10-K 1 rol-123117x10k.htm 10-K Document


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
 
Commission file No. 1-4422
 
 
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
51-0068479
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
 
 
2170 Piedmont Road, N.E., Atlanta, Georgia
 
30324
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number, including area code: (404) 888-2000
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Name of each
Title of each class         
 
Exchange on which registered     
Common Stock, $1 Par Value
 
The New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer
ý
 
Accelerated filer
o



 
 
Non-accelerated filer
o  
 
Smaller reporting company
o
(Do not check if a smaller reporting company)

 
Emerging growth company
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No ý
The aggregate market value of Rollins, Inc. Common Stock held by non-affiliates on June 30, 2017 was $3,875,558,068 based on the reported last sale price of common stock on June 30, 2017, which is the last business day of the registrant’s most recently completed second fiscal quarter.
Rollins, Inc. had 218,209,925 shares of Common Stock outstanding as of January 31, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting of Stockholders of Rollins, Inc. are incorporated by reference into Part III, Items 10-14.
 
 





Rollins, Inc.
Form 10-K
For the Year Ended December 31, 2017
Table of Contents
 
 
 
Page
Part I
 
 
 
Item 1.
 
Item 1.A.
 
Item 1.B.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 4.A.
 
 
 
 
 
Part II
 
 
 
Item 5.
 
Item 6.
 
Item 7.
 
Item 7.A.
 
Item 8.
 
Item 9.
 
Item 9.A.
 
Item 9.B. 
 
Part III
 
 
 
Item 10.
 
Item 11.
 
Item 12.
 
Item 13.
 
Item 14.
 
 
 
 
 
Part IV
 
 
 
Item 15.
 
 
 
 
 
 
 




PART I
Item 1.    Business
General
Rollins, Inc. (the “Company”) was originally incorporated in 1948 under the laws of the state of Delaware as Rollins Broadcasting, Inc.
The Company is an international service company with headquarters located in Atlanta, Georgia, providing pest and termite control services through its wholly-owned subsidiaries to both residential and commercial customers in North America, Australia, and Europe with international franchises in Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, Canada, Australia, and Mexico. Services are performed through a contract that specifies the pricing arrangement with the customer.

For a listing of the Company's Subsidiaries, see Note 1 - Summary of Significant Accounting Policies of Notes to the Financial Statements (Part II, Item 8, of this Form 10-k).
The Company has only one reportable segment, its pest and termite control business. Revenue, operating profit and identifiable assets for this segment, which includes the United States, Canada, Australia, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico are included in Item 8 of this document, “Financial Statements and Supplementary Data” on pages 28 and 29. The Company’s results of operations and its financial condition are not reliant upon any single customer or a few customers or the Company’s foreign operations.
Common Stock Repurchase Program
All share and per share data presented have been adjusted to account for the three-for-two stock split effective March 10, 2015. At the July 24, 2012 Board of Directors’ meeting, the Board authorized the purchase of 7.5 million shares of the Company’s common stock. During the year ended December 31, 2017, the Company did not repurchase shares on the open market compared to 0.8 million shares at a weighted average price of $27.19 in 2016, respectively. In total, there are 5.1 million additional shares authorized to be repurchased under prior Board approval. The repurchase program does not have an expiration date.

Backlog
Backlog services and orders are usually provided within the month following the month of order receipt, except in the area of prepaid pest control and bait monitoring services, which are usually provided within twelve months of order receipt. The Company does not have a material portion of its business that may be subject to renegotiation of profits or termination of contracts at the election of a governmental entity.

December 31,
2017
 
2016
 
2015
Backlog
$
4,875

 
$
5,303

 
$
4,352

Franchising Programs
Orkin Franchises

The Company continues to expand its growth through Orkin’s franchise program. This program is primarily used in smaller markets where it is currently not economically feasible to locate a conventional Orkin branch. Domestic franchisees are subject to a contractual buyback provision at Orkin’s option with a pre-determined purchase price using a formula applied to revenues of the franchise. International franchise agreements also contain an optional buyback provision; however, the franchisee has the prior right of renewal of agreement. The Company through its wholly-owned Orkin subsidiary began its Orkin franchise program in the U.S. in 1994, and established its first international franchise in 2000 and since has expanded to Central America, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico.
 
At December 31,
Orkin Franchises
2017
 
2016
 
2015
Domestic Franchises
47

 
50

 
51

International Franchises
81

 
70

 
48

Total Franchises
128

 
120

 
99


3



Critter Control Franchises

The Company expands its animal control growth through Critter Control’s franchise program. The Company has purchased several Critter Control locations from its franchise owners while renaming and converting several Trutech locations to Critter Control. The majority of Critter Control’s locations are franchised. Critter Control has franchises in the United States and two Canada as of December 31, 2017 and 2016 respectively.
 
At December 31,
Franchises
2017
2016
 
2015
Critter Control Franchises
89

94

 
108

Rollins Australia Franchises

The Company has Australian franchises through Rollins Australia’s wholly-owned subsidiary, Murray Pest Control and Scientific Pest Management. The Company purchased Murray Pest Control and Scientific Pest Management in 2016.
 
At December 31,
Rollins Australia Franchises
2017
 
2016
Murray Pest Control franchises
8

 
4

Scientific Pest Management franchises
3

 
3

Total Franchises
11

 
7

Seasonality
The business of the Company is affected by the seasonal nature of the Company’s pest and termite control services. The increase in pest presence and activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the timing of the change in seasons), has historically resulted in an increase in the revenue of the Company’s pest and termite control operations during such periods as evidenced by the following chart.
 
Total Net Revenues
(in thousands)
2017
 
2016
 
2015
First Quarter
$
375,247

 
$
352,736

 
$
330,909

Second Quarter
433,555

 
411,133

 
392,150

Third Quarter
450,442

 
423,994

 
399,746

Fourth Quarter
414,713

 
385,614

 
362,500

Years ended December 31,
$
1,673,957

 
$
1,573,477

 
$
1,485,305

Inventories
The Company has relationships with a national pest control product distributor and other vendors for pest and termite control treatment products. The Company maintains a sufficient level of chemicals, materials and other supplies to fulfill its immediate servicing needs and to alleviate any potential short-term shortage in availability from its national network of suppliers.
Competition
The Company believes that Rollins, through its wholly-owned subsidiaries Orkin, Orkin Canada, HomeTeam Pest Defense, Western Pest Services, The Industrial Fumigant Company, Crane Pest Control, Waltham Services, Trutech, Permatreat, Rollins Australia, Critter Control, Safeguard Pest Control and Northwest Exterminating competes favorably with competitors as the world’s largest pest and termite control company. The Company’s competitors include Terminix, Ecolab, Rentokil and Anticimex.
The principal methods of competition in the Company’s pest and termite control markets are quality of service, customer proximity and guarantee terms, reputation for safety, technical proficiency, and price.

4



Research and Development
Expenditures by the Company on research activities relating to the development of new products or services are not significant. Some of the new and improved service methods and products are researched, developed and produced by unaffiliated universities and companies. Also, a portion of these methods and products are produced to the specifications provided by the Company.
The Company maintains a close relationship with several universities for research and validation of treatment procedures and material selection.
The Company conducts tests of new products with the specific manufacturers of such products.  The Company also works closely with leading scientists, educators, industry consultants and suppliers to improve service protocols and materials.
Environmental and Regulatory Considerations
The Company’s pest control business is subject to various legislative and regulatory enactments that are designed to protect the environment, public health and consumers. Compliance with these requirements has not had a material negative impact on the Company’s financial position, results of operations or liquidity.
Federal Insecticide Fungicide and Rodenticide Act (“FIFRA”)
This federal law (as amended) grants to the states the responsibility to be the primary agent in enforcement and conditions under which pest control companies operate. Each state must meet certain guidelines of the Environmental Protection Agency in regulating the following: licensing, record keeping, contracts, standards of application, training and registration of products. This allows each state to institute certain features that set their regulatory programs in keeping with special interests of the citizens’ wishes in each state. The pest control industry is impacted by these federal and state regulations.
Food Quality Protection Act of 1996 (“FQPA”)
The FQPA governs the manufacture, labeling, handling and use of pesticides and does not have a direct impact on how the Company conducts its business.
Environmental Remediation
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), also known as Superfund, is the primary Federal statute regulating the cleanup of inactive hazardous substance sites and imposing liability for cleanup on the responsible parties. Responsibilities governed by this statute include the management of hazardous substances, reporting releases of hazardous substances, and establishing the necessary contracts and agreements to conduct cleanup. Customarily, the parties involved will work with the EPA and under the direction of the responsible state agency to agree and implement a plan for site remediation. Consistent with the Company’s responsibilities under these regulations, the Company undertakes environmental assessments and remediation of hazardous substances from time to time as the Company determines its responsibilities for these purposes. As these situations arise, the Company accrues management’s best estimate of future costs for these activities. Based on management’s current estimates of these costs, management does not believe these costs are material to the Company’s financial condition or operating results.
Employees
The number of persons employed by the Company as of January 31, 2018 was approximately 13,000.
December 31,
2017
 
2016
 
2015
Employees
13,126

 
12,153

 
11,268

Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports, are available free of charge on our web site at www.rollins.com as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission.



5




Item 1.A.    Risk Factors
Our business depends on our strong brands, and failing to maintain and enhance our brands could hurt our ability to retain and expand our base of customers.
Our strong brands, Rollins, Orkin, HomeTeam Pest Defense, Western Pest Services, Northwest Exterminating, The Industrial Fumigant Company, Crane Pest Control, Waltham Services, Trutech, Permatreat, Critter Control, Allpest, Safeguard Pest Control and other strong brands have significantly contributed to the success of our business.  Maintaining and enhancing our brands increases our ability to enter new markets and launch new and innovative services that better serve the needs of our customers.  Our brands may be negatively impacted by a number of factors, including, among others, reputational issues and product/technical failures.  Further, if our brands are significantly damaged, our business, operating results, and financial condition may be materially and adversely affected.  Maintaining and enhancing our brands will depend largely on our ability to remain a service leader and continue to provide high-quality, pest control products and services that are truly useful and play a meaningful role in people’s lives.

Economic conditions may adversely affect our business
Pest and termite services represent discretionary expenditures to many of our residential customers. As consumers restrict their discretionary expenditures, we may suffer a decline in revenues from our residential service lines. Economic downturns can also adversely affect our commercial customers, including food service, hospitality and food processing industries whose business levels are particularly sensitive to adverse economies. For example, we may lose commercial customers and related revenues because of consolidation or cessation of commercial businesses or because these businesses switch to a lower cost provider.
Our inability to attract and retain skilled workers may impair growth potential and profitability.
Our ability to remain productive and profitable will depend substantially on our ability to attract and retain skilled workers. Our ability to expand our operations is in part impacted by our ability to increase our labor force. The demand for skilled employees is high, and the supply is very limited. A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in wage rates paid by us, or both. If either of these events occurred, our capacity and profitability could be diminished, and our growth potential could be impaired.
We may not be able to maintain our competitive position in the pest control industry in the future.
We operate in a highly competitive industry. Our revenues and earnings may be affected by changes in competitors’ prices, and general economic issues. We compete with other large pest control companies, as well as numerous smaller pest control companies, for a finite number of customers. We believe that the principal competitive factors in the market areas that we serve are service quality, and product availability, terms of guarantees, reputation for safety, technical proficiency and price. Although we believe that our experience and reputation for safety and quality service are excellent, we cannot assure investors that we will be able to maintain our competitive position.

