UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

2018

Commission File Number 1-4422

ROLLINS, INC.

(Exact name of registrant as specified in its charter)

Delaware
Delaware51-0068479
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

2170 Piedmont Road, N.E., Atlanta, Georgia

(Address of principal executive offices)

30324

(Zip Code)

(404) 888-2000

(Registrant’s telephone number, including area code)

 

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. Yesxý    Noo

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  xý   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filerxýAccelerated filero
Non-accelerated fileroSmaller reporting companyo
  Emerging growth companyo

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 provided 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).

YesoNoxý 

Rollins, Inc. had 218,008,975218,187,939 shares of its $1 par value Common Stock outstanding as of April 15, 2017.

16, 2018.

ROLLINS, INC. AND SUBSIDIARIES



PART 1    FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF MARCH 31, 20172018 AND DECEMBER 31, 2016
2017
(in thousands except share data)

       
  March 31,  December 31, 
  2017  2016 
  (unaudited)    
ASSETS        
Cash and cash equivalents $162,478  $142,785 
Trade receivables, net of allowance for doubtful accounts of $9,118 and $11,443, respectively  85,178   88,490 
Financed receivables, short-term, net of allowance for doubtful accounts of $1,717 and $1,727, respectively  15,177   15,968 
Materials and supplies  14,736   13,724 
Other current assets  28,186   29,204 
Total current assets  305,755   290,171 
Equipment and property, net  132,101   133,477 
Goodwill  257,612   255,665 
Customer contracts  115,262   117,466 
Other intangible assets  43,784   44,310 
Financed receivables, long-term, net of allowance for doubtful accounts of $1,430 and $1,430, respectively  16,344   16,748 
Deferred income taxes  36,414   41,877 
Other assets  17,593   16,824 
Total assets $924,865  $916,538 
LIABILITIES        
Accounts payable $31,946  $30,284 
Accrued insurance  26,938   26,201 
Accrued compensation and related liabilities  60,338   75,839 
Unearned revenues  104,325   99,820 
Other current liabilities  43,968   44,847 
Total current liabilities  267,515   276,991 
Accrued insurance, less current portion  32,327   32,023 
Accrued pension  2,506   2,880 
Long-term accrued liabilities  38,966   36,099 
Total liabilities  341,314   347,993 
Commitments and Contingencies        
STOCKHOLDERS’ EQUITY        
Preferred stock, without par value; 500,000 shares authorized, zero shares issued  —   — 
Common stock, par value $1 per share; 375,000,000 shares authorized, 218,008,975 and 217,791,511 shares issued and outstanding, respectively  218,009   217,792 
Treasury stock, par value $1 per share; 0 and 0 shares, respectively  —   — 
Paid in capital  73,022   77,452 
Accumulated other comprehensive loss  (66,068)  (70,075)
Retained earnings  358,588   343,376 
Total stockholders’ equity  583,551   568,545 
Total liabilities and stockholders’ equity $924,865  $916,538 

 March 31, 2018 December 31, 2017
 (unaudited)  
ASSETS 
  
Cash and cash equivalents$84,319
 $107,050
Trade receivables, net of allowance for doubtful accounts of $10,536 and $11,814, respectively96,459
 97,802
Financed receivables, short-term, net of allowance for doubtful accounts of $1,581 and $1,535, respectively16,979
 17,263
Materials and supplies15,885
 14,983
Other current assets27,062
 25,697
Total current assets240,704
 262,795
Equipment and property, net136,272
 134,088
Goodwill364,606
 346,514
Customer contracts176,447
 152,869
Trademarks & Tradenames50,198
 49,998
Other intangible assets11,438
 11,550
Financed receivables, long-term, net of allowance for doubtful accounts of $1,406 and $1,357, respectively22,305
 20,414
Prepaid Pension18,237
 17,595
Deferred income taxes10,428
 18,420
Other assets20,061
 19,420
Total assets$1,050,696
 $1,033,663
LIABILITIES 
  
Accounts payable$30,624
 $26,161
Accrued insurance28,462
 28,018
Accrued compensation and related liabilities64,610
 73,016
Unearned revenues117,934
 109,029
Other current liabilities57,443
 58,345
Total current liabilities299,073
 294,569
Accrued insurance, less current portion34,787
 34,245
Long-term accrued liabilities54,073
 50,925
Total liabilities387,933
 379,739
Commitments and Contingencies

 

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

 

Common stock, par value $1 per share; 375,000,000 shares authorized, 218,186,439 and 217,992,177 shares issued and outstanding, respectively218,186
 217,992
Paid in capital75,079
 81,405
Accumulated other comprehensive loss(48,908) (45,956)
Retained earnings418,406
 400,483
Total stockholders’ equity662,763
 653,924
Total liabilities and stockholders’ equity$1,050,696
 $1,033,663

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

2

ROLLINS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 2016
2017
(in thousands per except share data)
(unaudited)
 Three Months Ended
March 31,
 2018 2017
REVENUES 
  
Customer services$408,742
 $375,247
COSTS AND EXPENSES 
  
Cost of services provided206,143
 189,163
Depreciation and amortization16,916
 13,771
Sales, general and administrative126,487
 115,154
Gain on sale of assets, net(56) (26)
Interest expense / (income), net58
 (73)
INCOME BEFORE INCOME TAXES59,194
 57,258
PROVISION FOR INCOME TAXES10,669
 16,988
NET INCOME$48,525
 $40,270
NET INCOME PER SHARE - BASIC AND DILUTED$0.22
 $0.18
DIVIDENDS PAID PER SHARE$0.14
 $0.12
Weighted average participating shares outstanding - basic and diluted218,163
 217,971

(unaudited)

  Three Months Ended 
  March 31, 
  2017  2016 
REVENUES        
Customer services $375,247  $352,736 
COSTS AND EXPENSES        
Cost of services provided  189,163   177,802 
Depreciation and amortization  13,771   11,640 
Sales, general and administrative  115,154   112,255 
Gain on sale of assets, net  (26)  (89)
Interest income, net  (73)  (50)
INCOME BEFORE INCOME TAXES  57,258   51,178 
PROVISION FOR INCOME TAXES  16,988   19,250 
NET INCOME $40,270  $31,928 
NET INCOME PER SHARE - BASIC AND DILUTED $0.18  $0.15 
DIVIDENDS PAID PER SHARE $0.115  $0.10 
         
Weighted average participating shares outstanding -basic and diluted  217,971   218,686 

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

3

ROLLINS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 20172018 AND 2016
2017
(in thousands)
(unaudited)

  Three Months Ended 
  March 31, 
  2017  2016 
NET INCOME $40,270  $31,928 
Other comprehensive earnings (loss), net of tax        
Foreign currency translation adjustments  4,007   9,892 
Other comprehensive earnings (loss)  4,007   9,892 
Comprehensive earnings $44,277  $41,820 

 Three Months Ended
March 31,
 2018 2017
NET INCOME$48,525
 $40,270
Other comprehensive earnings (loss), net of tax 
  
Foreign currency translation adjustments(2,952) 4,007
Other comprehensive earnings (loss)(2,952) 4,007
Comprehensive earnings$45,573
 $44,277
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

ROLLINS, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Rollins, Inc. and Subsidiaries

(In thousands) (unaudited)

 Common Stock Paid- 
Accumulated
Other
Comprehensive
 Retained  
 Shares Amount In-Capital Income / (Loss) Earnings Total
Balance at December 31, 2016217,792
 $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 Compensation434
 434
 11,965
 —
 —
 $12,399
Employee Stock Buybacks(234) (234) (8,012) —
 —
 $(8,246)
Balance at December 31, 2017217,992
 217,992
 81,405
 (45,956) 400,483
 653,924
Net Income 
  
  
  
 48,525
 48,525
Other Comprehensive Income, Net of Tax 
  
  
  
  
  
Foreign Currency Translation Adjustments—
 —
 —
 (2,952) —
 (2,952)
Cash Dividends—
 —
 —
 —
 (30,602) (30,602)
Stock Compensation377
 377
 2,716
 —
 —
 3,093
Employee Stock Buybacks(183) (183) (9,042) —
 —
 (9,225)
Balance at March 31, 2018218,186
 218,186
 75,079
 (48,908) 418,406
 662,763
 
                 Accumulated       
                 Other       
  Common Stock  Treasury  Paid-  Comprehensive  Retained    
  Shares  Amount  Shares  Amount  In-Capital  Income / (Loss)  Earnings  Total 
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                          40,270   40,270 
                                 
Other Comprehensive Income, Net of Tax                                
Foreign Currency Translation Adjustments   —    —    —    —    —   4,007    —   4,007 
Cash Dividends  —   —    —    —    —   —   (25,058)  (25,058)
Stock Compensation  435   435    —    —   2,832   —   —   3,267 
Employee Stock Buybacks  (218)  (218)  —   —   (7,262)  —   —   (7,480)
Balance at March 31, 2017  218,009   218,009   —   —   73,022   (66,068)  358,588   583,551 

(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.

