You should read the following discussion in conjunction with our audited financial statements and related notes included elsewhere in this document. The following discussion (as well as other discussions in this document) contains forward-looking statements. Please see "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of uncertainties, risks and assumptions associated with these statements.

Overview

The Company

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

RESULTS OF OPERATIONS

                                                                           % better/(worse)
                                                                            as compared to
                                      Years ended December 31,                prior year
(in thousands)                    2012          2011          2010          2012       2011

Revenues                       $ 1,270,909   $ 1,205,064   $ 1,136,890          5.5 %     6.0 %
Cost of services provided          647,578       616,842       583,089         (5.0 )    (5.8 )
Depreciation and
amortization                        38,655        37,503        36,408         (3.1 )    (3.0 )
Sales, general and
administrative                     407,488       388,710       373,288         (4.8 )    (4.1 )
(Gain)/loss on
sales/impairment of assets,
net                                   (468 )         405           123        215.6     229.3
Pension Settlement                   1,000             -             -          N/M       N/M
Interest expense                        14           508           437         97.2     (16.2 )

Income before income taxes         176,642       161,096       143,545          9.7      12.2
Provision for income taxes          65,310        60,385        53,543         (8.2 )   (12.8 )

Net income                         111,332       100,711        90,002         10.5      11.9

General Operating Comments

2012 marked the Company's 15th consecutive year of reporting improved results, with 2012 concluding with record revenues and profits. Last year (2012) the Company's revenue grew 5.5%, with growth in all lines of service.

Results of Operations-2012 Versus 2011

Overview

The Company's gross margin increased to 49.0% for 2012 from 48.8% in 2011. Sales, general and administrative expense decreased in 2012 to 32.1% of revenue versus 32.3% in 2011. The Company experienced a reduction in its depreciation and amortization margin to 3.0% in 2012 versus 3.1% in 2011. The Company had net income of $111.3 million in 2012 compared to $100.7 million in 2011, a 10.5% increase. Net profit margin improved to 8.8% in 2012 from 8.4% in 2011.

Revenues

Revenues for the year ended December 31, 2012 were $1.3 billion, an increase of $65.8 million or 5.5% from 2011 revenues of $1.2 billion. Commercial pest control represented approximately 41.0% of the Company's business in 2012 and grew 3.7% in 2012 due to increases in sales, bed bug revenues and an increase in the average sales price. Residential pest control represented approximately 41.0% of the Company's business and increased 8.0% driven by increased leads, closure and pricing as well as increased capture of TAEXX homebuilder installations and bed bug revenues. The Company's termite business, which represented approximately 18.0% of the Company's revenue, grew 4.0% in 2012 due to increases in ancillary service sales as well as the Company's expanded sales force and price increases.

The Company's foreign operations accounted for approximately 8% of total revenues for the years ended December 31, 2012 and 2011. The Company established new franchises in Mexico, China, Turks and Caicos Islands and Chile for a total of 22 and 18 international franchises at December 31, 2012 and 2011, respectively. Orkin had 79 and 76 total domestic and international franchises at December 31, 2012 and 2011, respectively.

Cost of Services Provided

For the twelve months ended December 31, 2012 cost of services provided increased $30.8 million or 5.0%, compared to the twelve months ended December 31, 2011. Gross margin for the year was 49.0% for 2012 and 48.8% for 2011. While all costs increased during the year due to the Company's early 2012 and late 2011 acquisitions, insurance and claims expense increased but was partially offset by lower termite provision claims and telephone costs were down marginally due to cost controls, partially offset by higher personnel related costs including payroll taxes and group premiums.

Depreciation and Amortization

For the twelve months ended December 31, 2012, depreciation and amortization increased $1.2 million, or 3.1% compared to the twelve months ended December 31, 2011. The increase is due to amortization of intangible assets acquired in late 2011 and early 2012 partially offset by several intangible assets being fully amortized.

