching contribution of one dollar ($1.00) for each one dollar ($1.00) of a participant’s 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 participant’s contributions to the Plan that do not exceed 6 percent of his or her eligible compensation (which include commissions, overtime and bonuses) in 2017. The charge to expense for the Company match was approximately $25.5 million and $21.1 million for the years ended December 31, 2019 and 2018, respectively and $11.0 million for the year ended December 31, 2017. At December 31, 2019, 2018, and 2017 approximately, 30.8%, 41.7%, and 38.8%, 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, 2019, 2018 and 2017.

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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 but has not done so since 2011.

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

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

At December 31, 2019, the Deferred Compensation Plan had 71 life insurance policies with a net face value of $47.4 million. The cash surrender value of these life insurance policies was worth $22.0 million and $18.3 million at December 31, 2019 and 2018, respectively.

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

(in thousands)
2020$108
20211,550
20221,665
20231,906
20242,417
Total$7,646

The following table presents our non-qualified deferred compensation plan assets using the fair value hierarchy as of December 31, 2019 and 2018.

(in thousands)Level 1Level 2Level 3Total
December 31, 2019$71$—$22,158$22,229
December 31, 2018$148$—$18,267$18,415

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

Total expense related to deferred compensation was $250 thousand, $180 thousand, and $230 thousand in 2019, 2018, and 2017, respectively. The Company had $22.2 million and $18.4 million in deferred compensation assets as of December 31, 2019 and 2018, respectively, included within other assets on the Company’s consolidated statements of financial position and $21.2 million and $17.5 million in deferred compensation liability as of December 31, 2019 and 2018, respectively, located within other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position. The amounts of assets were marked to fair value.

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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.

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 one-time grant of 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 vested 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 0.5 million, 0.6 million, and 0.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.

The Company issues new shares from its authorized but unissued share pool. At December 31, 2019, approximately 5.5 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 31,201920182017
Time lapse restricted stock:
Pre-tax compensation expense$14,159$13,726$12,399
Tax benefit(3,597)(3,486)(4,799)
Restricted stock expense, net of tax$10,562$10,240$7,600

As of December 31, 2019 and 2018, $41.3 million and $39.2 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 4.0 years and 4.1 years at December 31, 2019 and 2018, respectively.

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The following table summarizes information on unvested restricted stock units outstanding as of December 31, 2019, 2018 and 2017:

Number of Shares (in thousands)Weighted- Average Grant-Date Fair Value
Unvested as of December 31, 20163,392$13.47
Forfeited(51)14.92
Vested(1,018)11.47
Granted70322.97
Unvested as of December 31, 20173,02616.33
Forfeited(35)19.05
Vested(910)13.24
Granted64332.25
Unvested as of December 31, 20182,72421.08
Forfeited(98)24.61
Vested(800)17.39
Granted48438.40
Unvested as of December 31, 20192,310$25.84

18. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

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

Pension Liability AdjustmentForeign Currency TranslationInterest Rate SwapsTotal
Balance at December 31, 2016$(49,200)$(20,875)$—$(70,075)
Change during 2017:
Before-tax amount18,9809,960—28,940
Tax expense(4,821)——(4,821)
Other comprehensive earnings/(loss)14,1599,960—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 expense3,762—3,762
Other comprehensive earnings/(loss)(11,050)(14,072)—(25,122)
Balance at December 31, 2018(46,091)(24,987)—(71,078)
Change during 2019:
Before-tax amount75,4494,350(277)79,552
Tax expense(29,553)——(29,553)
Other comprehensive earnings/(loss)45,8964,350(277)49,969
Balance at December 31, 2019$(195)$(20,637)$(277)$(21,109)
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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, 2019, 2018, and 2017.

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 $0.8 million for the year ended December 31, 2019 and $0.9 million and $1.0 million for the years ended December 31, 2018 and 2017, 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, 2019, 2018 and 2017, the Company paid approximately $0.9 million, $0.7 million, and $0.8 million in rent and operating costs for the aircraft respectively. During 2019, 2018 and 2017, 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.

On January 24, 2018, the Company pledged a charitable gift of $0.7 million to Emory University Hospital Midtown. The amount will be paid in equal annual installments over the next five years. Dr. Lawley recused himself from the Board of Director’s approval of the gift agreement.

On December 1, 2019, Orkin, a subsidiary of the Company entered into a franchise agreement with Wilson Pest Management, Inc. The franchisee is owned 100% by John Wilson IV. The Company received a total of approximately $0.8 million, which included payment for the franchise and an initial franchise fee of seventy-five thousand dollars in connection with the transaction. The franchise agreement provides for a monthly royalty fee of 9.0% of the franchisee’s reported income. John Wilson IV is the son of John F. Wilson, President and Chief Operating Officer of the Company. The Company approved the agreement in accordance with its Related Party Transactions policy.

20. UNAUDITED QUARTERLY DATA

UNAUDITED QUARTERLY DATA

(in thousands except per share data)FirstSecondThirdFourth
2019
Revenues$429,069$523,957$556,466$505,985
Gross profit (Revenues less cost of services provided)$211,811$270,624$287,748$251,701
Net Income$44,226$64,295$44,064$50,762
Income per share:
Income per share-Basic$0.14$0.20$0.13$0.16
Income per share-Diluted$0.14$0.20$0.13$0.16
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

21. CASH DIVIDEND

On January 28, 2020, the Board of Directors approved a 14.3% increase in the Company’s quarterly cash dividend per common share to $0.12 payable March 10, 2020 to stockholders of record at the close of business February 10, 2020. On October 22, 2019, the Board of Directors declared its regular $0.105 per share as well as a special year-end dividend of $0.05 per share both payable December 10, 2019 to stockholders of record at the close of business November 11, 2019. 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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