5

ROLLINS, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(in thousands)
(unaudited)

  Three Months Ended 
  March 31, 
  2017  2016 
OPERATING ACTIVITIES        
Net income $40,270  $31,928 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization  13,771   11,640 
Provision for deferred income taxes  5,462   4,167 
Provision for bad debts  61   610 
Stock - based compensation expense  3,267   3,325 
Excess tax benefits from share-based payments  —   (3,019)
Other, net  (130)  2 
Changes in operating assets and liabilities  (4,654)  (7,309)
Net cash provided by operating activities  58,047   41,344 
INVESTING ACTIVITIES        
Cash used for acquisitions of companies, net of cash acquired  (3,020)  (21,109)
Purchases of equipment and property  (5,454)  (8,956)
Proceeds from sales of franchises  168   37 
Other  61   93 
Net cash used in investing activities  (8,245)  (29,935)
FINANCING ACTIVITIES        
Cash paid for common stock purchased  (7,480)  (8,779)
Dividends paid  (25,058)  (21,855)
Excess tax benefits from share-based payments  —   3,019 
Net cash used in financing activities  (32,538)  (27,615)
Effect of exchange rate changes on cash  2,429   12,870 
Net increase/(decrease) in cash and cash equivalents  19,693   (3,336)
Cash and cash equivalents at beginning of period  142,785   134,574 
Cash and cash equivalents at end of period $162,478  $131,238 

(in thousands)
(unaudited)
 Three Months Ended
March 31,
 2018 2017
OPERATING ACTIVITIES 
  
Net income$48,525
 $40,270
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Depreciation and amortization16,916
 13,771
Provision for deferred income taxes4,101
 5,462
Provision for bad debts932
 61
Stock - based compensation expense3,093
 3,267
Other, net(1,195) (130)
Changes in operating assets and liabilities376
 (5,930)
Net cash provided by operating activities72,748
 56,771
INVESTING ACTIVITIES 
  
Cash used for acquisitions of companies, net of cash acquired(43,154) (3,020)
Purchases of equipment and property(6,134) (5,454)
Proceeds from sales of franchises177
 168
Other76
 61
Net cash used in investing activities(49,035) (8,245)
FINANCING ACTIVITIES 
  
Cash paid for common stock purchased(9,225) (7,480)
Dividends paid(30,602) (25,058)
Net cash used in financing activities(39,827) (32,538)
Effect of exchange rate changes on cash(6,617) 3,705
Net increase/(decrease) in cash and cash equivalents(22,731) 19,693
Cash and cash equivalents at beginning of period107,050
 142,785
Cash and cash equivalents at end of period$84,319
 $162,478
The accompanying notes are an integral part of these condensed consolidated financial statements. 

6

ROLLINS, INC. AND SUBSIDIARIES




NOTE 1.BASIS OF PREPARATION AND OTHER

NOTE 1.    BASIS OF PREPARATION AND OTHER
Basis of Preparation -The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. There has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Annual Report on Form 10-K of Rollins, Inc. (the “Company”) for the year ended December 31, 2016.2017 other than updates related to Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) as noted below. Accordingly, the quarterly condensed consolidated financial statements and related disclosures herein should be read in conjunction with the 20162017 Annual Report on Form 10-K.

The preparation of interim financial statements requires management to make estimates and assumptions for the amounts reported in the condensed consolidated financial statements. Specifically, the Company makes estimates in its interim condensed consolidated financial statements for the termite accrual which includes future costs including termiticide life expectancy and government regulations, the insurance accrual which includes self-insurance and worker’s compensation, inventory adjustments, discounts and volume incentives earned, among others.

In the opinion of management, all adjustments necessary for a fair presentation of the Company’s financial results for the interim periods have been made. These adjustments are of a normal recurring nature. The results of operations for the three month period ended March 31, 20172018 are not necessarily indicative of results for the entire year.

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.


NOTE 2.RECENT ACCOUNTING PRONOUNCEMENTS

Recently adopted accounting standards

In March 2016,

NOTE 2.    RECENT ACCOUNTING PRONOUNCEMENTS
Revenue
Service Revenue and Other Revenue
Rollins’ revenues are sourced primarily from the FASB issued ASU No. 2016-09, Improvementssale of pest control and other protection services to Employee Share-Based Payment Accounting,residential and commercial consumers.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, each of which involve several aspectsare distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Nature of Goods and Services and Performance Obligations
The Company contracts with its customers to provide the following goods and services, each of which is a distinct performance obligation:
Pest control services - Rollins provides pest control services to protect residential and commercial properties from common pests, including rodents and insects. Pest control generally consists of assessing a customer’s property for conditions that invite pests, tackling current infestations, and stopping the life cycle to prevent future invaders. Revenue from pest control services is recognized as services are rendered.
The Company’s revenue recognition policies are designed to recognize revenues upon transfer of control at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. The Company defers recognition of advance payments and recognizes the revenue as the services are rendered. The Company classifies discounts related to the advance payments as a reduction in revenues.
Termite control services (including traditional and baiting) - Rollins provides both conventional and baiting termite protection services. Traditional termite protection uses “Termidor” liquid treatment and/or dry foam and Orkin foam to treat voids and spaces

ROLLINS, INC. AND SUBSIDIARIES


around the property, while baiting termite protection uses baits to disrupt the molting process termites require for share-based payment transactions, includinggrowth and offers ongoing protection. Revenue from initial termite treatment services is recognized as services are provided.
Maintenance/monitoring/inspection - In connection with the income tax consequences, classificationinitial service offerings, Rollins provides recurring maintenance, monitoring or inspection services to help protect consumer’s property for any future sign of awardstermite activities after the original treatment. This recurring service is a service-type warranty under ASC 606 as either equityit is routinely sold and purchased separately from the initial treatment services and is typically purchased or liabilities, and classificationrenewed annually.
Termite baiting revenues are recognized based on the statementtransfer of cash flows. Somecontrol of the areas for simplification apply only to nonpublic entities. The amendments in this update are effectiveindividual 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 Company’s financial statements issuedinstallation 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 that depicts the Company's performance in transferring control of the service. The allocation of the purchase price to the two deliverables is based on the relative stand-alone selling price. There are no contingencies related to the delivery of additional items or meeting other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual periods beginning after December 15, 2016,contract period on a straight-line basis that depicts the Company's performance in transferring control of the service.
Revenue received for conventional termite renewals is deferred and interim periods within annual periods.recognized on a straight-line basis over the remaining contract term that depicts the Company's performance in transferring control of the service; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company adopted this standard duringaccrues for noticed claims. The costs of providing termite services upon renewal are compared to the quarterexpected revenue to be received and a provision is made for any expected losses.
Miscellaneous services (e.g., cleaning, etc.) - In certain agreements with customers, Rollins may offer other miscellaneous services, including restroom cleaning (e.g., eliminating foul odors, grease and grime which could attract pests), training (e.g., seminar covering Good Manufacturing Practices and product stewardship), etc. Revenue from miscellaneous services is recognized when services are provided.
Products - Depending on customer demand, Rollins may separately sell pest control and/or termite protection products, such as baits. Revenue from product sales is recognized upon transfer of control of the asset.
Equipment rental (or lease) - Depending on customer demand, Rollins may lease certain pest control and/or termite protection equipment. Revenue from equipment rentals are recognized over the period of the rental/lease. Revenue from equipment rentals are not material and represent less than 1.0% of the Company's revenues for each reported period.
Right to access intellectual property (Franchise) - The right to access Rollins’ intellectual property is an essential part of Orkin’s franchising agreements. These agreements provide the franchisee (the customer) a license to use the Rollins’ name and trademark when advertising and selling services to end customers in their normal course of business. Orkin Franchise agreements contain a clause allowing Orkin to purchase certain assets of the franchisee. This is only an offer for Orkin to re-purchase the assets originally provided by Orkin to the franchisee and is not a performance obligation or a form of consideration. International and domestic franchising revenue was less than 0.5% of the Company’s annual revenues.
All Orkin domestic franchises have a guaranteed repurchase clause that the Orkin franchise may be repurchased by Orkin at a later date once it has been established. Deferred Orkin franchise fees of $3.4 million at both March 31, 2018 and December 31, 2017 were not material to the Company's financial statements.
Royalties from Orkin franchises are accrued and recognized as revenues are earned on a monthly basis. Revenue from franchises was $2.4 million for each of the three month periods ended March 31, 2018 and 2017, respectively.
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. The balance of long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 million as of March 31, 2018. As of December 31, 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $20.4 million and applied these provisions prospectively. See Management’s Discussionare included in financed receivables as a long-term asset on our consolidated statements of financial position.