Our operations could be affected by pending and ongoing litigation.
In the normal course of business, some of the Company’s subsidiaries are defendants in a number of lawsuits or arbitrations, which allege that plaintiffs have been damaged.  The Company 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; 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 year.
Our operations could be affected if there is unauthorized access of personal, financial, or other data or information about our customers, employees, third parties, or of Company’s proprietary of confidential information. We could be subject to interruption of our business operations, private litigation, reputational damage and costly penalties.

Our information technology systems, as well as the information technology systems of our third party business partners and service providers, can contain personal, financial, health, or other information that is entrusted to us by our customers and employees. Our information technology systems also contain Company’s and its wholly-owned subsidiaries’ proprietary and other confidential information related to our business, such as business plans and product development initiatives. We rely on, among other things, commercially available vendors, cyber protection systems, software, tools and monitoring to provide security for processing, transmission and storage of this information and data. The systems currently used for transmission and approval of payment card

6



transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, meet standards set by the payment card industry (“PCI”). We continue to evaluate and modify our systems and protocols for data security compliance purposes, and such standards may change from time to time. Activities by third parties, advances in computer and software capabilities and encryption technology, new tools and discoveries and other events or developments may facilitate or result in a compromise or breach of our systems. Any compromises, breaches or errors in applications related to our systems or failures to comply with applicable standards could cause damage to our reputation and interruptions in our operations, including our customers’ ability to pay for our services and products by credit card or their willingness to purchase our services and products and could result in a violation of applicable laws, regulations, orders, industry standards or agreements and subject us to costs, penalties and liabilities which could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows. Also, a breach of data security could expose us to customer litigation and costs related to the reporting and handling of such a breach.
Our operations may be adversely affected if we are unable to comply with regulatory and environmental laws.
Our business is significantly affected by environmental laws and other regulations relating to the pest control industry and by changes in such laws and the level of enforcement of such laws. We are unable to predict the level of enforcement of existing laws and regulations, how such laws and regulations may be interpreted by enforcement agencies or court rulings, or whether additional laws and regulations will be adopted. We believe our present operations substantially comply with applicable federal and state environmental laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations to date. However, such environmental laws are changed frequently. We are unable to predict whether environmental laws will, in the future, materially affect our operations and financial condition. Penalties for noncompliance with these laws may include cancellation of licenses, fines, and other corrective actions, which would negatively affect our future financial results.
We may not be able to identify, complete or successfully integrate acquisitions.
Acquisitions have been and may continue to be an important element of our business strategy. We cannot assure investors that we will be able to identify and acquire acceptable acquisition candidates on terms favorable to us in the future. We cannot assure investors that we will be able to integrate successfully the operations and assets of any acquired business with our own business. Any inability on our part to integrate and manage the growth from acquired businesses could have a material adverse effect on our results of operations and financial condition.
Our operations are affected by adverse weather conditions.
Our operations are directly impacted by the weather conditions worldwide. The business of the Company is affected by the seasonal nature of the Company’s pest and termite control services. The increase in pest presence and activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the timing of the change in seasons), has historically resulted in an increase in the revenue and income of the Company’s pest and termite control operations during such periods. The business of the Company is also affected by extreme weather such as drought which can greatly reduce the pest population for extended periods.
Our franchisees, subcontractors, and vendors could take actions that could harm our business.
Our franchisees, subcontractors, and vendors are contractually obligated to operate their businesses in accordance with the standards set forth in our agreements with them. Each franchising brand also provides training and support to franchisees. However, franchisees, subcontractors, and vendors are independent third parties that we do not control, and who own, operate and oversee the daily operations of their businesses. As a result, the ultimate success of any franchise operation rests with the franchisee. If franchisees do not successfully operate their businesses in a manner consistent with required standards, royalty payments to us will be adversely affected and our brands’ image and reputation could be harmed. This could adversely impact our business, financial position, results of operations and cash flows. Similarly, if subcontractors, vendors and franchisees do not successfully operate their businesses in a manner consistent with required laws, standards and regulations, we could be subject to claims from regulators or legal claims for the actions or omissions of such third‑party distributors, subcontractors, vendors and franchisees. In addition, our relationship with our franchisees, subcontractors, and vendors could become strained (including resulting in litigation) as we impose new standards or assert more rigorous enforcement practices of the existing required standards. These strains in our relationships or claims could have a material adverse impact on our reputation, business, financial position, results of operations and cash flows.
From time to time, we receive communications from our franchisees regarding complaints, disputes or questions about our practices and standards in relation to our franchised operations and certain economic terms of our franchise arrangements. If franchisees or groups representing franchisees were to bring legal proceedings against us, we would vigorously defend against the claims in any

7



such proceeding. Our reputation, business, financial position, results of operations and cash flows could be materially adversely impacted and the price of our common stock could decline.
Our brand recognition could be impacted if we are not able to adequately protect our intellectual property and other proprietary rights that are material to our business.
Our ability to compete effectively depends in part on our rights to service marks, trademarks, trade names and other intellectual property rights we own or license, particularly our registered brand names and service marks, Orkin®, Orkin Canada®, AcuridSM, Western Pest Services®, the Industrial Fumigant Company, HomeTeam Pest Defense®, TAEXX®, Critter Control®, Northwest Exterminating®, Allpest®, Murray®, Safeguard® and others. We have not sought to register or protect every one of our marks either in the United States or in every country in which they are or may be used. Furthermore, because of the differences in foreign trademark, patent and other intellectual property or proprietary rights laws, we may not receive the same protection in other countries as we would in the United States. If we are unable to protect our proprietary information and brand names, we could suffer a material adverse impact on our reputation, business, financial position, results of operations and cash flows. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products, services or activities infringe their intellectual property rights.
The Company’s management has a substantial ownership interest; public stockholders may have no effective voice in the Company’s management.
The Company has elected the “Controlled Company” exemption under Section 303A of the New York Stock Exchange (“NYSE”) Listed Company Manual. The Company is a “Controlled Company” because a group that includes the Company’s Chairman of the Board, R. Randall Rollins and his brother, Gary W. Rollins, who is the Vice Chairman and Chief Executive Officer, and a director of the Company and certain companies under their control, controls in excess of fifty percent of the Company’s voting power. As a “Controlled Company,” the Company need not comply with certain NYSE rules.
Rollins, Inc.’s executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 56 percent of the Company’s outstanding shares of common stock. As a result, these persons will effectively control the operations of the Company, including the election of directors and approval of significant corporate transactions such as acquisitions and approval of matters requiring stockholder approval. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control of the Company at a premium.
Our management has a substantial ownership interest, and the availability of the Company’s common stock to the investing public may be limited.
The availability of Rollins’ common stock to the investing public would be limited to those shares not held by the executive officers, directors and their affiliates, which could negatively impact Rollins’ stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a portion of their shares could also negatively affect the trading price of our common stock.
Provisions in Rollins, Inc.’s certificate of incorporation and bylaws may inhibit a takeover of the Company.
Rollins, Inc.’s certificate of incorporation, bylaws and other documents contain provisions including advance notice requirements for stockholder proposals and staggered terms for the Board of Directors. These provisions may make a tender offer, change in control or takeover attempt that is opposed by the Company’s Board of Directors more difficult or expensive.

Item 1.B.    Unresolved Staff Comments
None

8



Item 2.    Properties.
The Company’s administrative headquarters are owned by the Company, and are located at 2170 Piedmont Road, N.E., Atlanta, Georgia 30324. The Company owns or leases over 500 branch offices and operating facilities used in its business as well as the Rollins Training Center located in Atlanta, Georgia, the Rollins Customer Service Center located in Covington, Georgia, and the Pacific Division Administration and Training Center in Riverside, California. None of the branch offices, individually considered, represents a materially important physical property of the Company. The facilities are suitable and adequate to meet the current and reasonably anticipated future needs of the Company.
Item 3.    Legal Proceedings.
In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries’ services caused damage.  In addition, the Company defends employment related cases and claims from time to time. We are involved in certain environmental matters primarily arising in the normal course of business. We are actively contesting each of these matters. 
Management does not believe that any pending claim, proceeding or litigation, either alone or in the aggregate will have a material adverse effect on the Company’s financial position, results of operations or liquidity; however, it is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of an individual quarter or year.
Item 4.    Mine Safety Disclosures.
Not applicable.

9



Item 4.A.    Executive Officers of the Registrant.
Each of the executive officers of the Company was elected by the Board of Directors to serve until the Board of Directors’ meeting immediately following the next Annual Meeting of Stockholders or until his or herearlier removal by the Board of Directors or his or her resignation. The following table lists the executive officers of the Company and their ages, offices within the Company, and the dates from which they have continually served in their present offices with the Company.
Name
 
Age
 
Office with Registrant
 
Date First Elected
to Present Office
R. Randall Rollins (1)
 
86
 
Chairman of the Board of Directors
 
10/22/1991
Gary W. Rollins (1) (2)
 
73
 
Vice Chairman and Chief Executive Officer
 
7/24/2001
John Wilson (3)
 
60
 
President and Chief Operating Officer
 
1/23/2013
Paul E Northen (4)
 
53
 
Vice President, Chief Financial Officer and Treasurer
 
1/26/2016
Elizabeth Chandler (5)
 
54
 
Corporate Secretary and Chief Legal Officer
 
1/1/2018

(1)
R. Randall Rollins and Gary W. Rollins are brothers.
(2)
Gary W. Rollins was elevated to Vice Chairman Rollins in January 2013. He was elected to the office of Chief Executive Officer in July 2001. In February 2004, he was named Chairman of Orkin, LLC.
(3)
John Wilson joined the Company in 1996 and has held various positions of increasing responsibility, serving as a technician, sales inspector, branch manager, region manager, vice president and division president. His most senior positions have included Vice President of Rollins, Inc., Southeast Division President, Atlantic Division Vice President and Central Commercial region manager. Mr. Wilson was elevated to President and Chief Operating Officer in January 2013.
(4)
Paul E. Northen joined Rollins in 2015 as CFO and Corporate Treasurer. He was promoted to Vice President of Rollins, Inc. in January 2016. He began his career with UPS in 1985 and brings a wealth of Tax, Risk Management and Audit experience as well as strong international exposure to Rollins. Prior to joining Rollins, Mr. Northen was Vice President of International Finance and Accounting-Global Business Services for UPS. He previously held the positions of CFO of UPS’ Asia Pacific Region based in Hong Kong, and as Vice President of Finance in UPS’ Pacific and Western Regions.
(5)
Elizabeth (Beth) Brannen Chandler joined Rollins in 2013 as Vice President and General Counsel. In 2016, Beth assumed responsibility for the Risk Management and Internal Audit groups. She was appointed to Corporate Secretary in January 2018. Before joining Rollins, Mrs. Chandler was vice president, general counsel and corporate secretary for Asbury Automotive. Prior to working with Asbury, Mrs. Chandler served as city attorney for the City of Atlanta; and she served as vice president, assistant general counsel and corporate secretary for Mirant Corp.


