Rollins, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2017

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



For the years ended December 31,	2017			2016			2015
(in thousands)
Current:
Federal	$	76,178		$	69,102		$	68,667
State	13,406			12,949			11,335
Foreign	7,158			14,464			7,534
Total current tax	96,742			96,515			87,536
Deferred:
Federal	17,249			(5,991		)	1,286
State	1,610			2,892			2,078
Foreign	(223		)	(149		)	129
Total deferred tax	18,636			(3,248		)	3,493
Total income tax provision	$	115,378		$	93,267		$	91,029

The primary factors causing income tax expense to be different than the federal statutory rate for 2017, 2016, and 2015 are as follows:



For the years ended December 31,	2017			2016			2015
(in thousands)
Income tax at statutory rate	$	103,075		$	91,222		$	85,112
State income tax expense (net of federal benefit)	9,979			8,876			8,377
Foreign tax expense/(benefit)	(1,613		)	9,857			(1,729		)
Foreign tax	(221		)	(19,155		)	(2,816		)
Repatriation tax under TCJA	7,956			—			—
Other	(3,798		)	2,467			2,085
Total income tax provision	$	115,378		$	93,267		$	91,029

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

On December 22, 2017 the Tax Cuts And Jobs Act ("TCJA") was signed into law. The TCJA reduced the 2018 corporate tax rate from 35.0% to 21.0% and made numerous other tax law changes. Certain tax effects of the TCJA were recognized in year ended December 31, 2017 resulting in the recording of $11.6 million of additional tax expense. The additional tax of $11.6 million related to the following components: $8.0 million related to the imposition of a tax on deemed repatriated earnings of foreign subsidiaries due to implementation of a territorial tax system, $2.9 million related to remeasurement of deferred tax assets to the 21.0% tax rate, and $0.7 million related to reductions in tax benefits on stock compensation. A provisional amount based on reasonable estimates was made with respect to the tax implications associated with the deemed repatriated earnings on foreign subsidiaries based on the initial analysis of the TCJA. This provisional amount is based on information currently available, including estimated tax earnings and profits from foreign investments. The Company continues to gather and analyze information, including historical adjustments to earnings and profits of foreign subsidiaries, in order to complete the accounting for the effects of the estimated transition tax. The TCJA has significant complexity and implementation guidance from the Internal Revenue Service, clarifications of state tax law and the completion of the Company's 2017 tax return filings could all impact these estimates. The Company does not believe potential adjustments in future periods will materially impact the Company's financial condition or results of operations. Any such adjustments will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin ("SAB") No. 118. Additional guidance has been provided to address the accounting for the potential effects related to the taxation of global intangible low-taxed income (GILTI), noting that companies should make an accounting policy election to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to include the tax expense in the year incurred. The Company has not completed its analysis of the effects of the GILTI provisions and will further consider the accounting policy election.

The provision for income taxes resulted in an effective tax rate of 39.2% on income before income taxes for the year ended December 31, 2017. The effective rate differs from the annual federal statutory rate primarily because of state and foreign income taxes and adjustments due to the TCJA partially offset by tax benefits associated with restricted stock.

For 2016 and 2015 the effective tax rate was 35.8% and 37.4%, respectively. The effective income tax rate differs from the annual federal statutory tax rate primarily because of state and foreign income taxes, the increase of available foreign tax credit and the release of certain deferred tax liabilities.

During 2017, 2016 and 2015, the Company paid income taxes of $90.7 million, $88.8 million and $82.7 million, respectively, net of refunds.

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. Significant components of the Company’s deferred tax assets and liabilities at December 31, 2017 and 2016 are as follows:



December 31,	2017			2016
(in thousands)
Deferred tax assets:
Termite accrual	$	1,241		$	1,848
Insurance and contingencies	18,374			26,560
Unearned revenues	11,152			14,610
Compensation and benefits	11,157			15,798
State and foreign operating loss carryforwards	7,035			12,817
Bad debt reserve	3,203			4,842
Foreign tax credit	7,842			18,213
Other	1,861			1,804
Net Pension liability	—			1,109
Valuation allowance	(24		)	(6,507		)
Total deferred tax assets	61,841			91,094
Deferred tax liabilities:
Depreciation and amortization	(18,453		)	(21,217		)
Net Pension liability	(3,709		)	—
Intangibles and other	(21,259		)	(28,000		)
Total deferred tax liabilities	(43,421		)	(49,217		)
Net deferred tax assets	18,420			41,877

Analysis of the valuation allowance:



December 31,	2017			2016
(in thousands)
Valuation allowance at beginning of year	$	6,507		$	3,969
Change in valuation allowance	(6,483		)	2,538
Valuation allowance at end of year	$	24		$	6,507

As of December 31, 2017, the Company has net operating loss carryforwards for foreign and state income tax purposes of approximately $148 million, which will be available to offset future taxable income. If not used, these carryforwards will expire between 2018 and 2030. Management believes that it is unlikely to be able to utilize approximately $0.1 million of foreign net operating losses before they expire and has included a valuation allowance for the effect of these unrealizable operating loss carryforwards. The valuation allowance decreased by $6.5 million due to the liquidation of a foreign subsidiary.

Earnings from continuing operations before income tax include foreign income of $22.1 million in 2017, $6.4 million in 2016 and $17 million in 2015. The Company’s international business is expanding and we intend to continue to grow the business in foreign markets in the future through reinvestment of foreign deposits and future earnings as well as acquisition of unrelated companies. Repatriation of cash from the Company’s foreign subsidiaries is not part of the Company’s current business plan.

The total amount of unrecognized tax benefits at December 31, 2017 that, if recognized, would affect the effective tax rate is $0.6 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



December 31,	2017		2016
(in thousands)
Balance at Beginning of Year	$	2,554	$	2,554
Additions for tax positions of prior years	594		—
Balance at End of Year	$	3,148	$	2,554

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. In addition, the Company has subsidiaries in various state and international jurisdictions that are currently under audit for years ranging from 2010 through 2015. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years prior to 2012.

It is reasonably possible that the amount of unrecognized tax benefits will increase in the next 12 months.

The Company’s policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.9 million and $0.4 million as of December 31, 2017 and December 31, 2016, respectively. The Company recognized interest and penalties of $0.5 million, $0.1 million, and $0.2 million in 2017, 2016, and 2015, respectively.