ROLLINS, INC. AND SUBSIDIARIES


The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and Analysisother currently available evidence. Activity in the allowance for a summarydoubtful accounts was as follows:
(In thousands)
Three Months ended March 31, 2018
Balance at December 31, 2017$14,706
Charged to costs and expenses932
Net (deductions) recoveries(2,115)
Balance at March 31, 2018$13,523
Unearned revenue is comprised mainly of unearned revenue related to the Company’s termite baiting offering and year-in-advance pest control services for which we have been paid in advance and earn the revenue when we transfer control of the impactproduct or service.
Refer to Note 7 - Unearned Revenue for further information, including changes in unearned revenue during the period.
Payment terms and conditions vary by contract type, although terms generally include a requirement of such adoption.

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

Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Recently issued accounting standards to be adopted in 20172018 or later

REVENUE RECOGNITION:

In June of 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The Financial Accounting Standards Boardupdated 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 International Accounting Standards Boardannual 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 their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduceASU 2016-02, Leases (Topic 842). In September 2017, the complexity inherent in today’s revenue recognition guidance. The various ASUs related toFASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606) have been listed below:

·ASU No. 2014-09. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five step process.
·ASU No. 2015-14. Deferred the effective date of ASU 2014-09 for all entities by one year to the first quarter of 2018 with early application permitted.
·ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments provide, Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on whether an entity is a principal or agent when providing services to a customer along with another party.
·ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments clarify the earlier guidance on identifying performance obligations and licensing implementation.
·ASU No. 2016-11, Rescission of SEC Guidance Because of ASUs 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. This ASU rescinds certain SEC guidance related to issues that are currently codified under various topics.
·ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients. The amendments provide clarifying guidance on certain aspects of the five step process and practical expedients regarding the effect of modifications and status of completed contracts under legacy GAAP and disclosures related to the application of this guidance using the modified retrospective or retrospective transition method.
7

ROLLINS, INC. AND SUBSIDIARIES

·ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 and includes among others, loan guarantees, impairment testing of contract costs, performance obligations disclosures and accrual of advertising costs.

Current Status of implementation:
The Company is currently analyzing the effect of the standard across all of its revenue streams to evaluate the impact of the new standard on revenue contracts. This includes reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements under the new standard. Most of the Company’s services are primarily short-term in nature, and the assessment at this stage is that the Company does not expect the adoption of the new revenue recognition standard to have a material impact on its financial statements. The Company plans to adopt the standard in the first quarter of 2018 using the modified retrospective method by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. The Company intends to engage a consultant to assist the Company with implementation of this standard.

In February 2016, the FASBpreviously issued ASU No. 2016-02 Leases which require lessees(Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with lease terms of moregreater than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. The amendments in this update are effective for the Company’s financial statements issued for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

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

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

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

In February 2017, the FASB issued Accounting Standards Update No. 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting (“ASU 2017-06”). ASU 2017-06 relates primarily to the reporting by an employee benefit plan (a plan) for its interest in a master trust. A master trust is a trust for which a regulated financial institution (bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency) serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. Under Topic 960, investments in master trusts are presented in a single line item in the statement of net assets available for benefits. Similar guidance is not provided in Topic 962 or 965, which has resulted in diversity in practice. For each master trust in which a plan holds an interest, the amendments in ASU 2017-06 require a plan’s interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in ASU 2017-06 are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.  An entity should apply the amendments in ASU 2017-06 retrospectively to each period for which financial statements are presented. We do not expect this standard to have a material impact on the Company’s reported results of operations or financial position.

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ROLLINS, INC. AND SUBSIDIARIES

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement 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 2017-072016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,2018, and early adoption is permitted. We doBased 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 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 expect this standardexpected to have a material impact on the Company's consolidated financial statements.





ROLLINS, INC. AND SUBSIDIARIES


NOTE 3.    REVENUE
Adoption of ASC Topic 606, "Revenue from Contracts with Customers" On January 1, 2018, and the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
There was no impact on the Company’s reported resultsfinancial statements as a result of operationsadopting Topic 606 for the three months ended March 31, 2018 and 2017, or financial position.

the twelve months ended December 31, 2017.
The following tables present our revenues disaggregated by revenue source (in thousands, unaudited).
Sales and usage-based taxes are excluded from revenues. No sales to an individual customer or country other than the United States accounted for more than 10% of the three months ended March 31, 2018 and 2017, respectively. Revenue, classified by the major geographic areas in which our customers are located, was as follows:

 (in thousands)
 Three Months Ended
 March 31,
 2018
 2017
United States$375,959
 $345,580
Other countries32,783
 29,667
Total Revenues$408,742
 $375,247

Revenue from external customers, classified by significant product and service offerings, was as follows:
 (in thousands)
 Three Months Ended
 March 31,
 2018
 2017
Residential contract revenue$144,197
 $132,344
Commercial contract revenue132,079
 124,833
Termite completions, bait monitoring, & renewals76,491
 65,652
Other revenues55,975
 52,418
Total Revenues$408,742
 $375,247

NOTE 3.4.    EARNINGS PER SHARE

The Company follows ASC 260,Earnings Per Share (ASC 260) that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to participating common stockholders by the weighted average number of participating common shares outstanding for the period.

Basic and diluted earnings per share attributable to common and restricted shares of common stock for the period were as follows:

  Three Months Ended 
  March 31, 
  2017  2016 
Basic and diluted earnings per share        
Common stock $0.18  $0.15 
Restricted shares of common stock $0.18  $0.15 

 Three Months Ended
March 31,
 2018 2017
Basic and diluted earnings per share 
  
Common stock$0.22
 $0.18
Restricted shares of common stock$0.22
 $0.18

NOTE 4.5.    CONTINGENCIES

In the normal course of business, certain of the Company’s subsidiaries are defendants in a number of lawsuits, claims or arbitrations which allege that the subsidiaries’ services caused damage.  In addition, the Company defends employment related cases and

ROLLINS, INC. AND SUBSIDIARIES


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. 

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

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

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

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ROLLINS, INC. AND SUBSIDIARIES

NOTE 5.              FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 6.    FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, trade receivables, notes receivable, accounts payable and other short-term liabilities. The carrying amounts of these financial instruments approximate their fair values.  The Company has 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. There were no outstanding borrowings at March 31, 20172018 and December 31, 2016.

2017. 