10



PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Common Stock of the Company is listed on the New York Stock Exchange and is traded on the Philadelphia, Chicago and Boston Exchanges under the symbol ROL. The high and low prices of the Company’s common stock and dividends paid for each quarter in the years ended December 31, 2017 and 2016, were as follows:
STOCK PRICES AND DIVIDENDS
Rounded to the nearest $.01
 
 
 
 
 
 
Dividends
Paid
Per Share
 
 
 
 
 
 
 
Dividends
Paid
Per Share
 
 
Stock Price
 
 
 
 
Stock Price
 
2017
 
High
 
Low
 
 
2016
 
High
 
Low
 
First Quarter
 
$
37.29

 
$
32.82

 
$
0.12

 
First Quarter
 
$
29.11

 
$
23.69

 
$
0.10

Second Quarter
 
$
43.75

 
$
35.82

 
$
0.12

 
Second Quarter
 
$
29.27

 
$
26.21

 
$
0.10

Third Quarter
 
$
46.22

 
$
39.90

 
$
0.12

 
Third Quarter
 
$
29.71

 
$
27.29

 
$
0.10

Fourth Quarter
 
$
48.29

 
$
42.82

 
$
0.22

 
Fourth Quarter
 
$
34.24

 
$
28.00

 
$
0.20

  
As of January 31, 2018, there were 2,496 holders of record of the Company’s common stock. However, a large number of our shareholders hold their shares in “street name” in brokerage accounts and, therefore, do not appear on the shareholder list maintained by our transfer agent.

On January 23, 2018 the Board of Directors approved a 21.7% increase in the Company's quarterly cash dividend per common share to $0.14 payable March 9, 2018 to stockholders of record at the close of business February 9, 2018. On October 24, 2017, the Board of Directors declared its regular $0.115 per share as well as a special year-end dividend of $0.10 per share both payable December 11, 2017 to stockholders of record at the close of business November 10, 2017. 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.

Issuer Purchases of Equity Securities
During the years ended December 31, 2017, the Company did not repurchase shares on the open market compared to 0.8 million shares at a weighted average price of $27.19 in 2016. In total, there remain 5.1 million additional shares authorized to be repurchased under prior Board approval. The repurchase program does not have an expiration date.

Period
 
Total Number of
Shares Purchased (1)
 
Weighted Average
Price Paid per
Share
 
Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plans (2)
 
Maximum Number of Shares that May Yet Be Purchased Under the Repurchase Plans
October 1 to 31, 2017
 

 
$

 

 
5,073,611

November 1 to 30, 2017
 

 

 

 
5,073,611

December 1 to 31, 2017
 
1,167

 
46.53

 

 
5,073,611

Total
 
1,167

 
$
46.53

 

 
5,073,611


(1)
Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts: October 2017: 0; November 2017: 0; and December 2017: 1,167.

(2)
The Company has a share repurchase plan adopted in 2012, to repurchase up to 7.5 million shares of the Company’s common stock. The plan has no expiration date.





11




PERFORMANCE GRAPH

The following graph sets forth a five year comparison of the cumulative total stockholder return based on the performance of the stock of the Company as compared with both a broad equity market index and an industry index. The indices included in the following graph are the S&P 500 Index and the S&P 500 Commercial Services Index.

rol-123117x_chartx08348.jpg
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*

Rollins, Inc., S&P 500 Index and peer group composite index
 
 
 
 
 
 
 
 
Cumulative Total Shareholder Return $ at Fiscal Year End
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Rollins, Inc.
100.00

 
139.85

 
155.55

 
185.54

 
246.31

 
344.05

S&P 500
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14

Peer Index
100.00

 
130.77

 
146.46

 
159.68

 
185.38

 
227.58


ASSUMES INITIAL INVESTMENT OF $100
*TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS
NOTE: TOTAL RETURNS BASED ON MARKET CAPITALIZATION

12



Item 6    Selected Financial Data
The following summary financial data of Rollins highlights selected financial data and should be read in conjunction with the financial statements included elsewhere in this document.
FIVE-YEAR FINANCIAL SUMMARY
Rollins, Inc. and Subsidiaries

STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
 
(in thousands except per share data)
Years ended December 31,
2017
 
2016
 
2015
 
2014
 
2013
Revenues
$
1,673,957

 
$
1,573,477

 
$
1,485,305

 
$
1,411,566

 
$
1,337,374

Income Before Income Taxes
294,502

 
260,636

 
243,178

 
219,484

 
191,606

Net Income
179,124

 
167,369

 
152,149

 
137,664

 
123,330

Earnings Per Share - Basic:
0.82

 
0.77

 
0.70

 
0.63

 
0.56

Earnings Per Share - Diluted:
0.82

 
0.77

 
0.70

 
0.63

 
0.56

Dividends paid per share
0.56

 
0.50

 
0.42

 
0.35

 
0.30

OTHER DATA:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
235,370

 
$
226,525

 
$
196,356

 
$
194,146

 
$
162,665

Net cash used in investing activities
(154,175
)
 
(76,842
)
 
(69,942
)
 
(89,471
)
 
(30,790
)
Net cash used in financing activities
(130,263
)
 
(136,371
)
 
(97,216
)
 
(106,519
)
 
(75,653
)
Depreciation
27,381

 
24,725

 
19,354

 
16,627

 
14,415

Amortization of intangible assets
29,199

 
26,177

 
25,168

 
26,882

 
25,156

Capital expenditures
$
(24,680
)
 
$
(33,081
)
 
$
(39,495
)
 
$
(28,739
)
 
$
(18,632
)
BALANCE SHEET DATA AT END OF YEAR:
 
 
 
 
 
 
 
 
 
Current assets
$
262,795

 
$
290,171

 
$
269,434

 
$
241,194

 
$
234,924

Total assets
1,033,663

 
916,538

 
848,651

 
808,162

 
739,217

Stockholders’ equity
$
653,924

 
$
568,545

 
$
524,029

 
$
462,676

 
$
438,255

Number of shares outstanding at year-end
217,992

 
217,792

 
218,553

 
218,283

 
218,797



13



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

Presentation
This discussion should be read in conjunction with our audited financial statements and related notes included elsewhere in this document. The following discussion (as well as other discussions in this document) contains forward-looking statements. Please see “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of uncertainties, risks and assumptions associated with these statements.
The Company
Rollins, Inc. (the “Company”) was originally incorporated in 1948 under the laws of the state of Delaware as Rollins Broadcasting, Inc. The Company is an international service company with headquarters located in Atlanta, Georgia, providing pest and termite control services through its wholly-owned subsidiaries to both residential and commercial customers in North America, Australia, and Europe with international franchises in Central America, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico. Services are performed through a contract that specifies the treatment and the pricing arrangement with the customer.
The Company has only one reportable segment, its pest and termite control business. The Company’s results of operations and its financial condition are not reliant upon any single customer or a few customers or the Company’s foreign operations.
Overview
RESULTS OF OPERATIONS
 
 
 
 
 
 
 
% better/(worse) as compared to prior year
 
(in thousands)
 
Years ended December 31,
2017
 
2016
 
2015
 
2017
 
2016
Revenues
$
1,673,957

 
$
1,573,477

 
$
1,485,305

 
6.4
 %
 
5.9
 %
Cost of services provided
819,943

 
772,348

 
735,976

 
(6.2
)
 
(4.9
)
Depreciation and amortization
56,580

 
50,902

 
44,522

 
(11.2
)
 
(14.3
)
Sales, general and administrative
503,433

 
490,528

 
463,742

 
(2.6
)
 
(5.8
)
Gain on sales of assets, net
(242
)
 
(777
)
 
(1,953
)
 
(68.9
)
 
(60.2
)
Interest income
(259
)
 
(160
)
 
(160
)
 
61.9

 

Income before income taxes
294,502

 
260,636

 
243,178

 
13.0

 
7.2

Provision for income taxes
115,378

 
93,267

 
91,029

 
(23.7
)
 
(2.5
)
Net income
$
179,124

 
$
167,369

 
$
152,149

 
7.0
 %
 
10.0
 %

General Operating Comments    
2017 marked the Company’s 20th consecutive year of improved revenues and profits. Revenues for the year rose 6.4 percent to $1.674 billion compared to $1.573 billion for the prior year. Income before income taxes increased 13.0% to $294.5 million compared to $260.6 million the prior year. Net income increased 7.0% to $179.1 million, with earnings per diluted share of $0.82 compared to $167.4 million, or $0.77 per diluted share for the prior year.
The Company’s 2017 net income was negatively affected by the 2017 Tax Cuts and Jobs Act (“TCJA”) which was signed in to law on December 22, 2017. The estimated negative impact of the enactment of the TCJA was an $11.6 million increase to tax expense, which was a direct decrease to net income. The $11.6 million increase in tax was as follows: $8.0 million from transition tax on foreign earnings, $2.9 million from the revaluation of deferred tax assets, and $0.7 million from reductions in tax benefits on stock compensation. This resulted in a $0.05 per diluted share decrease in net income for the year.
Net income excluding the effect of the TCJA increased 13.9% to $190.7 million or $0.87 per share. Net income and diluted earnings per share excluding the effect of the TCJA are non-GAAP financial measures. Management believes these measures help investors understand the effect of these on reported results.
All of the Company’s business lines experienced growth for the year, with residential pest control revenues up 6.4%, commercial pest control revenues up 5.1% and termite and ancillary services revenues up 9.7%.

14



During the year, the Company increased its presence around the world with the addition of 11 new Orkin international franchises. HomeTeam Pest Defense announced that they had reached one million TAEXX® installations. We acquired Northwest Exterminating based in Marietta, GA which contributed in the growth of the Company's revenues the last five months. Strategic acquisitions remain a priority for Rollins. The Company also continued to improve our routing and scheduling capabilities as we utilize our Customer Service Manager (“CSM”) BOSS and its Virtual Route Management feature. BOSS has been fully implemented in the Orkin’s U.S. operations.
Strategic acquisitions remain a priority for Rollins, and as in the past, we will continue to seek out companies that are a “fit” for us in both, the pest control and wildlife areas of our business.