Sales, General and Administrative

For the twelve months ended December 31, 2012, sales, general and administrative (SG&A) expenses increased $18.8 million, or 4.8% compared to the twelve months ended December 31, 2011 representing 32.1% of revenues compared to 32.3% of revenues in the prior year. As a percentage of revenues, SG&A decreased due to reductions in professional services due to timing of projects and reduced salaries as a percentage of revenues as the Company continues to maximize efficiency in its workforce.

Interest Expense, Net

Interest expense, net for the year ended December 31, 2012 was $14 thousand, a decrease of $0.5 million compared to $0.5 million in 2011 due to the pay-off of the remainder of the Company's outstanding borrowings in 2011.

Pension Settlement

Management terminated its wholly-owned subsidiary's (Waltham Services, LLC) salaried pension plan and recorded a settlement loss, which resulted in an additional expense of $1.0 million for the year ended December 31, 2012.

(Gain)/loss on Sales/Impairment of assets, Net

(Gain)/Loss on Sales/Impairment of assets, net increased to $0.5 million gain for the year ended December 31, 2012 compared to $0.4 million loss in 2011. The Company recognized gains from the sale of owned vehicles and property in Canada in 2012 while recognizing an impairment on software related to terminated projects for approximately $0.5 million in 2011.

Taxes

The Company's effective tax rate was 37.0% in 2012 compared to 37.5% in 2011, due primarily to differences in state tax rates.

Results of Operations-2011 Versus 2010

Overview

The Company's gross margin increased slightly to 48.8% for 2011 from 48.7% in 2010. Sales, general and administrative expense decreased in 2011 to 32.3% of revenue versus 32.8% in 2010. The Company experienced a reduction in its depreciation and amortization margin to 3.1% in 2011 versus 3.2% in 2010 due to several assets being fully depreciated, partially offset by amortization of intangible assets acquired in 2010. The Company had net income of $100.7 million compared to $90.0 million in 2010, an 11.9% increase. Net profit margin improved to 8.4% in 2011 from 7.9% in 2010.

Revenues

Revenues for the year ended December 31, 2011 were $1.2 billion, an increase of $68.2 million or 6.0% from 2010 revenues of $1.1 billion. Commercial pest control represented approximately 42.0% of the Company's business in 2011 and grew 6.0% in 2011 due to increases in sales, bed bug revenues and revenues from 2010 acquisitions. Residential pest control represented approximately 40.0% of the Company's business and increased 7.7% driven by increased leads, closure and pricing. The Company's termite business, which represented approximately 18.0% of the Company's revenue, grew 2.8% in 2011 due to increases in ancillary services sales as well as the Company's expanded sales force and price increases.

The Company's foreign operations accounted for approximately 8% of total revenues for the years ended December 31, 2011 and 2010. The Company established new franchises in China and two locations in Nigeria for a total of 18 and 16 international franchises at December 31, 2011 and 2010, respectively. Orkin had 76 and 72 total domestic and international franchises at December 31, 2011 and 2010, respectively.

Cost of Services Provided

For the twelve months ended December 31, 2011 cost of services provided increased $33.8 million or 5.8%, compared to the twelve months ended December 31, 2010. Gross margin for the year was 48.8% for 2011 and 48.7% for 2010. While all costs increased during the year due to the Company's 2010 acquisitions and fleet expenses were marginally better due to better routing and scheduling.

Depreciation and Amortization

For the twelve months ended December 31, 2011, depreciation and amortization increased $1.1 million, or 3.0% compared to the twelve months ended December 31, 2010. The increase is due to amortization of intangible assets acquired in 2010, partially offset by several assets being fully depreciated.

Sales, General and Administrative

For the twelve months ended December 31, 2011, sales, general and administrative (SG&A) expenses increased $15.4 million, or 4.1% compared to the twelve months ended December 31, 2010 representing 32.3% of revenues compared to 32.8% of revenues in the prior year. As a percentage of revenues, SG&A decreased due to reductions in professional services related to the Company's 2010 pricing study and reduced salaries as a percentage of revenues as the Company continues to maximize efficiency in its workforce.