NOTE 7.     UNEARNED REVENUE
Changes in unearned revenue were as follows:
(In thousands)
Three Months ended March 31, 2018
Balance at December 31, 2017$117,614
Deferral of unearned revenue47,725
Recognition of unearned revenue(38,809)
Balance at March 31, 2018126,530
  
Year ended December 31, 2017 
Balance at December 31, 2016$106,323
Deferral of unearned revenue140,019
Recognition of unearned revenue(128,728)
Balance at December 31, 2017117,614

Deferred revenue recognized in the three month period ended March 31, 2018 and March 31, 2017 were $38.8 million and $32.6 million, respectively.
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. The Company has no material contracted not recognized revenue as of March 31, 2018 or December 31, 2017.
At March 31, 2018 and December 31, 2017, the Company had long-term unearned revenue of $8.6 million. Unearned short-term revenue is recognized over the next 12 month period. The majority of unearned long-term revenue is recognized over a period of five years or less with immaterial amounts recognized through 2025.

NOTE 6.              STOCKHOLDERS’ EQUITY

NOTE 8.    STOCKHOLDERS' EQUITY
During the three months ended March 31, 20172018, the Company paid $25.0$30.6 million or $0.115$0.14 per share in cash dividends compared to $21.9$25.1 million or $0.10$0.115 per share during the same period in 2016.

The2017.

During the first quarter ended March 31, 2018 and during the same period in 2017 the Company did not repurchase shares of its common stock fromon the open market duringmarket.
The Company also repurchases shares from employees for the first three monthspayment of 2017 compared to the repurchase of approximately 54,000 shares at a weighted average price of $24.77 during the first three months of 2016.

taxes on vesting restricted shares. The Company repurchased $7.5$9.2 million and $7.4$7.5 million of common stock for the three monthsquarter ended March 31, 20172018 and 2016,2017, respectively, from employees for the payment of taxes on vesting restricted shares.


ROLLINS, INC. AND SUBSIDIARIES


As more fully discussed in Note 15 of the Company’s notes to the consolidated financial statements in its 20162017 Annual Report on Form 10-K, stock options, time lapse restricted shares (TLRS’s) and restricted stock units have been issued to officers and other management employees under the Company’s Employee Stock Incentive Plans.  The Company issues new shares from its authorized but unissued share pool. At March 31, 2017,2018, approximately 4.33.9 million shares of the Company’s common stock were reserved for issuance.

Time Lapse Restricted Shares and Restricted Stock Units

The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense:

  Three Months Ended 
  March 31, 
(in thousands) 2017  2016 
Time lapse restricted stock:        
Pre-tax compensation expense $3,267  $3,325 
Tax benefit  (1,264)  (1,287)
Restricted stock expense, net of tax $2,003  $2,038 

 Three Months Ended
March 31,
(in thousands)2018 2017
Time lapse restricted stock: 
  
Pre-tax compensation expense$3,093
 $3,267
Tax benefit(786) (1,264)
Restricted stock expense, net of tax$2,307
 $2,003
The Company adopted the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accountingduring its first quarter of 2017. Accordingly, the Company did not recognize a deferred tax benefit for the first quarter of 2017. A deferred tax benefit of $3.0 million was recognized during the 1st quarter ended March 31, 2016 and a deferred tax benefit of approximately $3.7 million was recognized for the year ended December 31, 2016, related to the vesting of restricted shares which have been recorded as increases to paid-in capital.

The following table summarizes information on unvested restricted stock outstanding as of March 31, 2017:

  Number of
Shares		  Weighted-Average
Grant-Date Fair
Value		 
Unvested Restricted Stock Units at December 31, 2016  2,261  $20.21 
Forfeited  (13)  22.03 
Vested  (626)  16.87 
Granted  448   33.80 
Unvested Restricted Stock Units at March 31, 2017  2,070  $24.15 

2018:

 
Number of
Shares
 
Average Grant-
Date Fair
Value
Unvested Restricted Stock at December 31, 20172,017
 $24.50
Forfeited(5) 18.68
Vested(586) 19.69
Granted384
 47.88
Unvested Restricted Stock at March 31, 20181,810
 $31.00
At March 31, 20172018 and December 31, 2016,2017, the Company had $41.6$48.1 million and $29.9$32.9 million of total unrecognized compensation cost, respectively, related to time-lapse restricted shares that are expected to be recognized over a weighted average period of approximately 4.14.5 years and 3.83.9 years, respectively.

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ROLLINS, INC. AND SUBSIDIARIES

NOTE 7.              PENSION AND POST RETIREMENT BENEFIT PLANS

NOTE 9.    PENSION AND POST RETIREMENT BENEFIT PLANS

The following table represents the net periodic pension benefit costs and related components in accordance with FASB ASC 715 “Compensation - Retirement Benefits”:

Components of Net Pension Benefit Gain      
  Three Months Ended 
  March 31, 
(in thousands) 2017  2016 
Interest and service cost $2,138  $2,350 
Expected return on plan assets  (3,342)  (3,305)
Amortization of net loss  830   816 
Net periodic benefit $(374) $(139)

Components of Net Pension Benefit Gain
 Three Months Ended
March 31,
(in thousands)2018 2017
Interest and service cost$1,995
 $2,138
Expected return on plan assets(3,443) (3,342)
Amortization of net loss826
 830
Net periodic benefit$(622) $(374)

During the three months ended March 31, 20172018 and the same period in 20162017 the Company made no contributions respectively to its defined benefit retirement plans (the “Plans”). The Company made $3.3 million inno contributions for the year ended December 31, 2016.2017. The Company is planningadequately funded on makingits Pension Plans and is not expecting to make further contributions to the Plans during the fiscal year ending December 31, 2017 of approximately $5.5 million.

in 2018.

NOTE 8.              BUSINESS COMBINATIONS

NOTE 10.    BUSINESS COMBINATIONS
The Company made five16 acquisitions during the three month period ended March 31, 2017,2018, and 3423 acquisitions for the year ended December 31, 2016,2017, respectively, assome of which have been disclosed on various press releases and related Current Reports on Form 8-Ks.

8-K.

On August 1, 2017, the Company completed the acquisition of Northwest Exterminating Co., Inc. Northwest has 23 offices in 5 southeastern states and was the nation’s 17th largest pest management company. Northwest performs services for approximately

ROLLINS, INC. AND SUBSIDIARIES


120,000 customers and will continue to operate as a separate business, as one of Rollins’ Specialty Brands, along with HomeTeam Pest Defense, Western Pest Services and Waltham Pest Services.

On February 28, 2018, the Company announced that it has purchased the stock of AMES Group Limited and Kestrel Pest Control Limited, both companies operating in the UK. AMES Group Limited is a long established pest control company, with a rich history of providing superior pest control, bird control, and specialist services to commercial customers throughout the midlands and including London. Kestrel Pest Control provides superior commercial pest control to customers in South Hampton and surrounding areas of the Southwest. Kestrel Pest Control will merge with our Safeguard UK brand.

On March 1, 2018, the Company announced that it had completed its acquisition of OPC Services. OPC Services will continue to operate as a separate business, and one of Rollins' Specialty Brands, along with HomeTeam Pest Defense, Northwest Exterminating, Western Pest Services and Waltham Pest Services.

The preliminary values of major classes of assets acquired and liabilities assumed recorded at the date of acquisition, as adjusted during the valuation period, are included in the reconciliation of the total consideration as follows (in thousands):

  March 31, 
  2017 
Accounts receivable $136 
Materials and supplies  78 
Equipment and property  185 
Customer contracts  3,291 
Other intangible assets  9 
Current liabilities  (700)
Other assets and liabilities, net  21 
Total cash purchase price $3,020 

 March 31, 2018
Accounts Receivable$1,536
Current Assets273
Equipment and property3,591
Goodwill33,613
Customer Contracts and other intangible assets18,225
Current liabilities(9,310)
Long-term liabilities(490)
Total consideration paid$47,438
Less:  Contingent consideration liability(4,284)
Total cash purchase price$43,154

Goodwill from acquisitions represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $257.6$364.6 million and $255.7$346.5 million at March 31, 20172018 and December 31, 2016,2017, respectively. Goodwill generally changes due to the timing of acquisitions, finalization of allocation of purchase prices of previous acquisitions and foreign currency translations. The carrying amount of goodwill in foreign countries was $44.6$46.5 million at March 31, 20172018 and $42.7$46.3 million at December 31, 2016.