Results of Operations—2017 Versus 2016
Overview
The Company’s revenues increased to $1.674 billion in 2017, a 6.4% increase compared to 2016. Gross margin increased to 51.0% for 2017 from 50.9% in 2016. Sales, general and administrative expense were 30.1% of revenues in 2017 compared to 31.2% in 2016. The Company’s depreciation and amortization margin increased 0.2 percentage points to 3.4% in 2017 compared to 3.2% in 2016. Rollins’ net income of $179.1 million in 2017 was an increase of $11.7 million or 7.0% over $167.4 million in 2016. Net profit margin improved to 10.7% in 2017 from 10.6% in 2016. Rollins continued to expand our global brand recognition with acquisitions in the United States and Canada as well as expanding our Orkin international franchise program in numerous countries around the globe. The Company is now in 53 countries and continues to seek new international opportunities.
Revenues    
Revenues for the year ended December 31, 2017 were $1.674 billion, an increase of $100.5 million or 6.4% from 2016 revenues of $1.573 billion. Growth occurred across all service lines and brands with our Canadian and Australian companies being hindered by unfavorable foreign currency exchange rates. Organic growth and pricing accounted for approximately 4.5% of our increase and our acquisitions contributed the remaining revenue growth. Commercial pest control represented approximately 40% of the Company’s revenue in 2017 and grew 5.1% due to increases in sales, an emphasis on closing leads, increased bed bug revenue, and acquisitions. Commercial pest control was negatively impacted by foreign currency exchange as Orkin Canada and Rollins Australia are heavily commercial. Residential pest control, which represented approximately 42% of the Company’s revenue, increased 6.4% driven by an increase in lead closure, pricing, as well as increased TAEXX® homebuilder installations, and acquisitions. The Company’s termite business, which represented approximately 18% of the Company’s revenue, grew 9.7% in 2017 due to acquisitions, increases in drywood fumigations and ancillary service sales, (such as moisture control and insulation).
The Company implemented its traditional price increase program in June 2017. Less than 2% of the Company’s revenue increase is attributable to pricing actions. Approximately 80% of the Company’s pest control revenue was recurring in 2017 as well as 2016.
The Company’s foreign operations accounted for approximately 8% and 7% of total revenues for the years ended December 31, 2017 and 2016, respectively. The Company established new franchises in several international countries around the globe in 2017 for a total of 81 Orkin international franchises, two Canadian Critter Control franchises, and eleven Australian franchises operated by Murray Pest Control and Scientific Pest Management at December 31, 2017, compared to 70 Orkin international franchises, two Canadian Critter Control franchises and seven Australian Franchises at December 31, 2016.
International and domestic franchising revenue was less than 1% of the Company’s revenues for 2017. Orkin had 128 and 120 franchises (domestic and international) at December 31, 2017 and 2016, respectively. The Company had 89 Critter Control franchises at December 31, 2017, down 5 from 2016. Critter Control Operations, Inc., a wholly-owned subsidiary of the Company, has begun the process of purchasing Critter Control franchises. Revenue from franchises was down 2.9% in 2017 compared to 2016 as we acquire franchises from Critter Control.
Cost of Services Provided
For the twelve months ended December 31, 2017 cost of services provided increased $47.6 million or 6.2%, compared to the twelve months ended December 31, 2016. Gross margin for the year increased to 51.0% for 2017 compared to 50.9% for 2016 due to favorable service salary cost as we utilize BOSS, our CRM and operating system and VRM to improve our customer routing and scheduling to maximize efficiencies. We had lower administrative salaries as we maximize our efficiencies and lower insurance and claims as we saw reductions in our actuarial calculations on future losses and lower vehicle loss expenses. The favorable margins were partially offset by higher fleet costs as gasoline prices rose and leased vehicle costs as we replace our fleet and materials and supplies as we increase termite treatments. We experienced good cost controls across most spending categories during 2017 compared to 2016.

15



Depreciation and Amortization    

For the twelve months ended December 31, 2017, depreciation and amortization increased $5.7 million, or 11.2% compared to the twelve months ended December 31, 2016. The dollar increase was primarily due to depreciation increasing $2.7 million or 10.7% as we continue to depreciate our CRM software BOSS, while amortization of intangible assets increased $3.0 million or 11.5% for 2017 due to the additional amortization of customer contracts of Northwest Exterminating, as well as several other acquisitions over the last year.
Sales, General and Administrative
For the twelve months ended December 31, 2017, sales, general and administrative (SG&A) expenses increased $12.9 million, or 2.6% compared to the twelve months ended December 31, 2016. SG&A decreased to 30.1% of revenues for the year ended December 31, 2017 compared to 31.2% in 2016. The Company had a one-time tax event to dissolve its subsidiary, Kinro Investment Inc. in 2016. This increased SG&A expense $9.1 million or 0.6 percentage points due to the one-time tax event that was offset as a credit in income tax expense. Administrative salaries were relatively flat to prior year as we reduced the number of temporary personnel working on the BOSS system. Personnel related costs were marginally lower as we experienced leveling of our premiums. Gains in these areas were partially offset by higher sales salaries, fleet expense, and contractor expenses for various projects as well as the aforementioned 2016 foreign tax withholding expense.
Gain on Sales of assets, Net
Gain on sales of assets, net decreased to $0.2 million for the year ended December 31, 2017 compared to $0.8 million in 2016. The Company recognized gains from the sale of owned vehicles and owned property in 2017 and 2016.

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

The Company’s effective tax rate increased to 39.2% in 2017 compared to 35.8% in 2016, due primarily to the effects of the TCJA in 2017, a one-time tax event in 2016 and differences in state and foreign income taxes. The estimated impact of the enactment of the TCJA was an $11.6 million increase to tax expense, which was a direct decrease to net income. The $11.6 million increase in tax was as follows: ($8.0 million from transition tax on foreign earnings, $2.9 million from the revaluation of deferred tax assets, and $0.7 million from reductions in tax benefits on stock compensation). The increase due to the TCJA was partially offset by a reduction related to the implementation of ASU 2016-09 that was a $4.0 million benefit. Management believes that the Corporate tax rate in 2018 will be in the mid 20% range with a lower rate in the first quarter 2018 adjusted throughout the year to the mid 20% range for the year.
Results of Operations—2016 Versus 2015
Overview    
The Company’s revenues increased to $1.573 billion in 2016, a 5.9% increase compared to 2015. Gross margin increased to 50.9% for 2016 from 50.4% in 2015. Sales, general and administrative expense remained flat at 31.2% of revenues in 2016 compared to 2015. The Company’s depreciation and amortization margin increased 0.2 percentage points to 3.2% in 2016 compared to 3.0% in 2015. Rollins’ net income of $167.4 million in 2016 was an increase of $15.2 million or 10.0% over $152.1 million in 2015. Net profit margin improved to 10.6% in 2016 from 10.2% in 2015. Rollins continued to expand our global brand recognition with acquisitions in the United States, Australia, and the United Kingdom as well as expanding our Orkin international franchise program in numerous countries around the globe. The Company is now in 47 countries and continues to seek new opportunities.
Revenues    
Revenues for the year ended December 31, 2016 were $1.573 billion, an increase of $88.2 million or 5.9% from 2015 revenues of $1.485 billion. Growth occurred across all service lines and brands with our Canadian and Australian companies being hindered by unfavorable foreign currency exchange rates. Organic growth and pricing accounted for approximately 5.2% of our increase and our acquisitions contributed the remaining revenue growth. Commercial pest control represented approximately 40% of the Company’s revenue in 2016 and grew 4.4% due to increases in sales, increased bed bug revenue, an increase in commercial fumigations, and acquisitions. Commercial pest control was negatively impacted by foreign currency exchange as Orkin Canada and Rollins Australia are heavily commercial. Residential pest control which represented approximately 42% of the Company’s

16



revenue, increased 7.3% driven by increased leads, the improved closure and pricing as well as increased TAEXX® homebuilder installations, bed bug revenues and acquisitions. The Company’s termite business, which represented approximately 17% of the Company’s revenue, grew 6.3% in 2016 due to acquisitions, increases in drywood fumigations and ancillary service sales, (such as moisture control and insulation).
The Company implemented its traditional price increase program in June 2016. Less than 2% of the Company’s revenue increase came from pricing actions. Approximately 80% of the Company’s pest control revenue was recurring in 2016 as well as 2015.
The Company’s foreign operations accounted for approximately 7% of total revenues for each of the years ended December 31, 2016 and 2015, respectively. Foreign currency exchange translation and increased domestic revenues have reduced the percentage in both years. The Company established new franchises in several countries around the globe in 2016 for a total of 70 Orkin international franchises, two Canadian Critter Control franchises, and seven Australian franchises operated by Murray Pest Control and Scientific Pest Management at December 31, 2016, compared to 48 Orkin international franchises and two Canadian Critter Control franchises at December 31, 2015.
International and domestic franchising revenue was less than 1% of the Company’s revenues for 2016. Orkin had 120 and 99 franchises (domestic and international) at December 31, 2016 and 2015, respectively. The Company had 94 Critter Control franchises and 4 Murray Pest Control franchises at December 31, 2016, down 14 from 2015. Critter Control Operations, Inc., a wholly-owned subsidiary of the Company, has begun the process of purchasing Critter Control franchises. Revenue from franchises was up 8.4% in 2016 compared to 2015.
Cost of Services Provided
For the twelve months ended December 31, 2016 cost of services provided increased $36.4 million or 4.9%, compared to the twelve months ended December 31, 2015. Gross margin for the year increased to 50.9% for 2016 compared to 50.4% for 2015 due to favorable service salary cost as we finalized the roll-out of BOSS, our CRM and operating system, improving our routing and scheduling to maximize efficiencies, lower personnel related expenses as healthcare claims were lower than expected, and insurance and claims were lower as a percentage of revenues as we continue to focus on efficiency and safety. The favorable margins were partially offset by professional fees as we used outside sources to roll-out BOSS. We experienced good cost controls across most spending categories during 2016 compared to 2015.
Depreciation and Amortization    

For the twelve months ended December 31, 2016, depreciation and amortization increased $6.4 million, or 14.3% compared to the twelve months ended December 31, 2015. The dollar increase was due primarily to depreciation increasing $5.4 million as we began to depreciate our CRM software BOSS, while amortization of intangible assets increased as we acquired 34 companies in 2016.
Sales, General and Administrative
For the twelve months ended December 31, 2016, sales, general and administrative (SG&A) expenses increased $26.8 million, or 5.8% compared to the twelve months ended December 31, 2015. SG&A remained flat at 31.2% of revenues for each of the years 2016 and 2015. The Company had a one-time tax event to dissolve its subsidiary, Kinro Investment Inc. This increased SG&A expense $9.1 million or 0.6 percentage points due to the one-time tax event that was offset as a credit in income tax expense. Sales salaries increased due to the increase in sales commissions and service contracts increased as a result of maintaining the BOSS system. The increases were offset by decreases as a percentage of revenue by administrative salaries as we continue to grow revenue with a static headcount, personnel related expense margin decreased due to lower than expected healthcare claims, and decreases in insurance claims as we continue to focus on efficiency and safety, and telephone costs as we negotiate contracts for Internet service.    
Gain on Sales of assets, Net
Gain on sales of assets, net decreased to $0.8 million for the year ended December 31, 2016 compared to $2.0 million gain in 2015. The Company recognized gains from the sale of owned vehicles and owned property in 2016 and 2015. The decrease was due to the Company selling two buildings in 2015.