Interest Expense, Net

Interest expense, net for the year ended December 31, 2011 was $0.5 million, an increase of $0.1 million compared to $0.4 million in 2010 due interest on acquisition related payables and outstanding debt during the year.

Loss on Sales/Impairment of assets, Net

Loss on Sales/Impairment of assets, net increased to $0.4 million loss for the year ended December 31, 2011 compared to $0.1 million loss in 2010. The Company recognized an impairment on software related to terminated projects for approximately $0.5 million in 2011.

Taxes

The Company's effective tax rate was 37.5% in 2011 compared to 37.3% in 2010, due primarily to differences in state tax rates.

Liquidity and Capital Resources

Cash and Cash Flow

The Company's cash and cash equivalents at December 31, 2012, 2011, and 2010
were $65.1 million, $46.3 million and $20.9 million, respectively.


                                                          Years ended December 31,
(in thousands)                                          2012        2011        2010

Net cash provided by operating activities             $ 141,919   $ 154,647   $ 124,053
Net cash used in investing activities                   (42,693 )   (29,154 )   (47,645 )
Net cash provided by (used in) financing activities     (80,989 )   (99,427 )   (65,497 )
Effect of exchange rate changes on cash                     570        (704 )       498

Net increase in cash and cash equivalents             $  18,807   $  25,362   $  11,409

Cash Provided by Operating Activities

The Company's operations generated cash of $141.9 million for the year ended December 31, 2012 primarily from net income of $111.3 million, compared with cash provided by operating activities of $154.6 million in 2011 and 124.1 million in 2010. 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 made contributions totaling $5.2 million to the Rollins, Inc. and its wholly-owned subsidiaries' defined benefit retirement plans (the "Plans") during the year ended December 31, 2012 and $4.9 million and $5.2 million during the years ended December 31, 2011 and 2010, respectively, as a result of the Plans' funding status. The Company is considering making contributions to its Plans of

approximately $5.0 million during fiscal 2013. In the opinion of management, additional Plan contributions will not have a material effect on the Company's financial position, results of operations or liquidity.

Cash Used in Investing Activities

The Company used $42.7 million on investing activities for the year ended December 31, 2012 compared to $29.2 million and $47.6 million during 2011 and 2010, respectively, and of that, invested approximately $19.0 million in capital expenditures during 2012 compared to $18.7 million and $13.0 million during 2011 and 2010, respectively. Capital expenditures for the year consisted primarily of property purchases, equipment replacements and technology related projects. The Company expects to invest between $15.0 million and $20.0 million in 2013 in capital expenditures. During 2012, the Company's subsidiaries acquired several small companies totaling $25.0 million compared to $11.4 million in acquisitions during 2011 and $34.8 million in 2010. The expenditures for the Company's acquisitions were funded with cash on hand. The Company continues to seek new acquisitions.

Cash Provided by Financing Activities

The Company used cash of $81.0 million on financing activities for the year ended December 31, 2012 compared to $99.4 million and $65.5 million during 2011 and 2010, respectively. A total of $64.3 million was paid in cash dividends ($0.44 per share) during the year ended December 31, 2012 including a special dividend paid in December 2012 of $0.12 per share, compared to $41.1 million ($0.28 per share) during the year ended December 31, 2011 and $35.5 million ($0.24 per share) in 2010. The Company used $19.9 million to repurchase 0.9 million shares of its common stock at a weighted average price of $20.93 per share during 2012 compared to $30.2 million to purchase 1.5 million shares at an average price of $18.68 in 2011 and $29.7 million to purchase 1.9 million shares at a weighted average price of $13.95 in 2010. There are 5.3 million shares authorized remaining to be repurchased under prior Board approval.

The Company's $65.1 million of total cash at December 31, 2012, is primarily cash held at various banking institutions. Approximately $40.9 million is held in cash accounts at international bank institutions and the remaining $24.2 million is primarily held in non-interest-bearing accounts at various domestic banks. In July 2010, President Obama signed into law the Dodd-Frank Act, which again led to changes in FDIC deposit guarantees. Beginning January 1, 2011 and lasting through December 31, 2012, all funds held in noninterest-bearing transaction accounts at insured depository institutions were automatically fully insured, without limit. This temporary unlimited insurance expired at the end of 2012 and has reverted to a $250,000 limit per bank.