2017.

The Company completed its most recent annual impairment analysesanalysis as of September 30, 2016.2017. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.

The carrying amount of customer contracts was $115.3$176.4 million and $117.5$152.9 million at March 31, 20172018 and December 31, 2016, respectively,2017, respectively. The carrying amount of trademarks and thetradenames was $50.2 million and $50.0 million at March 31, 2018 and December 31, 2017, respectively. The carrying amount of other intangible assets was $43.8$11.4 million and $44.3$11.6 million at March 31, 20172018 and December 31, 2016,2017, respectively. The carrying amount of customer contracts in foreign countries was $30.9$33.0 million and $29.7$29.8 million at March 31, 20172018 and December 31, 2016, respectively2017, respectively. The carrying amount of trademarks and thetradenames in foreign countries was $1.7 million at March 31, 2018 and December 31, 2017, respectively. The carrying amount of other intangible assets in foreign countries was $3.8$1.6 million and $1.7 million at both March 31, 20172018 and December 31, 2016.

11
2017, respectively.

ROLLINS, INC. AND SUBSIDIARIES

Customer contracts and other amortizable intangible assets are amortized on a straight-line basis over their economic useful lives. The following table sets forth the components of intangible assets as of March 31, 20172018 (in thousands):

  Carrying  Useful Life 
Intangible Asset Value  in Years 
Customer contracts $115,262    3 - 12.5 
Trademarks and tradenames  32,607    0 - 20 
Non-compete agreements  4,383    3 - 20 
Patents  2,950   15 
Other assets  1,617   10 
Internet domains  2,227    n/a 
Total customer contracts and other intangible assets $159,046     
Intangible Asset 
Carrying
Value
 
Useful Life
in Years
Customer contracts $176,447
 3 - 12
Trademarks and tradenames 50,198
 0 - 20
Non-compete agreements 4,054
 3 - 20
Patents 2,405
 3 - 15
Other assets 2,752
 10
Internet domains 2,227
 n/a
Total customer contracts and other intangible assets $238,083
  

ROLLINS, INC. AND SUBSIDIARIES



NOTE 9.11.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

Hedges of Foreign Exchange Risk

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

The Company does not currently designate any of these foreign exchange forwards under hedge accounting, but rather reflects the changes in fair value immediately in earnings. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a gain of $30,000$147,000 for the quarter ended March 31, 20172018 and a lossgain of $469,000$30,000 for the three months ended March 31, 2016.same quarter in the prior year. As of March 31, 2017,2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (in thousands except for number of instruments):

Non-Designated Derivative Summary
  Number of
Instruments		  Sell
Notional		  Buy
Notional		 
FX Forward Contracts            
Sell AUD/Buy USD Fwd Contract  6  $1,275  $960 
Sell CAD/Buy USD Fwd Contract  8  $8,150  $6,179 
Total  14      $7,139 
12

Non-Designated Derivative Summary
 
Number of
Instruments
 
 Sell Notional
 
 Buy Notional
FX Forward Contracts 
  
  
Sell AUD/Buy USD Fwd Contract3
 $550
 $425
Sell CAD/Buy USD Fwd Contract6
 $4,800
 $3,808
Total9
 $—
 $4,233
ROLLINS, INC. AND SUBSIDIARIES

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 20172018 and December 31, 20162017 (in thousands):

  Tabular Disclosure of Fair Values of Derivative Instruments 
  Derivatives Asset  Derivative Liabilities 
  Fair Value as of: 
  March 31,  December 31,  March 31,  December 31, 
  2017  2016  2017  2016 
Designated as Hedging Instruments                
FX Forward Contracts                
Balance Sheet Location  Other
Assets		   Other
Assets		   Other
Current
Liabilities		   Other
Current
Liabilities		 
Sell AUD/Buy USD Fwd Contract $0  $0  $8  $0 
Sell CAD/Buy USD Fwd Contract $36  $0  $13  $0 
Total $36  $0  $21  $0 

 Tabular Disclosure of Fair Values of Derivative Instruments
 Derivatives Asset Derivative Liabilities
   Fair Value as of:  
 March 31, 2018 December 31, 2017 March 31, 2018 December 31, 2017
Derivatives Not Designated as Hedging Instruments       
FX Forward Contracts       
Balance Sheet Location       
 Other Assets Other Assets 
Other Current
Liabilities
 
Other Current
Liabilities
Sell AUD/Buy USD Fwd Contract$2
 $—
 $—
 $(9)
Sell CAD/Buy USD Fwd Contract$73
 $—
 $—
 $(61)
Total$75
 $—
 $—
 $(70)

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of March 31, 20172018 and March 31, 20162017 (in thousands):

      
  Effect of Derivative Instruments on the Income Statement
for Derivatives Not Designated as Hedging Instruments for the
Three Months Ended March 31, 2017 and 2016		 
    Amount of Gain or (Loss) 
  Location of Gain or Recognized in Income 
Derivatives Not Designated as
Hedging Instruments		 (Loss) Recognized 
in Income		 Three Months Ended
March 31,		 
    2017  2016 
Sell AUD/Buy USD Fwd Contract Other Inc/Exp $(8) $(35)
Sell CAD/Buy USD Fwd Contract Other Inc/Exp  38   (545)
Total   $30  $(580)


ROLLINS, INC. AND SUBSIDIARIES


Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated
as Hedging Instruments for the Three Months Ended March 31, 2018 and 2017
Derivatives Not Designated as
Hedging Instruments
Location of Gain or
(Loss) Recognized in Income
 Amount of Gain or
(Loss) Recognized
in Income
Three Months Ended
March 31,
   2018 2017
Sell AUD/Buy USD Fwd ContractOther Inc/(Exp) $11
 $(8)
Sell CAD/Buy USD Fwd ContractOther Inc/(Exp) 136
 38
Total  $147
 $30

The table below presents the total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions at March 31, 20172018 (in thousands):

  Recurring Fair Value Measurements 
  Quoted Prices in Active                   
  Markets for Identical  Significant Other  Significant       
  Assets and Liabilities  Observable Inputs  Unobservable Inputs       
  (Level 1)  (Level 2)  (Level 3)  Total Fair Value at As of 
  March 31,  March 31,  March 31,  March 31, 
  2017  2016  2017  2016  2017  2016  2017  2016 
Assets                                
Derivative Financial Instruments $0  $0  $36  $0  $0  $0  $36  $0 
Liabilities                                
Derivative Financial Instruments $0  $0  $(21) $(469)  $0  $0  $(21) $(469)

 Recurring Fair Value Measurements
 Quoted Prices in Active            
 
Markets for Identical
Assets and Liabilities
 
Significant Other
Observable Inputs
 
Significant
Unobservable Inputs
    
 (Level 1)
March 31,		 (Level 2)
March 31,		 (Level 3)
March 31,		 Total Fair Value at
As of
March 31,
 2018 2017 2018 2017 2018 2017 2018 2017
Assets 
  
  
  
  
  
  
  
Derivative Financial Instruments$—
 $—
 $75
 $36
 $—
 $—
 $75
 $36
Liabilities 
  
  
  
  
  
  
  
Derivative Financial Instruments$—
 $—
 $—
 $(21) $—
 $—
 $—
 $(21)
As of March 31, 2017,2018, the fair value of derivatives in a net asset position was $15,000$75,000 inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2017,2018, it could have been required to settle its obligations under the agreements at their termination value of $15,000.

13
$75,000.

ROLLINS, INC. AND SUBSIDIARIES

NOTE 10.12.    SUBSEQUENT EVENTS

On April 25, 2017: Rollins, Inc. (NYSE:ROL), a premier global consumer and commercial services company24, 2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.115$0.14 per share payable June 9, 201711, 2018 to stockholders of record at the close of business May 10, 2017.