Interest (Income)/Expense, Net
Interest income, net for each of the years ended December 31, 2016 and 2015 was $0.2 million. Interest income for each year is due to interest received on cash balances in the Company’s various cash accounts.

17



Taxes

The Company’s effective tax rate decreased to 35.8% in 2016 compared to 37.4% in 2015, due primarily to a one-time tax event in 2016 and differences in state and foreign income taxes.

Liquidity and Capital Resources
Cash and Cash Flow
Cash from operating activities is the principal source of cash generation for our businesses.
The most significant source of cash in Rollins’ cash flow from operations is customer-related activities, the largest of which is collecting cash resulting from services sales. The most significant operating use of cash is to pay our suppliers, employees, tax authorities and others for a wide range of material and services.
The Company’s cash and cash equivalents at December 31, 2017, 2016, and 2015 were $107.1 million, $142.8 million, and $134.6 million, respectively.

 
2017
 
2016
 
2015
Net cash provided by operating activities
$
235,370

 
$
226,525

 
$
196,356

Net cash used in investing activities
(154,175
)
 
(76,842
)
 
(69,942
)
Net cash used in financing activities
(130,263
)
 
(136,371
)
 
(97,216
)
Effect of exchange rate changes on cash
13,333

 
(5,101
)
 
(2,996
)
Net increase (decrease) in cash and cash equivalents
$
(35,735
)
 
$
8,211

 
$
26,202


Cash Provided by Operating Activities
The Company’s operations generated cash of $235.4 million for the year ended December 31, 2017 primarily from net income of $179.1 million, compared with cash provided by operating activities of $226.5 million in 2016 and $196.4 million in 2015. The Company believes its current cash and cash equivalents balances, future cash flows expected to be generated from operating activities and available borrowings under its $175.0 million credit facility will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future.
The Company’s made no contributions to the Rollins, Inc. and its wholly-owned subsidiaries’ defined benefit retirement plans (the “Plans”) during the year ended December 31, 2017. The Plans were fully-funded with a prepaid balance. We contributed $3.3 million and $5.0 million during the years ended December 31, 2016 and 2015, respectively, as a result of the Plans’ funding status. The Company’s management is not expecting to make a contribution during fiscal year 2018. In the opinion of management, additional Plan contributions, if any, will not have a material effect on the Company’s financial position, results of operations or liquidity.
Cash Used in Investing Activities
The Company used $154.2 million on investing activities for the year ended December 31, 2017 compared to $76.8 million and $69.9 million during 2016 and 2015, respectively, and of that, invested approximately $24.7 million in capital expenditures during 2017 compared to $33.1 million and $39.5 million during 2016 and 2015, respectively. Capital expenditures for the year consisted primarily of property purchases, equipment replacements and technology related projects. The Company expects to invest between $25.0 million and $28.0 million in 2018 in capital expenditures. During 2017, the Company’s and its subsidiaries acquired Northwest Exterminating as well as several small companies for a total of $130.2 million compared to $46.3 million and $33.5 million in acquisitions during 2016 and 2015, respectively. The expenditures for the Company’s acquisitions were funded with cash on hand. The Company continues to seek new acquisitions.
Cash Used in Financing Activities
The Company used cash of $130.3 million on financing activities for the year ended December 31, 2017, compared to $136.4 million and $97.2 million during 2016 and 2015, respectively. A total of $122.0 million was paid in cash dividends ($0.56 per share) during the year ended December 31, 2017 including a special dividend paid in December 2017 of $0.10 per share, compared to $109.0 million in cash dividends paid ($0.50 per share) during the year ended December 31, 2016, including a special dividend paid in December 2016 of $0.10 per share and $91.8 million paid in cash dividends ($0.42 per share) during the year ended December 31, 2015, including a special dividend paid in December 2015 of $0.10 per share.

18



The Company did not purchase shares on the open market during the year ended December 31, 2017 while using $8.2 million to repurchase 0.8 million shares of its common stock at a weighted average price of $27.19 per share during 2016 and $0.4 million to purchase 19 thousand shares at an weighted average price of $22.42 in 2015. There remain 5.1 million shares authorized to be repurchased under prior Board approval. The Company repurchased $8.2 million, $8.4 million, and $7.0 million of common stock for the years ended December 31, 2017, 2016 and 2015, respectively, from employees for the payment of taxes on vesting restricted shares.
The Company’s $107.1 million of total cash at December 31, 2017, is primarily cash held at various banking institutions. Approximately $57.8 million is held in cash accounts at international bank institutions and the remaining $49.3 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times may exceed federally insured amounts.
The Company’s international business is expanding and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. Repatriation of cash from the Company’s foreign subsidiaries is not a part of the Company’s current business plan.
The Company maintains a large cash position in the United States while having no third-party debt to service. Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its domestic business.  

For Information regarding our Revolving Credit Agreement see Note 3 - Debt of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K).
Litigation
For discussion on the Company’s legal contingencies, see note 13 to the accompanying financial statements.

Off Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments
Other than the operating leases disclosed in the table that follows, the Company has no material off balance sheet arrangements.
The impact that the Company’s contractual obligations as of December 31, 2017 are expected to have on our liquidity and cash flow in future periods is as follows:
 
Payments due by period
Contractual obligations (in thousands)
Total
 
Less than
1 year
 
1 - 3
years
 
4 - 5
years
 
More than
5 years
Business combination related liabilities
$
29,389

 
$
18,661

 
$
10,728

 
$

 
$

Non-cancelable operating leases
143,539

 
34,112

 
24,890

 
38,713

 
45,824

Unrecognized Tax Positions (1)
4,084

 
4,084

 

 

 

Total (2)
$
177,012

 
$
56,857

 
$
35,618

 
$
38,713

 
$
45,824

(1)
These amounts represent expected payments with interest for unrecognized tax benefits as of December 31, 2017.
(2)
Minimum pension funding requirements are not included as funding will not be required.
Critical Accounting Policies
The Company views critical accounting policies to be those policies that are very important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, complex or subjective judgments. The circumstances that make these judgments difficult or complex relate to the need for management to make estimates about the effect of matters that are inherently uncertain. We believe our critical accounting policies to be as follows:
Accrual for Termite Contracts—The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future cost include termiticide life expectancy and government regulation. It is significant that the actual number of claims has decreased in recent years due to changes in the Company’s business practices. However, it is not possible to precisely predict future significant claims. Accruals for termite contracts are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

19



Accrued Insurance—The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and vehicle liability. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts with an independent third party actuary on a semi-annual basis to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective and a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events. The Company continues to be proactive in risk management to develop and maintain ongoing programs to reduce claims. Initiatives that have been implemented include pre-employment screening and an annual motor vehicle report required on all its drivers, post-offer physicals for new employees, pre-hire, random and post-accident drug testing, increased driver training and a post-injury nurse triage program for employees.
Revenue Recognition—The Company’s revenue recognition policies are designed to recognize revenues at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. For pest control customers, the Company offers a discount for those customers who prepay for a full year of services. The Company defers recognition of these advance payments and recognizes the revenue as the services are rendered. The Company classifies the discounts related to the advance payments as a reduction in revenues.
Termite baiting revenues are recognized based on the delivery of the individual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue in a pattern that approximates the timing of performing monitoring visits. The allocation of the purchase price to the two deliverables is based on the relative selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that approximates the timing of performing the required monitoring visits.

Revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.
All revenues are reported net of sales taxes.
Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 450 “Contingencies,” Management estimates and accrues for its liability and costs associated with the litigation. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the litigation, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liabilities may vary from amounts estimated or accrued. However, in the opinion of management, the outcome of the litigation will not have a material adverse impact on the Company’s financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

Defined benefit pension plans — In 2005, the Company ceased all future benefit accruals under the Rollins, Inc. defined benefit plan, although the Company remains obligated to provide employees benefits earned through June 2005. The Company also includes the Waltham Services, LLC Hourly Employee Pension Plan to the Company’s financial statements. 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.

20




The Company chooses an expected rate of return on plan assets based on historical results for similar allocations among asset classes, the investments strategy, and the views of our investment adviser. Differences between the expected long-term return on plan assets and the actual return are amortized over future years. Therefore, the net deferral of past asset gains or losses ultimately affects future pension expense. The Company’s assumption for the expected return on plan assets is 7.0% which is unchanged from the prior year.

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 utilizes a yield curve approach. The approach utilizes an economic model whereby the Company’s expected benefit payments over the life of the plans is forecast and then compared to a portfolio of corporate bonds that will mature at the same time that the benefit payments are due in any given year. The economic model then calculates the one discount rate to apply to all benefit payments over the life of the plan which will result in the same total lump sum as the payments from the corporate bonds. The discount rate was 4.0% as of December 31, 2017 compared to 4.45% in 2016 and 4.7% in 2015. A lower discount rate increases the present value of benefit obligation.

As set forth in note 14 to the Company’s financial statements, included among the asset categories for the Plan’s investments are real estate, tactical composite and alternative investments comprised of investments in real estate and hedge funds. These investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value. In accordance with Accounting Standards Update (“ASU”) No. 2009-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness.

As of December 31, 2017, the defined benefit plans were fully-funded and the recorded change within accumulated other comprehensive income increased stockholders’ equity by $19.0 million before tax and $14.2 million after tax.

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

21




Forward-Looking Statements

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements regarding (i) management's belief that the Company competes favorably with competitors, (ii) the expectation for the Company's corporate tax rate for 2018; (iii) the Company's maintenance of sufficient supplies to fulfill its immediate needs and to alleviate potential short-term shortages in such supplies, (iv) any environmental remediation costs estimated to be incurred are not material to the Company's financial condition or operating results, (v) the adequacy of the Company's facilities to meet its future needs; (vi) the outcome of litigation, as discussed in the Legal Proceedings section and elsewhere and the Company's belief that such litigation will not have a material adverse effect on the Company's financial condition, results of operations or liquidity; (vii) the belief that the Company has adequate liquid assets, funding sources and accruals to satisfy any claims; (viii) the Company's expectation to continue its payment of cash dividends; (ix) plans regarding acquisitions and franchise expansion; (x) the adequacy of the Company's resources and borrowings to fund operations, obligations, and expansions; (xi) management's belief that the Company is not expected to make a contribution to the Plans in 2018; (xii) the Company's projected 2018 capital expenditures; (xiii) the plans to grow the business in foreign markets through reinvestment of foreign deposits and future earnings and through acquisitions of unrelated companies; (xiv) the Company's expectation to maintain compliance with the covenants contained in its Revolving Credit Agreement throughout 2018; (xv) the impact and amount of the Company's contractual obligations; (xvi) management's expectations regarding termite claims and factors that impact future costs from those claims; (xvii) the expected cost of termite renewals; (xviii) the expected collectability of accounts receivable; (xix) the expected tax consequences and the impact of the TCJA; (xx) expectations and plans regarding any losses from franchisees; (xxi) the impact of recent accounting pronouncements; (xxii) and interest rate risks and foreign exchange currency risk on the Company's financial position, results of operations and liquidity and (xxiii) the ability of the Company to utilize all of its foreign net operating losses and the possibility that the Company's unrecognized tax benefits will increase in the next 12 months. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks, timing and uncertainties including, without limitation, the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; market risk; changes in industry practices or technologies; the degree of success of the Company's termite process reforms and pest control selling and treatment methods; the Company's ability to identify potential acquisitions; climate and weather trends; competitive factors and pricing practices; potential increases in labor costs; and changes in various government laws and regulations, including environmental regulations. All of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk

The Company maintains an investment portfolio subject to short-term interest rate risk exposure. The Company is also subject to interest rate risk exposure through borrowings on its $175.0 million credit facility. Currently, the Company has no outstanding borrowings. However, the Company does maintain approximately $29.4 million in Letters of Credit. The Company is also exposed to market risks arising from changes in foreign exchange rates. The Company believes that this foreign exchange rate risk will not have a material effect upon the Company’s results of operations or financial position going forward. For a discussion of the Company’s activities to manage risks relative to fluctuations in foreign currency exchange rates, see note 10 to the accompanying financial statements.