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. As of December 31, 2012, no borrowings were outstanding under the line of credit or under the swingline subfacility. The Company maintains approximately $33.2 million in letters of credit. These letters of credit are required by the Company's fronting insurance companies and/or certain states, due to the Company's self-insured status, to secure various workers' compensation and casualty insurance contracts coverage. The Company believes that it has adequate liquid assets, funding sources and insurance accruals to accommodate such claims.

The Revolving Credit Agreement is guaranteed by certain of Rollins' domestic-subsidiaries. The maturity date of the Credit Agreement is October 31, 2016, subject to optional annual extensions on the first three anniversaries of the Credit Agreement for one year each. Revolving loans under the Revolving Credit Agreement bear interest at one of the following two rates, at the Company's election:

º •
º the Base Rate, which shall mean the highest of (i) the per annum rate which the Administrative Agent publicly announces from time to time as its prime lending rate, (ii) the Federal Funds rate, plus 0.50% per annum, and (iii) the Adjusted LIBOR Rate (which equals LIBOR as increased to account for the maximum reserve percentages established by the U.S. Federal Reserve) determined on a daily basis for an Interest Period of one (1), plus 1.0% per annum.

º •
º with respect to any Eurodollar borrowings, Adjusted LIBOR plus an additional amount, which varies between .75% and 1.00%, based upon Rollins' then-current debt-to-EBITDA ratio. As of December 31, 2012, the additional rate allocated was .75%.

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

The Company remained in compliance with applicable debt covenants at December 31, 2012 and expects to maintain compliance throughout 2013.

Litigation

For discussion on the Company's legal contingencies, see note 12 to the accompanying financial statements.

Off Balance Sheet Arrangements, Contractual Obligations and Contingent
Liabilities and Commitments

Other than the operating leases disclosed in the table that follows, the Company
has no material off balance sheet arrangements.

The impact that the Company's contractual obligations as of December 31, 2012
are expected to have on our liquidity and cash flow in future periods is as
follows:

                                                     Payments due by period
Contractual obligations (in                    Less than     1 - 3      4 - 5      More than
thousands)                          Total       1 year       years      years       5 years

Business combination related
liabilities                        $  9,447    $    6,531   $  2,858   $     58    $        -
Non-cancelable operating leases      85,501        31,265     34,921     13,420         5,895
Unrecognized Tax Positions (1)          901           901          -          -             -

Total (2)                          $ 95,849    $   38,697   $ 37,779   $ 13,478    $    5,895

º (1)
º These amounts represent expected payments with interest for unrecognized tax benefits as of December 31, 2012. Uncertain tax positions of $0.7 million are not included due to the uncertainty of the final amount and settlement.

º (2)
º Minimum pension funding requirements are not included as funding will not be required. The Company is considering making contributions to its pension plans of approximately $5.0 million during 2013.

Critical Accounting Policies

The Company views critical accounting policies to be those policies that are very important to the portrayal of our financial condition and results of operations, and that require management's most difficult, complex or subjective judgments. The circumstances that make these judgments difficult or complex relate to the need for management to make estimates about the effect of matters that are inherently uncertain. We believe our critical accounting policies to be as follows:

Accrual for Termite Contracts-The Company maintains an accrual for termite claims representing the estimated costs of reapplications, repairs and associated labor and chemicals, settlements, awards and other costs relative to termite control services. Factors that may impact future cost include termiticide life expectancy and government regulation. It is significant that the actual number of claims has decreased in recent years due to changes in the Company's business practices. However, it is not possible to precisely predict future significant claims. Accruals for termite contracts are included in other current liabilities and long-term accrued liabilities on the Company's consolidated statements of financial position.