2018.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview


On April 26, 2017,25, 2018, the Company reported its 44th48th consecutive quarter of improved revenue and earnings. NetThe Company recorded first quarter revenues of $408.7 million, an increase of 8.9% over the prior year’s first quarter revenue of $375.2 million. Rollins’ net income wasincreased 20.5% to $48.5 million or $0.22 per diluted share for the first quarter ended March 31, 2018, compared to $40.3 million or $0.18 per diluted share for the same period in 2017. The Northern U.S. region experienced major snow storms during the first quarter of 2018, which makes the 48th consecutive quarter of improved earnings all the more encouraging as weather normalizes.

On April 17, the Company announced that it will use part of the savings from the 2017 Tax Cuts and Jobs Act to improve employee benefits. These changes include an enhanced 401(k) match, stock grants, additional paid time off and additional employee scholarship opportunities.

On February 28, 2018, the Company announced that it has purchased the stock of AMES Group Limited and Kestrel Pest Control Limited, both companies operating in the UK. AMES Group Limited is a long established pest control company, with a rich history of providing superior pest control, bird control, and specialist services to commercial customers throughout the midlands and including London. Kestrel Pest Control provides superior commercial pest control to customers in South Hampton and surrounding areas of the Southwest. Kestrel Pest Control will merge with our Safeguard UK brand.


ROLLINS, INC. AND SUBSIDIARIES


On March 1, 2018, the Company announced that it had completed its acquisition of OPC Services. OPC Services will continue to operate as a separate business, and one of Rollins' Specialty Brands, along with HomeTeam Pest Defense, Northwest Exterminating, Western Pest Services and Waltham Pest Services.

Rollins continued its solid financial performance generating $72.7 million in cash from operations year to date. 

Results of Operations:
THREE MONTHS ENDED MARCH 31, 2018 COMPARED TO THREE MONTHS ENDED MARCH 31, 2017

Revenue

Revenues for the first quarter ended March 31, 2018 increased $33.5 million or 8.9% to $408.7 million compared to $375.2 million for the first quarter ended March 31, 2017, as compared to $31.9 million for the prior year quarter, a 26.1% improvement.  Revenues increased by 6.4% to $375.2 million for the first quarter 2017 as compared to $352.7 million for the prior year first quarter.  The Company saw a negative impact on the exchange rate of the Canadian and Australian dollars and British pounds to U.S. dollars reducing revenues and pre-tax earnings by $1.4 million and $1.5 million, in 2017 and 2016, respectively. Earnings for the quarter ended March 31, 2017 increased to $0.18 per diluted share, as compared to $0.15 per diluted share for the same period in 2016.

A portion of the Company’s higher net income was due to a tax benefit of approximately $4.3 million as result of adoption of the Accounting Standards Update (ASU) 2016-09, which was recently issued by the Financial Accounting Standards Board, addressing the accounting of employee share-based payments in the first quarter 2017. Excluding this tax benefits in the first quarter, net income increased approximately 12.7% to $36.0 million or $0.17 per diluted share. See the reconciliation of this non-GAAP measure below.

Reconciliation of Non-GAAP Financial Measure:

Rollins has used the non-GAAP financial measure of earnings excluding the tax benefit of the adoption of ASU 2016-09 addressing the accounting of employee share-based payments. Earnings excluding the tax benefit of the adoption of ASU 2016-09 should not be considered in isolation or as a substitute for operating income, net income or other performance measures prepared in accordance with U.S. GAAP. Rollins uses Earnings excluding the tax benefit of the adoption of ASU 2016-09 as a measure of operating performance because it allows us to compare performance consistently over various periods without regard to changes in our capital structure. A non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that either 1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows, or 2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measure so calculated and presented. Set forth below is a reconciliation of Earnings excluding the tax benefit of the adoption of ASU 2016-09 with Net Income, the most comparable GAAP measure. This reconciliation also appears on Rollins’ investor website, which can be found on the Internet at www.rollins.com.

Periods ended, (Unaudited) Three Months Ended, 
(in thousands except per share data) March 31,
2017		  March 31,
2016		  Increase  % Increase 
Net Income (as reported) $40,270  $31,928  $8,342   26.1%
Less:                
Tax benefit of the adoption of ASU 2016-09  (4,292)  —   (4,292)  N/A 
Earnings excluding the tax benefit of the adoption of ASU 2016-09 $35,978  $31,928  $4,050   12.7%
                 
Earnings per share excluding the tax benefit of the adoption of ASU 2016-09  basic and diluted $0.17  $0.15  $0.02   13.1%
                 
Basic and diluted shares outstanding  217,971   218,686   (715)  -0.3%
14

ROLLINS, INC. AND SUBSIDIARIES

During the quarter, the Company announced that its wholly-owned subsidiary, HomeTeam Pest Defense had performed its one millionth TAEXX Tubes in the Wall® installation. TAEXX is installed while a home is being constructed. HomeTeam has relationships with more than 1,000 home builders nationwide, ranging from the top 10 national home builders to regional and local customer home builders. For most of our national home builder partners, TAEXX is included as a standard feature in their homes. We are proud of HomeTeam and proud to be a part of this accomplishment.

Rollins continued its solid financial performance generating $58.0 million in cash from operations year to date. 

Results of Operations:

THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THREE MONTHS ENDED MARCH 31, 2016

Revenue

Revenues for the first quarter ended March 31, 2017 increased $22.5 million or 6.4% to $375.2 million compared to $352.7 million for the first quarter ended March 31, 2016.  Growth occurred across all service lines. Substantially allApproximately 4.2 percentage points of thisthe 8.9% increase in revenues was due tocame from acquisitions while growth in customers and pricing while approximately 1% ofmade up the increase was attributable to acquisitions made within the last twelve months.

remaining 4.7 percentage points.

The Company has three primary service offerings: commercial pest control, residential pest control and termite, including ancillary services. During the first quarter ended March 31, 2017,2018, commercial pest control revenue approximated 41%40% of the Company’s revenues, residential pest control approximated 41%40% of the Company’s revenues, and termite and ancillary service revenue approximated 18%19% of the Company’s revenues. Comparing first quarter 20172018 to first quarter 2016,2017, the Company’s commercial pest control revenue grew 5.3%5.6%, residential pest control revenue grew 7.0%8.4%, and termite and ancillary services revenue grew 7.5%16.2%. Foreign operations accounted for approximately 8% and 7% of total revenues during the first quarters of both 2018 and 2017, and 2016, respectively.


Revenues are impacted by the seasonal nature of the Company’s pest and termite control services. The increase in pest activity, as well as the metamorphosis of termites in the spring and summer (the occurrence of which is determined by the change in seasons), has historically resulted in an increase in the Company’s revenues as evidenced by the following chart:

Consolidated Net Revenues
(in thousands)
  2017  2016  2015 
First Quarter $375,247  $352,736  $330,909 
Second Quarter  —   411,133   392,150 
Third Quarter  —   423,994   399,746 
Fourth Quarter  —   385,614   362,500 
Year ended December 31, $375,247  $1,573,477  $1,485,305 

Consolidated Net Revenues
(in thousands)
 2018 2017 2016
First Quarter$408,742
 $375,247
 $352,736
Second Quarter—
 433,555
 411,133
Third quarter—
 450,442
 423,994
Fourth Quarter—
 414,713
 385,614
Year ended December 31,$408,742

$1,673,957

$1,573,477

Cost of Services Provided


Cost of Services provided for the first quarter ended March 31, 20172018 increased $11.4$17.0 million or 6.4%,9.0% to $206.1 million, compared to $189.2 million the quarter ended March 31, 2016.2017. Gross margin for the quarter remainedwas flat at 49.6% for the first quarter, compared to the prior year first quarter.quarter gross margin. The margin for the quarter was negatively affected by the severe weather in the Northeast. The Company paid $2.2 million to employees via a 401(k) match that decreased first quarter 2018 gross margin by 1 percentage point. The quarter benefited from improved efficiencies in routing and scheduling technology which also helped to lower service salaries as a percent of revenue. Service salaries were down compared to revenue, but we expect this to rise second quarter with the arrival of spring and summer months. Insurance and claims were lower than prior year as a percent of revenue as there was a decreasewe reduced our exposure in service salaries and administrative salaries as a percent of revenues from the prior year. Personnel related expenses were down as a percent of revenue as group insurance expense was down quarter-over-quarter marginally. Insurance and claims were flat to prior year as we emphasize safety in all areas. Thelitigation. These gains the Company experienced were offset by higher personnel related costs from the aforementioned 401(k) plan Company match. Fleet expenses are up as gasoline expenses as the pricecosts are up an average of $0.25 per gallon rose, leased vehicle costs, and accruedincreased lease expenses. The Company experienced good cost controls across most spending categories.