22



MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
To the Stockholders of Rollins, Inc.:
The management of Rollins, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Rollins, Inc. maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded against loss or unauthorized use and that the financial records are adequate and can be relied upon to produce financial statements in accordance with accounting principles generally accepted in the United States of America. The internal control system is augmented by written policies and procedures, an internal audit program and the selection and training of qualified personnel. This system includes policies that require adherence to ethical business standards and compliance with all applicable laws and regulations.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of internal controls over financial reporting, as of December 31, 2017 based on criteria established in the 2013 Internal Control—Integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management’s assessment is that Rollins, Inc. maintained effective internal control over financial reporting as of December 31, 2017.
The independent registered public accounting firm, Grant Thornton LLP has audited the consolidated financial statements as of and for the year ended December 31, 2017, and has also issued their report on the effectiveness of the Company’s internal control over financial reporting, included in this report on page 26.
 
 
 
/s/ Gary W. Rollins
 
/s/ Paul E Northen
Gary W. Rollins
Vice Chairman and Chief Executive Officer
 
Paul E. Northen
Vice President, Chief Financial Officer and Treasurer

Atlanta, Georgia
February 26, 2018

23



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Stockholders’

Rollins, Inc.

Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Rollins, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 26, 2018, expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Atlanta, GA
February 26, 2018

24



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Board of Directors and Stockholders’

Rollins, Inc.

Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Rollins, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive earnings, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017 and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 26, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2004.

Atlanta, GA
February 26, 2018


25



Item 8.    Financial Statements and Supplementary Data
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
 
 
Rollins, Inc. and Subsidiaries
 
 
 
(in thousands except share information)
 
 
 
December 31,
2017
 
2016
ASSETS
 
 
 
Cash and cash equivalents
$
107,050

 
$
142,785

Trade receivables, net of allowance for doubtful accounts of $11,814 and $11,443, respectively
97,802

 
88,490

Financing receivables, short-term, net of allowance for doubtful accounts of $1,535 and $1,727, respectively
17,263

 
15,968

Materials and supplies
14,983

 
13,724

Other current assets
25,697

 
29,204

Total Current Assets
262,795

 
290,171

Equipment and property, net
134,088

 
133,477

Goodwill
346,514

 
255,665

Customer contracts, net
152,869

 
117,466

Other intangible assets, net
61,548

 
44,310

Financing receivables, long-term, net of allowance for doubtful accounts of $1,357 and $1,430 respectively
20,414

 
16,748

Prepaid Pension
17,595

 

Deferred income taxes
18,420

 
41,877

Other assets
19,420

 
16,824

Total Assets
1,033,663

 
916,538

LIABILITIES
 
 
 
Accounts payable
26,161

 
30,284

Accrued insurance
28,018

 
26,201

Accrued compensation and related liabilities
73,016

 
75,839

Unearned revenue
109,029

 
99,820

Other current liabilities
58,345

 
44,847

Total current liabilities
294,569

 
276,991

Accrued insurance, less current portion
34,245

 
32,023

Accrued pension

 
2,880

Long-term accrued liabilities
50,925

 
36,099

Total Liabilities
379,739

 
347,993

Commitments and Contingencies


 


STOCKHOLDERS’ EQUITY
 
 
 
Preferred stock, without par value; 500,000 authorized, zero shares issued

 

Common stock, par value $1 per share; 375,000,000 shares authorized, 217,992,177 and 217,791,511 shares issued, respectively
217,992

 
217,792

Paid-in-capital
81,405

 
77,452

Accumulated other comprehensive loss
(45,956
)
 
(70,075
)
Retained earnings
400,483

 
343,376

Total Stockholders’ Equity
653,924

 
568,545

Total Liabilities and Stockholders’ Equity
$
1,033,663

 
$
916,538


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

26



CONSOLIDATED STATEMENTS OF INCOME
 
 
 
 
 
Rollins, Inc. and Subsidiaries
 
 
 
 
 
(in thousands except per share data)
 
 
 
 
 
Years ended December 31,
2017
 
2016
 
2015
REVENUES
 
 
 
 
 
Customer services
$
1,673,957

 
$
1,573,477

 
$
1,485,305

COSTS AND EXPENSES
 
 
 
 
 
Cost of services provided
819,943

 
772,348

 
735,976

Depreciation and amortization
56,580

 
50,902

 
44,522

Sales, general and administrative
503,433

 
490,528

 
463,742

Gain on sales of assets, net
(242
)
 
(777
)
 
(1,953
)
Interest income
(259
)
 
(160
)
 
(160
)
 
1,379,455

 
1,312,841

 
1,242,127

INCOME BEFORE INCOME TAXES
294,502

 
260,636

 
243,178

PROVISION FOR INCOME TAXES
 
 
 
 
 
Current
96,742

 
96,515

 
87,536

Deferred
18,636

 
(3,248
)
 
3,493

 
115,378

 
93,267

 
91,029

NET INCOME
$
179,124

 
$
167,369

 
$
152,149

INCOME PER SHARE - BASIC
$
0.82

 
$
0.77

 
$
0.70

INCOME PER SHARE - DILUTED
$
0.82

 
$
0.77

 
$
0.70

Weighted average shares outstanding - basic
217,988

 
218,244

 
218,583

Weighted average shares outstanding - diluted
217,988

 
218,244

 
218,583

DIVIDENDS PAID PER SHARE
$
0.56

 
$
0.50

 
$
0.42


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


27



CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
 
 
 
 
Rollins, Inc. and Subsidiaries
 
 
 
 
 
(in thousands)
 
 
 
 
 
Years ended December 31,
2017
 
2016
 
2015
NET INCOME
$
179,124

 
$
167,369

 
$
152,149

Other comprehensive earnings/(loss), net of tax
 
 
 
 
 
Pension and other postretirement benefit plans
14,159

 
1,705

 
9,070

Foreign currency translation adjustments
9,960

 
(602
)
 
(14,760
)
Other comprehensive earnings/(loss)
24,119

 
1,103

 
(5,690
)
Comprehensive earnings
$
203,243

 
$
168,472

 
$
146,459


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


28



CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Rollins, Inc. and Subsidiaries
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
Common Stock
 
Treasury
 
Paid-
 
Comprehensive
 
Retained
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
In-Capital
 
Income (Loss)
 
Earnings
 
Total
Balance at December 31, 2014
218,483

 
$
218,483

 
(200
)
 
$
(200
)
 
$
62,839

 
$
(65,488
)
 
$
247,042

 
$
462,676

Net Income
 
 


 
 
 


 
 
 
 
 
152,149

 
152,149

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Liability Adjustment

 

 

 

 

 
9,070

 

 
9,070

Foreign Currency Translation Adjustments

 

 

 

 

 
(14,760
)
 

 
(14,760
)
Cash Dividends

 

 

 

 

 

 
(91,755
)
 
(91,755
)
Common Stock Purchased (1)
(19
)
 
(19
)
 

 

 

 

 
(416
)
 
(435
)
Stock Compensation
597

 
597

 

 

 
11,731

 

 
(218
)
 
12,110

Employee Stock Buybacks
(308
)
 
(308
)
 

 

 
(6,754
)
 

 
90

 
(6,972
)
Excess Tax Benefit on Share-based payments

 

 

 

 
1,946

 

 

 
1,946

Balance at December 31, 2015
218,753

 
$
218,753

 
$
(200
)
 
$
(200
)
 
$
69,762

 
$
(71,178
)
 
$
306,892

 
$
524,029

Net Income
 
 


 
 
 


 
 
 
 
 
167,369

 
167,369

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Liability Adjustment

 

 

 

 

 
1,705

 

 
1,705

Foreign Currency Translation Adjustments

 

 

 

 

 
(602
)
 

 
(602
)
Cash Dividends

 

 

 

 

 

 
(109,002
)
 
(109,002
)
Common Stock Purchased (1)
(836
)
 
(836
)
 

 

 

 

 
(21,883
)
 
(22,719
)
Common Stock Retired
(200
)
 
(200
)
 
200

 
200

 

 

 
 
 

Stock Compensation
388

 
388

 

 

 
12,027

 

 

 
12,415

Employee Stock Buybacks
(313
)
 
(313
)
 

 

 
(8,036
)
 

 

 
(8,349
)
Excess Tax Benefit on Share-based payments

 

 

 

 
3,699

 

 

 
3,699

Balance at December 31, 2016
217,792

 
$
217,792

 
$

 
$

 
$
77,452

 
$
(70,075
)
 
$
343,376

 
$
568,545

Net Income
 
 
 
 
 
 
 
 
 
 
 
 
179,124

 
179,124

Other Comprehensive Income, Net of Tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Liability Adjustment

 

 

 

 

 
14,159

 

 
14,159

Foreign Currency Translation Adjustments

 

 

 

 

 
9,960

 

 
9,960

Cash Dividends

 

 

 

 

 

 
(122,017
)
 
(122,017
)
Stock Compensation
434

 
434

 

 

 
11,965

 

 

 
12,399

Employee Stock Buybacks
(234
)
 
(234
)
 

 

 
(8,012
)
 

 

 
(8,246
)
Balance at December 31, 2017
217,992

 
$
217,992

 

 

 
81,405

 
(45,956
)
 
400,483

 
$
653,924

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

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

29



CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
 
 
Rollins, Inc. and Subsidiaries
 
 
 
 
 
(in thousands)
 
 
 
 
 
Years ended December 31,
2017
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
 
 
Net Income
$
179,124

 
$
167,369

 
$
152,149

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation, amortization and other non-cash charges
55,533