Accrued Insurance-The Company self-insures, up to specified limits, certain risks related to general liability, workers' compensation and vehicle liability. The estimated costs of existing and future claims under the self-insurance program are accrued based upon historical trends as incidents occur, whether reported or unreported (although actual settlement of the claims may not be made until future periods) and may be subsequently revised based on developments relating to such claims. The Company contracts an independent third party actuary on a semi-annual basis to provide the Company an estimated liability based upon historical claims information. The actuarial study is a major consideration, along with management's knowledge of changes in business practice and existing claims compared to current balances. The reserve is established based on all these factors. Management's judgment is inherently subjective and a number of factors are outside management's knowledge and control. Additionally, historical information is not always an accurate indication of future events. The Company continues to be proactive in risk management to develop and maintain ongoing programs to reduce claims. Initiatives that have been implemented include pre-employment screening and an annual motor vehicle report required on all its drivers, post-offer physicals for new employees, and pre-hire, random and post-accident drug testing. The Company has improved the time required to report a claim by utilizing a "Red Alert" program that provides serious accident assessment twenty four hours a day and seven days a week and has instituted a modified duty program that enables employees to go back to work on a limited-duty basis.

Revenue Recognition-The Company's revenue recognition policies are designed to recognize revenues at the time services are performed. For certain revenue types, because of the timing of billing and the receipt of cash versus the timing of performing services, certain accounting estimates are utilized. Residential and commercial pest control services are primarily recurring in nature on a monthly, bi-monthly or quarterly basis, while certain types of commercial customers may receive multiple treatments within a given month. In general, pest control customers sign an initial one-year contract, and revenues are recognized at the time services are performed. For pest control customers, the Company offers a discount for those customers who prepay for a full year of services. The Company defers recognition of these advance payments and recognizes the revenue as the services are rendered. The Company classifies the discounts related to the advance payments as a reduction in revenues.

Termite baiting revenues are recognized based on the delivery of the individual units of accounting. At the inception of a new baiting services contract upon quality control review of the installation, the Company recognizes revenue for the installation of the monitoring stations, initial directed liquid termiticide treatment and servicing of the monitoring stations. A portion of the contract amount is deferred for the undelivered monitoring element. This portion is recognized as income on a straight-line basis over the remaining contract term, which results in recognition of revenue in a pattern that approximates the timing of performing monitoring visits. The allocation of the purchase price to the two deliverables is based on the relative selling price. There are no contingencies related to the delivery of additional items or meeting

other specified performance conditions. Baiting renewal revenue is deferred and recognized over the annual contract period on a straight-line basis that approximates the timing of performing the required monitoring visits.

At inception revenue received for conventional termite renewals is deferred and recognized on a straight-line basis over the remaining contract term; and, the cost of reinspections, reapplications and repairs and associated labor and chemicals are expensed as incurred. For outstanding claims, an estimate is made of the costs to be incurred (including legal costs) based upon current factors and historical information. The performance of reinspections tends to be close to the contract renewal date and while reapplications and repairs involve an insubstantial number of the contracts, these costs are incurred over the contract term. As the revenue is being deferred, the future cost of reinspections, reapplications and repairs and associated labor and chemicals applicable to the deferred revenue are expensed as incurred. The Company accrues for noticed claims. The costs of providing termite services upon renewal are compared to the expected revenue to be received and a provision is made for any expected losses.

All revenues are reported net of sales taxes.

Contingency Accruals-The Company is a party to legal proceedings with respect to matters in the ordinary course of business. In accordance with FASB ASC Topic
450 "Contingencies," Management estimates and accrues for its liability and costs associated with the litigation. Estimates and accruals are determined in consultation with outside counsel. Because it is not possible to accurately predict the ultimate result of the litigation, judgments concerning accruals for liabilities and costs associated with litigation are inherently uncertain and actual liabilities may vary from amounts estimated or accrued. However, in the opinion of management, the outcome of the litigation will not have a material adverse impact on the Company's financial condition or results of operations. Contingency accruals are included in other current liabilities and long-term accrued liabilities on the Company's consolidated statements of financial position.

Defined benefit pension plans-In 2005, the Company ceased all future benefit accruals under the Rollins, Inc. defined benefit plan, although the Company . . .