Bad debt increased as compared to 2017.


Depreciation and Amortization


Depreciation and Amortization expenses for the first quarter ended March 31, 20172018 increased $2.1$3.1 million to $13.8$16.9 million, an increase of 18.3%22.8%. Depreciation increased $0.3 million due to expenditures associated with the 2016 rollout of BOSS as well as acquisitions and equipment purchases while amortization of intangible assets increased $2.8 million due to amortization of customer contracts included in various acquisitions.

several acquisitions which reduced the Company’s earnings per share by approximately $0.01 per diluted share after taxes.



ROLLINS, INC. AND SUBSIDIARIES


Sales, General and Administrative


Sales, General and Administrative Expenses for the first quarter ended March 31, 20172018 increased $2.9$11.3 million or 2.6%9.8%, to 30.7%30.9% of revenues, down 1.1up 0.2 percentage points from 31.8%30.7% for the first quarter ended March 31, 2016.2017.  The decreaseincrease in the percent of revenue is due to lowerhigher administrative salaries as percent of revenues as we maintain a quality support center staff while continuing to grow revenues. The Company experienced reducedand personnel related expenses from lower group insurance costs and reduced telephonedue to acquisitions, fleet costs due to a change of dataincreased gasoline prices, and professional service providers. As planned, the Company experienced increased sales salariescosts related to IT projects. The increases were partially offset by lower insurance and advertising expenses directed toward increased revenue productionclaims expense, due to claims and higher use of outside contractors to develop and maintain the BOSS system, the Company’s customer relationship management system.

15
litigation resolution.

ROLLINS, INC. AND SUBSIDIARIES

Gain on Sale of assets, Net

Gain on sales of assets, net was a net gain of $26,000 for the first quarter ended March 31, 2017, down from $89,000 prior year. The gains were for the sales of Company owned vehicles and equipment.

Income Taxes


Income Taxes for the first quarter ended March 31, 20172018 decreased $2.3$6.3 million or 11.8%37.2% to $17.0$10.7 million from $19.3$17.0 million reported for first quarter ended March 31, 2016. The Company adopted the amendments of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accountingin the first quarter of 2017. Accordingly, excess tax benefits of $4.3 million related to share based payment award transactions were recognized as a component of income tax expense rather than equity. The effective tax rate was 18.0% for the first quarter ended March 31, 2018 and 29.7% for the first quarter ended March 31, 2017 and 37.6% for2017. The decrease in the first quarter ended March 31, 2016effective rate was primarily due to differencesa reduction in the federal income tax credits,rate enacted under the Tax Cuts and Jobs Act of 2017 (the Tax Act). The Tax Act has significant complexities and the Company, under Staff Accounting Bulletin 118, has made certain reasonable estimates that could be adjusted in future periods as required. Implementation guidance from the Internal Revenue Service, clarifications of state tax rateslaw and completion of the adoptionCompany’s 2017 tax return filings could all impact these estimates. The Company does not believe potential adjustments in future periods would materially impact the Company’s financial condition or results of ASU 2016-09.

operations. Management believes that the corporate effective tax rate for 2018 will be in the mid 20% range.


Liquidity and Capital Resources


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 operating activities generated net cash of $58.0$72.7 million and $41.3$56.8 million for the three months ended March 31, 2017,2018, and 2016,2017, respectively. During the three months ended March 31, 20172018 and 2016,the same period in 2017 the Company made no contributionscontribution to its defined benefit retirement plans (the “Plans”).plans. The Company is planningadequately funded on makingits Pension Plans and is not expecting to make further contributions of $5.5 million to the Plans during the fiscal year ending December 31, 2017. In the opinion of management, Plan contributions will not have a material effect on the Company’s financial position, results of operations or liquidity for 2017.

in 2018.

The Company invested approximately $5.5$6.1 million in capital expenditures, exclusive of expenditures for business acquisitions, during the three months ended March 31, 2017,2018, compared to $9.0$5.5 million during the same period in 2016,2017, and expects to invest approximately $22.0 million for the remainder of 2017.2018. Capital expenditures for the first three months consisted primarily of the purchase of operating equipment replacements and technology related projects. During the three months ended March 31, 2017,2018, the Company made expenditures for acquisitions totaling $3.0$43.2 million, compared to $21.1$3.0 million during the same period in 2016.2017. A total of $25.1$30.6 million was paid in cash dividends ($0.1150.14 per share) a 21.7% increase during the first three months of 2017,2018, compared to $21.9$25.1 million or ($0.100.115 per share) during the same period in 2016.2017. On April 25, 2017,24, 2018, the Company announced that the Board of Directors declared a regular quarterly cash dividend on its common stock of $0.115$0.14 per share payable June 9, 201711, 2018 to stockholders of record at the close of business May 10, 20172018 to be funded with existing cash balances. The Company expects to continue to pay cash dividends to common stockholders, subject to the earnings and financial condition of the Company and other relevant factors. The Company did not repurchase shares of its common stock fromon the open market during the first three months of 2017 compared to the repurchase of approximately 54,000 shares at a weighted average price of $24.772018 and during the first three months of 2016.same period in 2017. The Company has had a buyback program in place for a number of years and has routinely purchased shares when it felt the opportunity was desirable. The Board authorized the purchase of 7.5 million additional shares of the Company’s common stock in July 2012. These authorizations enable the Company to continue the purchase of Company common stock when appropriate, which is an important benefit resulting from the Company’s strong cash flows. The stock buy-back program has no expiration date. In total, 5.1 million additional shares may be purchased under the share repurchase program. The Company repurchased $7.5$9.2 million and $7.4$7.5 million of common stock for the three months ended March 31, 20172018 and 2016,2017, respectively, from employees for the payment of taxes on vesting restricted shares. The acquisitions, capital expenditures, share repurchases and cash dividends were funded through existing cash balances and operating activities.

The Company’s balance sheet as of March 31, 20172018 and December 31, 20162017 includes short-term unearned revenues of $104.3$117.9 million and $99.8$109.0 million, respectively, representing approximately 7% of our annual revenue. This represents cash paid to the Company by its customers in advance of services that will be recognized over the next twelve months. The Company’s $162.5$84.3 million of total cash at March 31, 2017,2018, is held at various banking institutions. Approximately $53.2$62.7 million is held in cash accounts at foreign bank institutions and the remaining $109.3$21.6 million is primarily held in non-interest-bearing accounts at various domestic banks. 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 little third-partyfirst-party debt to service. The Company maintains adequate liquidity

ROLLINS, INC. AND SUBSIDIARIES


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

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 Company had no outstanding borrowings under the line of credit or under the swingline subfacility as of March 31, 2017.2018. The Company remained in compliance with applicable debt covenants through the date of this filing and expects to maintain compliance through 2017.

16
2018.

ROLLINS, INC. AND SUBSIDIARIES

Litigation


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. 

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

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

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


Critical Accounting Policies

There have been no changes to the Company’s critical accounting policies since the filing of its Form 10-K for the year ended December 31, 2016.

2017, other than Topic 606.