 
49,894

 
42,139

Provision for deferred income taxes
18,636

 
(3,248
)
 
3,493

Stock based compensation expense
12,399

 
12,415

 
12,110

Excess tax benefits from share-based payments

 
(3,699
)
 
(1,946
)
Provision for bad debts
10,455

 
11,257

 
10,113

Changes in assets and liabilities:
 
 
 
 
 
Trade accounts receivables and other accounts receivables
(13,661
)
 
(15,868
)
 
(12,494
)
Financing receivables
(6,527
)
 
(6,133
)
 
(3,630
)
Materials and supplies
(837
)
 
(671
)
 
814

Other current assets
1,448

 
(1,464
)
 
(2,144
)
Other non-current assets
(5,137
)
 
(1,934
)
 
154

Accounts payable and accrued expenses
(25,691
)
 
13,327

 
(2,039
)
Unearned revenue
1,222

 
2,842

 
2,822

Accrued insurance
4,039

 
2,949

 
126

Pension funding

 
(3,256
)
 
(5,000
)
Long-term accrued liabilities
4,367

 
2,745

 
(311
)
Net cash provided by operating activities
235,370

 
226,525

 
196,356

INVESTING ACTIVITIES
 
 
 
 
 
Cash used for acquisitions of companies, net of cash acquired
(130,189
)
 
(46,308
)
 
(33,462
)
Capital expenditures
(24,680
)
 
(33,081
)
 
(39,495
)
Cash from sale of franchises
519

 
699

 
767

Derivative Investments
(264
)
 

 

Proceeds from sale of assets
370

 
1,663

 
2,752

Investment tax credits
69

 
185

 
(504
)
Net cash used in investing activities
(154,175
)
 
(76,842
)
 
(69,942
)
FINANCING ACTIVITIES
 
 
 
 
 
Payment of dividends
(122,017
)
 
(109,002
)
 
(91,755
)
Cash paid for common stock purchased
(8,246
)
 
(31,068
)
 
(7,407
)
Excess tax benefits from share-based payments

 
3,699

 
1,946

Net cash used in financing activities
(130,263
)
 
(136,371
)
 
(97,216
)
Effect of exchange rate changes on cash
13,333

 
(5,101
)
 
(2,996
)
Net increase (decrease) in cash and cash equivalents
(35,735
)
 
8,211

 
26,202

Cash and cash equivalents at beginning of year
142,785

 
134,574

 
108,372

Cash and cash equivalents at end of year
$
107,050

 
$
142,785

 
$
134,574

Supplemental disclosure of cash flow information
 
 
 
 
 
Cash paid for interest
$

 
$
13

 
$

Cash paid for income taxes, net
$
90,702

 
$
88,766

 
$
82,690


The accompanying notes are an integral part of these consolidated financial statements
Supplemental Disclosures of Non-Cash Items
Pension—Non-cash decreases in the minimum pension liability which were credited to other comprehensive income were $19.0 million, $3.0 million, and $14.8 million in 2017, 2016, and 2015, respectively.
Business Combinations —There were $34.0 million in non-cash acquisitions of assets in business combinations for the year ended December 31, 2017, $11.4 million in 2016 and $0.1 million for 2015. In 2015, the Company used 873,349 shares of Company stock at a price of $18.79 per share or $16.4 million in acquisitions of companies.


30




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2017, 2016, and 2015, Rollins, Inc. and Subsidiaries

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description—Rollins, Inc. (the “Company”) was originally incorporated in 1948 under the laws of the state of Delaware as Rollins Broadcasting, Inc.
The Company is an international service company with headquarters located in Atlanta, Georgia, providing pest and termite control services through its wholly-owned subsidiaries to both residential and commercial customers in North America, Australia, and Europe with international franchises in Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, Canada, Australia, and Mexico. Services are performed through a contract that specifies the pricing arrangement with the customer.
Orkin, LLC. (“Orkin”), a wholly-owned subsidiary of the Company founded in 1901, is the world’s largest pest and termite control company. It provides customized services from over 400 locations. Orkin either serves customers directly or through franchise operations, in the United States, Canada, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico providing essential pest control services and protection against termite damage, rodents and insects to homes and businesses, including hotels, food service establishments, food manufacturers, retailers and transportation companies. Orkin operates under the Orkin®, and Orkin Canada® trademarks and the AcuridSM service mark. The Orkin® brand name makes Orkin the most recognized pest and termite company throughout the United States. The Orkin Canada brand name provides similar brand recognition throughout Canada.

Orkin Canada, a wholly-owned subsidiary of Orkin founded in 1952, was acquired by Orkin in 1999. Orkin Canada is Canada’s largest pest control provider and a leader in the development of fast, effective and environmentally responsible pest control solutions.
Western Pest Services (“Western”), a wholly-owned subsidiary of the Company founded in 1928, was acquired by Rollins, Inc. in 2004. Western is primarily a commercial pest control service company and its business complements most of the services Orkin offers, focusing on the northeastern United States.
The Industrial Fumigant Company (“IFC”), a wholly-owned subsidiary of the Company founded in 1937, was acquired by Rollins, Inc. in 2005. IFC is a leading provider of pest management and sanitation services and products to the food and commodity industries.

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

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

Critter Control, a wholly-owned subsidiary of the Company, was acquired by Rollins, Inc. on February 27, 2015. Critter Control was established in 1983 and is headquartered in Traverse City, Michigan. The business is primarily franchised, operating in 40 states and 2 Canadian provinces.

Rollins UK was formed as a wholly-owned subsidiary of the Company to acquire Safeguard Pest Control (“Safeguard”). Safeguard, which was acquired in June 2016, is a pest control company established in the United Kingdom in 1991 with a history of providing superior pest control, bird control, and specialist services to residential and commercial customers.
Northwest Exterminating, LLC, a wholly-owned subsidiary of the Company founded in 1951, was acquired by Rollins, Inc. in August 2017. Northwest specializes in residential and commercial termite control, pest control, mosquito control, wildlife services, lawn care, insulation, and HVAC services, focusing on the Southeast United States.

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

31



The Company has only one reportable segment, its pest and termite control business. Revenue, operating profit and identifiable assets for this segment, includes the United States, Canada, Australia, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa, and Mexico. The Company’s results of operations and its financial condition are not reliant upon any single customer, few customers or foreign operations.
Principles of Consolidation— The Company’s Consolidated Financial Statements include the accounts of Rollins, Inc. and our wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). The Company does not consolidate the financial statements of any company in which it has an ownership interest of 50% or less. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity. The Company reclassified certain prior period amounts, none of which were material, to conform to the current period presentation. All material intercompany accounts and transactions have been eliminated.
 
Subsequent Events—The Company evaluates its financial statements through the date the financial statements are issued. As of the filing date, February 26, 2018, there were no subsequent events that would affect the Company’s financial statements.
Estimates Used in the Preparation of Consolidated Financial Statements—The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying notes and financial statements. Actual results could differ from those estimates.
Revenue Recognition— The Company’s revenue recognition policies are designed to recognize revenues at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial 1-year contract, and revenues are recognized at the time services are performed. For pest control customers, the Company offers a discount for those customers who prepay for a full year of services. The Company defers recognition of these advance payments and recognizes the revenue as the services are rendered. The Company classifies the discounts related to the advance payments as a reduction in revenues.
Termite baiting revenues are recognized based on the delivery of the individual units of accounting. At the inception of a new baiting services contract, upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue in a pattern that approximates the timing of performing monitoring visits. The allocation of the purchase price to the two deliverables is based on the estimated relative selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that approximates the timing of performing the required monitoring visits.
Revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.
All revenues are reported net of sales taxes.
The Company’s foreign operations accounted for approximately 8% of revenues for the year ended December 31, 2017 and 7% for the years ended December 2016 and 2015. Currency exchange translation and increases in foreign revenues are the cause of the increased percentage from 2016.
Interest income on installment receivables is accrued monthly based on actual loan balances and stated interest rates. Recognition of initial franchise fee revenues occurs when all material services or conditions relating to a new agreement have been substantially performed or satisfied by the Company, and initial franchise fees are treated as unearned revenue in the Statement of Financial Position until such time. Royalties from franchises are accrued and recognized as revenues as earned on a monthly basis. Gains on sales of pest control customer accounts to franchises are recognized at the time of sale and when collection is reasonably assured.

32



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 2017, 2016, and 2015.  We record specific provisions when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, our estimates of the realizability of receivables would be further adjusted, either upward or downward.

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

Years ended December 31,
2017
 
2016
 
2015
(in thousands)
 
 
 
 
 
Advertising
$
66,115

 
$
61,258

 
$
57,705

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 $107.1 million of total cash at December 31, 2017, is primarily cash held at various banking institutions. Approximately $57.8 million is held in cash accounts at international bank institutions and the remaining $49.3 million is primarily held in Federal Deposit Insurance Corporation (“FDIC”) insured non-interest-bearing accounts at various domestic banks which at times may exceed federally insured amounts.
The Company’s international business is expanding and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisitions of unrelated companies. Repatriation of cash from the Company’s foreign subsidiaries is not a part of the Company’s current business plan.
The Company maintains a large cash position in the United States while having no third-party debt to service. Rollins maintains adequate liquidity and capital resources, without regard to its foreign deposits, that are directed to finance domestic operations and obligations and to fund expansion of its domestic business for the foreseeable future.  

At December 31,
2017
 
2016
(in thousands) (in US dollars)
 
 
 
Cash held in foreign bank accounts
$
57,790

 
$
54,424

Marketable Securities— From time to time, the Company maintains investments held by several large, well-capitalized financial institutions. The Company’s investment policy does not allow investment in any securities rated less than “investment grade” by national rating services.
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included as a component of interest income.
The Company had no marketable securities other than those held in the defined benefit pension plan and the non-qualified deferred compensation plan at December 31, 2017 and 2016. See note 14 for further details.
Materials and Supplies— Materials and supplies are recorded at the lower of cost (first-in, first-out basis) or market.

33



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,
2017
 
2016
 
2015
(in thousands)
 
 
 
 
 
Depreciation
$
27,381

 
$
24,725

 
$
19,354


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, 2017. 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.
Insurance—The Company retains, up to specified limits, certain risks related to general liability, workers’ compensation and vehicle liability. The estimated costs of existing and future claims under the retained loss program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts with an independent third party actuary on a semi-annual basis to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration in establishing the reserve, along with management’s knowledge of changes in business practice and existing claims compared to current balances. Management’s judgment is inherently subjective and a number of factors are outside management’s knowledge and control. Additionally, historical information is not always an accurate indication of future events.

34



Accrual for Termite Contracts—The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future costs include termiticide life expectancy and government regulation. It is significant that the actual number of claims has decreased in recent years due to changes in the Company’s business practices. However, it is not possible to precisely predict future significant claims. An accrual for termite contracts is included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.
Contingency Accruals—The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with the FASB ASC Topic 450 “Contingencies,” management estimates and accrues for its liability and costs associated with the litigation. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the litigation, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liability may vary from amounts estimated or accrued. However, in the opinion of management, the outcome of the litigation will not have a material adverse impact on the Company’s financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company’s consolidated statements of financial position.

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

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

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

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

35



A reconciliation of weighted average shares outstanding along with the earnings per share attributable to restricted shares of common stock (participating securities) is as follows (in thousands except per share data). All share and per share information in the following chart are restated for the stock split effective March 10, 2015:
Years Ended December 31,
2017
 
2016
 
2015
Net income available to stockholders
$
179,124

 
$
167,369

 
$
152,149

Less:  Dividends paid
 

 
 

 
 

Common Stock
(120,930
)
 
(107,880
)
 
(90,631
)
Restricted shares of common stock
(1,087
)
 
(1,122
)
 
(1,124
)
Undistributed earnings for the period
$
57,107

 
$
58,367

 
$
60,394

Allocation of undistributed earnings:
 

 
 

 
 

Common stock
$
56,567

 
$
57,722

 
$
59,611

Restricted shares of common stock
540

 
645

 
783

Basic and diluted shares outstanding:
 

 
 

 
 

Common stock
215,927

 
215,831

 
215,749

Restricted shares of common stock
2,061

 
2,413

 
2,834

 
217,988

 
218,244

 
218,583

Basic and diluted earnings per share:
 

 
 

 
 

Common stock:
 

 
 

 
 

Distributed earnings
$
0.56

 
$
0.50

 
$
0.42

Undistributed earnings
0.26

 
0.27

 
0.28

 
$
0.82

 
$
0.77

 
$
0.70

Restricted shares of common stock
 

 
 

 
 

Distributed earnings
$
0.53

 
$
0.46

 
$
0.40

Undistributed earnings
0.26

 
0.27

 
0.28

 
$
0.79

 
$
0.73

 
$
0.68


Translation of Foreign Currencies—Assets and liabilities reported in functional currencies other than U.S. dollars are translated into U.S. dollars at the year-end rate of exchange. Revenues and expenses are translated at the weighted-average exchange rates for the year. The resulting translation adjustments are charged or credited to other comprehensive income. Gains or losses from foreign currency transactions, such as those resulting from the settlement of receivables or payables, denominated in foreign currency are included in the earnings of the current period.
Stock-Based Compensation— The Company accounts for its stock-based compensation in accordance with the FASB ASC Topic 718 “Compensation – Stock Compensation.” Time lapse restricted shares (TLRSs) have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plan.
TLRSs provide for the issuance of a share of the Company’s Common Stock at no cost to the holder and generally vest after a certain stipulated number of years from the grant date, depending on the terms of the issue. Outstanding TLRSs vest in 20 percent increments starting with the second anniversary of the grant, over six years from the date of grant. During these years, grantees receive all dividends declared and retain voting rights for the granted shares. The agreements under which the restricted stock is issued provide that shares awarded may not be sold or otherwise transferred until restrictions established under the plans have lapsed. The fair value of these awards is recognized as compensation expense, net of forfeitures, on a straight-line basis over six years.
 
Comprehensive Income (Loss)—Other Comprehensive Income (Loss) results from foreign currency translations and minimum pension liability adjustments.

36



Franchising Program – Rollins’ wholly-owned subsidiary, Orkin, had 47, 50 and 51 domestic franchises as of December 31, 2017, 2016 and 2015, respectively. Transactions with Orkin’s domestic franchises involve sales of customer contracts to establish new Orkin franchises, initial franchise fees and royalties. The customer contracts and initial Orkin franchise fees are typically sold for a combination of cash and notes due over periods ranging up to five years. Notes receivable from Orkin franchises were $5.9 million at December 31, 2017 and $5.0 million at December 31, 2016. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.
 
All Orkin domestic franchises have a guaranteed repurchase clause that the Orkin franchise may be repurchased by Orkin at a later date once it has been established; therefore, initial Orkin domestic franchise fees are deferred in accordance with the Financial Accounting Standards Board ("FASB ) Accounting Standards Codification ("ASC") Topic 952-605 Franchisor Revenue Recognition,” for the duration of the initial contract period and are included as unearned revenue in the Consolidated Statements of Financial Position. Deferred Orkin franchise fees were $3.4 million, $3.0 million, and $2.9 million at December 31, 2017, 2016, and 2015, respectively.

 As of December 31, 2017, 2016 and 2015, Orkin had 81, 70, and 48 international franchises, respectively. Orkin’s international franchise program began with its first international franchise in 2000 and since has expanded to Central America, South America, the Caribbean, the Middle East, Asia, the Mediterranean, Europe, Africa and Mexico.
 
Royalties from Orkin franchises are accrued and recognized in accordance with the FASB ASC Topic 952-605Franchisor Revenue Recognition,” as revenues are earned on a monthly basis. Revenue from Orkin franchises was $5.4 million for the year ended December 31, 2017 and $5.1 million and $4.9 million for the years ended 2016 and 2015, respectively.

The Company’s maximum exposure to loss (notes receivable from franchises less deferred franchise fees) relating to the Orkin franchises was $2.5 million, $2.0 million, and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Rollins’ wholly-owned subsidiary, Critter Control, had 89 and 94 franchises in the United States and Canada as of December 31, 2017 and 2016, respectively. Transactions with Critter Control franchises involve sales of territories to establish new franchises, initial franchise fees and royalties. The territories and initial franchise fees are typically sold for a combination of cash and notes. Notes receivable from franchises were $0.2 million and $0.3 million at December 31, 2017 and 2016, respectively. These notes are not guaranteed.  The Company anticipates that should there be any losses from franchisees these losses would be recouped by removing the individual franchisee and re-selling the abandoned territory. These amounts are included as financing receivables in the accompanying Consolidated Statements of Financial Position.
 
Recent Accounting Guidance
Recently issued accounting standards to be adopted in 2018 or later    

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

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flow Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods. Earlier adoption is permitted for any entity in any interim or annual reporting period. The Company adopted this ASU on January 1, 2018 it had no impact on its consolidated financial statements.


37



In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The amendments in the update are effective for the Company’s financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those years. The Company adopted this ASU on January 1, 2018 it had no impact on its consolidated financial statements.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post retirement Benefit Cost (“ASU 2017-07”). The update requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The other components of net benefit cost, including interest cost, expected return on plan assets, amortization of prior service cost/credit and actuarial gain/loss, and settlement and curtailment effects, are to be presented outside of any subtotal of operating income. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for fiscal years and interim periods beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018 it had no impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, an update to ASC Topic 718, Compensation - Stock Compensation. ASU 2017-09 clarifies the types of changes to the terms and conditions of a share-based payment award that requires modification accounting. ASU 2017-09 does not change the accounting for modification of share-based awards, but clarifies that modification accounting should only be applied if there is a change to the value, vesting condition or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is effective for interim and annual reporting periods in fiscal years that begin after December 31, 2017. The adoption of the provisions of ASU 2017-09 on January 1, 2018 will not have an impact on our consolidated financial statements.
In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The updated accounting guidance requires changes to the recognition of credit losses on financial instruments not accounted for at fair value through net income. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU 2016-02 Leases (Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Based on a preliminary assessment, the Company expects the adoption of this guidance to have a material impact on its assets and liabilities due to the recognition of right-of-use assets and lease liabilities on its consolidated balance sheets at the beginning of the earliest period presented. The Company is continuing its assessment, which may identify additional impacts this guidance will have on its consolidated financial statements and disclosures.

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

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


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2.    ACQUISITIONS
 
The Company has made 23, and 34 acquisitions that are not material individually or in the aggregate to the Company’s consolidated financial statements during the years ended December 31, 2017, and 2016, respectively.  The largest acquisitions made during these periods are as follows:

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

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

Total cash purchase price for the Company’s acquisitions in 2017 and 2016 were $130.2 million and $46.3 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,
2017
 
2016
Accounts receivable, net
$
3,836

 
$
3,334

Materials and supplies
312

 
353

Equipment and property
3,027

 
4,525

Goodwill
87,261

 
6,468

Customer contracts
60,695

 
49,365

Other intangible assets
20,086

 
1,285

Current liabilities
(30,344
)
 
(10,809
)
Other assets and liabilities, net
1,209

 
(594
)
Total consideration paid
146,082

 
53,927

Less: Contingent consideration liability
(15,893
)
 
(7,619
)
Total cash purchase price
$
130,189

 
$
46,308

3.    DEBT
On October 31, 2012, the Company entered into a Revolving Credit Agreement with SunTrust Bank and Bank of America, N.A. for an unsecured line of credit of up to $175.0 million, which includes a $75.0 million letter of credit subfacility, and a $25.0 million swingline subfacility. The Credit Agreement was amended on October 30, 2014 to extend the maturity date to October 31, 2018 and add three optional one year extensions. On October 27, 2015 the Company exercised a one year extension option to extend the maturity date to October 31, 2019. As of December 31, 2017, no borrowings were outstanding under the line of credit or under the swingline subfacility. The Company maintains approximately $29.4 million in letters of credit. These letters of credit are required by the Company’s fronting insurance companies and/or certain states, due to the Company’s self-insured status, to secure various workers’ compensation and casualty insurance contracts coverage. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate such claims.
 
The Revolving Credit Agreement is guaranteed by certain of Rollins’ domestic-subsidiaries. The maturity date of the Credit Agreement is October 31, 2019, subject to up to two optional extensions of the Credit Agreement for one year each. Revolving loans under the Revolving Credit Agreement bear interest at one of the following two rates, at the Company’s election:
 
the Base Rate, which shall mean the highest of (i) the per annum rate which the Administrative Agent publicly announces from time to time as its prime lending rate, (ii) the Federal Funds rate, plus 0.50% per annum, and (iii) the Adjusted LIBOR Rate (which equals LIBOR as increased to account for the maximum reserve percentages established by the U.S. Federal Reserve) determined on a daily basis for an interest period of one (1)month, plus 1.0% per annum.

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with respect to any Eurodollar borrowings, the Adjusted LIBOR Rate plus an additional amount, which varies between 0.75% and 1.00%, based upon Rollins’ then-current debt-to-EBITDA ratio. As of December 31, 2017, the additional rate allocated was .75%.
The Revolving Credit Agreement contains customary terms and conditions, including, without limitation, certain financial covenants including covenants restricting the Company’s ability to incur certain indebtedness or liens, or to merge or consolidate with or sell substantially all of its assets to another entity. Further, the Revolving Credit Agreement contains financial covenants restricting the Company’s ability to permit the ratio of the Company’s consolidated debt to EBITDA to exceed certain limits.
The Company was in compliance with applicable debt covenants at December 31, 2017 and expects to maintain compliance throughout 2018.
4.     TRADE RECEIVABLES:
The Allowance for Doubtful Accounts is principally calculated based on the application of estimated loss percentages to delinquency aging totals, based on contractual terms, for the various categories of receivables. Bad debt write-offs occur according to Company policies that are specific to pest control, commercial and termite accounts.