New Accounting Standards

See Note 2 of the Notes to Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include, without limitation, the effect of the future adoption of recent accounting pronouncements on the Company’s financial statements; statements regarding management’s expectation regarding the effect of the ultimate resolution of pending claims, proceedings or litigation on the Company’s financial position, results of operation and liquidity; the Company’s belief that its current cash and cash equivalent balances, future cash flows expected to be generated from operating activities and available borrowings will be sufficient to finance its current operations and obligations, and fund expansion of the business for the foreseeable future; our expectation that the Company will continue to pay dividends; our intention 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 and that repatriation of cash is not a part of the Company’s business plan; possiblethe expectation of no defined benefit retirement plan contributions and their effect on the Company’s financial position, results of operations and liquidity;contributions: the Company’s expectation regarding capital expenditure for the remainder of 2017;2018; the Company's expectations regarding our corporate tax rate for 2018; the expectation of sales salaries to rise in the second quarter; the Company’s expectation to maintain compliance with debt covenants; and the Company’s belief that interest rate exposure and foreign exchange rate risk will not have a material effect on the Company’s results of operations going forward. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, the possibility of an adverse ruling against the Company in pending litigation; general economic conditions; actions taken by our franchisees, subcontractors or vendors that may harm our business; market risk; changes in industry practices or technologies; a breach of data security; the degree of success of the Company’s termite process and pest control selling and treatment methods; damage to our brands or reputation; our ability to protect our intellectual property and other proprietary rights; the Company’s ability to identify and successfully integrate potential acquisitions; climate and weather conditions; competitive factors and pricing practices; our ability to attract and retain skilled workers, and potential increases in labor costs; and changes in various government laws and regulations, including environmental regulations.regulations; and the existence of certain anti-takeover provisions in our governance documents, which could make a tender offer, change in control or takeover attempt that is opposed by the Company’s Board of Directors more difficult or expensive. 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. A more detailed discussion

ROLLINS, INC. AND SUBSIDIARIES


of potential risks facing the Company can be found in the Company’s Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2016.2017. The Company does not undertake to update its forward lookingforward-looking statements.

17

ROLLINS, INC. AND SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2017,2018, the Company maintained an investment portfolio (included in cash and cash equivalents) subject to short-term interest rate risk exposure. The Company is subject to interest rate risk exposure through borrowings on its $175 million credit facility. The Company is also exposed to market risks arising from changes in foreign exchange rates. See note 9Note 11 to Part I, Item 1 for a discussion of the Company’s investments in derivative financial instruments to manage risks of fluctuations in foreign exchange rates. The Company believes that this foreign exchange rate risk will not have a material impact upon the Company’s results of operations going forward. There have been no material changes to the Company’s market risk exposure since the end of fiscal year 2016.

2017.

ITEM 4. CONTROLS AND PROCEDURES

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 our disclosure controls and procedures, as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 20172018 (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation

ROLLINS, INC. AND SUBSIDIARIES


Date to ensure that the information required to be included in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

In addition, management’s quarterly evaluation identified no changes in our internal control over financial reporting during the first quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of March 31, 20172018, we did not identify any material weaknesses in our internal controls, and therefore no corrective actions were taken.


PART II OTHER INFORMATION
Item 1.Legal Proceedings.
See Note 4 to Part I, Item 1 for discussion of certain litigation.
Item 1A.Risk Factors


PART II OTHER INFORMATION

Item 1.        Legal Proceedings

See Note 5 to Part I, Item 1 for discussion of certain litigation.

Item 1A.     Risk Factors

See the Company’s risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  

18
2017.

ROLLINS, INC. AND SUBSIDIARIES


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Shares repurchased by Rollins and affiliated purchases during the first quarter ended March 31, 20172018 were as          follows:

Period Total Number
of shares
Purchased  (1)		  Weighted-Average
Price paid per
Share		  Total number of
shares purchased
as part of publicly
announced
repurchases (2)		  Maximum number of
shares that may yet be
purchased under the
repurchase plans		 
January 1 to 31, 2017  203,443  $34.60   —   5,073,611 
February 1 to 28, 2017  3,260   36.48   —   5,073,611 
March 1 to 31, 2017  11,291   28.57   —   5,073,611 
Total  217,994  $34.31   —   5,073,611 

 
Total Number
of shares
 
Weighted-Average
Price paid per
 
Total number of
shares purchased
as part of publicly
announced
 
Maximum number of
shares that may yet be
purchased under the repurchase plans
PeriodPurchased (1) Share repurchases (2) 
January 1 to 31, 2018165,852
 $49.92
 —
 5,073,611
February 1 to 28, 20183,589
 50.85
 —
 5,073,611
March 1 to 31, 201815,277
 49.87
 —
 5,073,611
Total184,718
 $49.94
 —
 5,073,611
(1)Includes repurchases from employees for the payment of taxes on vesting of restricted shares in the following amounts:January 2017: 203,443;2018: 165,852; February 2017: 3,260;2018: 3,589; and March 2017: 11,2912018: 15,277


(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.

Item 5.Other Information

On April 25, 2017, the Board of Directors of the Company amended the Company’s Restated By-laws (the “By-laws”) to remove provision formerly providing for the payment of costs for specified stockholder actions including a stockholders’ breach of the By-laws or specified intracorporate proceedings in which such stockholder is not the prevailing party. The foregoing summary of the amendment to the By-laws is qualified in its entirety by reference to the text of the By-laws, as amended and restated on the effective April 25, 2017, a copy of which is attached hereto as Exhibit 3(ii).

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ROLLINS, INC. AND SUBSIDIARIES



Item 6.Exhibits.5. Exhibits.
  (a) Exhibits
 (a)Exhibits
      
  (3)    (i)
(A) Restated Certificate of Incorporation of Rollins, Inc. dated July 28, 1981, incorporated herein by reference to Exhibit (3)(i)(A) as filed with the registrant’s Form 10-Q filed August 1, 2005.
 
      
   
(B) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated August 20, 1987, incorporated herein by reference to Exhibit 3(i)(B) filed with the registrant’s 10-K filed March 11, 2005.
 
      
   
(C) Certificate of Change of Location of Registered Office and of Registered Agent dated March 22, 1994, incorporated herein by reference to Exhibit (3)(i)(C) filed with the registrant’s Form 10-Q filed August 1, 2005.
 
     
   

(D) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April 25, 2006, incorporated herein by reference to Exhibit 3(i)(D) filed with the registrant’s 10-Q filed October 31, 2006.

(E) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April, 26, 2011, incorporated herein by reference to Exhibit 3(i)(E) filed with the Registrant’s 10-K filed February 25, 2015.

(F) Certificate of Amendment of Certificate of Incorporation of Rollins, Inc. dated April 28, 2015, incorporated herein by reference to Exhibit 3(i)(F) filed with the Registrant’s 10-Q filed on July 29, 2015.

 
      
  (ii)
Amended and Restated By-laws of Rollins, Inc., incorporated herein by reference to exhibit 3(ii) as filed with its Form 10-Q for the quarter ended March 31, 2017.
    
  (4)

Form of Common Stock Certificate of Rollins, Inc., incorporated herein by reference to Exhibit (4) as filed with its Form 10-K for the year ended December 31, 1998.

    
    (10.1) 
Form of Time-Lapse Restricted Stock Agreement

 (31.1)

Certification of Chief Executive Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  
(31.2)

Certification of Chief Financial Officer Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  
(32.1)

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

2002
 
 (101.INS)XBRL Instance Document
   
 

(101.SCH)

XBRL Taxonomy Extension Schema Document

(101.CAL) 

XBRL Taxonomy Extension Calculation Linkbase Document      
   
 (101.CAL)XBRL Taxonomy Extension Calculation Linkbase Document
 (101.DEF)XBRL Taxonomy Extension Definition Linkbase Document
   
 

(101.LAB)

XBRL Taxonomy Extension Label Linkbase Document
   
 

(101.PRE)

XBRL Taxonomy Extension Presentation Linkbase Document
20+Confidential treatment has been requested for certain portions of this exhibit (indicated by asterisks). Such information has been omitted and was filed separately with the securities and Exchange Commission.


ROLLINS, INC. AND SUBSIDIARIES



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  ROLLINS, INC. 
 ROLLINS, INC.(Registrant)
 (Registrant)
   
Date: April 28, 201727, 2018By:/s/ Gary W. Rollins
  Gary W. Rollins
  Vice Chairman and Chief Executive Officer
  (Principal Executive Officer)
   
Date: April 28, 201727, 2018By:/s/ Paul E. Northen
  Paul E. Northen
  Vice President, Chief Financial Officer and Treasurer
 Treasurer
  (Principal Financial and Accounting Officer)
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