UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-4422
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
Rollins, Inc. had 68,664,084 shares of its $1 par value Common Stock outstanding
as of July 15, 2005.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
------------
Item 1. Financial Statements.
Consolidated Statements of Financial Position as of June 30, 2005 and
December 31, 2004 2
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 2005 3
Consolidated Statements of Cash Flows for the Six Months Ended June
30, 2005 and 2004 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 24
Item 4. Controls and Procedures. 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits. 26
SIGNATURES 27
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share and per share data)
June 30, December 31,
2005 2004
------------------- ---------------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 65,179 $ 56,737
Marketable Securities 629 ---
Trade Receivables, Short Term, Net of Allowance for Doubtful Accounts of $3,549
and $3,712, respectively 48,556 45,469
Materials and Supplies 8,120 8,876
Deferred Income Taxes 29,496 28,355
Other Current Assets 10,979 7,368
------------------- ---------------------
Current Assets 162,959 146,805
Equipment and Property, Net 57,873 49,163
Goodwill 119,476 119,568
Customer Contracts and Other Intangible Assets, Net 70,609 75,902
Deferred Income Taxes 18,544 13,328
Trade Receivables, Long Term, Net of Allowance for Doubtful Accounts of $1,624
and $1,589, respectively 10,604 9,755
Other Assets 4,142 4,259
------------------- ---------------------
Total Assets $ 444,207 $ 418,780
=================== =====================
LIABILITIES
Accounts Payable $ 12,405 $ 15,438
Accrued Insurance 16,437 14,963
Accrued Compensation and Related Liabilities 36,618 38,453
Unearned Revenue 86,337 81,195
Accrual for Termite Contracts 12,399 11,992
Other Current Liabilities 29,540 25,939
------------------- ---------------------
Current Liabilities 193,736 187,980
Accrued Insurance, Less Current Portion 19,226 22,667
Accrual for Termite Contracts, Less Current Portion 13,511 13,319
Accrued Pension 27,291 10,579
Long-Term Accrued Liabilities 15,241 16,686
------------------- ---------------------
Total Liabilities 269,005 251,231
------------------- ---------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000 shares authorized; 69,687,109
and 69,060,112 shares issued, respectively 69,687 69,060
Treasury Stock, par value $1 per share; 1,083,736 shares at June 30, 2005 and
556,000 shares at December 31, 2004 (1,084) (556)
Additional Paid-In Capital 8,711 10,659
Accumulated Other Comprehensive Loss (26,850) (16,066)
Unearned Compensation (6,553) (3,475)
Retained Earnings 131,291 107,927
------------------- ---------------------
Total Stockholders' Equity 175,202 167,549
------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 444,207 $ 418,780
=================== =====================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three months ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------------
2005 2004 2005 2004
------------- ------------- --------------- --------------
REVENUES
Customer Services $ 214,326 $ 202,725 $ 398,241 $ 363,141
COSTS AND EXPENSES
Cost of Services Provided 110,594 105,422 209,232 191,964
Depreciation and Amortization 6,045 5,764 12,008 10,421
Sales, General & Administrative 71,294 69,149 131,577 121,917
Gain on Sale of Assets (546) (14,143) (544) (14,142)
Pension Curtailment (4,176) --- (4,176) ---
Interest Income (354) (47) (816) (197)
-------------- ------------- --------------- --------------
182,857 166,145 347,281 309,963
-------------- ------------- --------------- --------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 31,469 36,580 50,960 53,178
-------------- ------------- --------------- --------------
PROVISION FOR INCOME TAXES
Current 14,144 10,251 19,725 14,911
Deferred (1,399) 5,438 914 7,510
-------------- ------------- --------------- --------------
12,745 15,689 20,639 22,421
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 18,724 20,891 30,321 30,757
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES
OF $4,017 --- --- --- (6,204)
-------------- ------------- --------------- --------------
NET INCOME $ 18,724 $ 20,891 $ 30,321 $ 24,553
============== ============= =============== ==============
INCOME PER SHARE - BASIC
Income Before Cumulative Effect of Change in Accounting
Principle 0.28 0.31 0.45 0.45
Cumulative Effect of Change in Accounting Principle --- --- --- (0.09)
-------------- ------------- --------------- --------------
Net Income Per Share - Basic $ 0.28 $ 0.31 $ 0.45 $ 0.36
============== ============= =============== ==============
INCOME PER SHARE - DILUTED
Income Before Cumulative Effect of Change in Accounting
Principle 0.27 0.30 0.43 0.44
Cumulative Effect of Change in Accounting Principle --- --- --- (0.09)
-------------- ------------- --------------- --------------
Net Income Per Share - Diluted $ 0.27 $ 0.30 $ 0.43 $ 0.35
============== ============= =============== ==============
Weighted Average Shares Outstanding - Basic 67,937 68,133 67,940 68,040
Weighted Average Shares Outstanding - Diluted 70,029 70,180 70,046 70,072
DIVIDENDS PAID PER SHARE $ 0.05 $ 0.04 $ 0.10 $ 0.08
============== ============= =============== ==============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
3
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------------------------------
2005 2004
--------------------- -------------------
OPERATING ACTIVITIES
Net Income $ 30,321 $ 24,553
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Change in Accounting Principle, Net --- 6,204
Depreciation and Amortization 12,008 10,421
Pension Curtailment (4,176) ---
Provision for Deferred Income Taxes 914 7,510
Gain on Sale of Assets (544) (14,142)
Other, Net 205 202
(Increase) Decrease in Assets:
Trade Receivables (3,826) (7,390)
Materials and Supplies 761 (655)
Other Current Assets (3,594) (2,666)
Other Non-Current Assets 297 (2,235)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 4,555 10,172
Unearned Revenue 5,142 7,655
Accrued Insurance (1,967) (1,642)
Accrual for Termite Contracts 599 828
Long-Term Accrued Liabilities 1,403 (3,043)
--------------------- -------------------
Net Cash Provided by Operating Activities 39,292 35,772
===================== ===================
INVESTING ACTIVITIES
Purchases of Equipment and Property (14,203) (3,751)
Acquisitions/Dispositions of Companies, Net (1,606) (103,155)
Marketable Securities, Net (629) 21,866
Proceeds from Sale of Assets 749 15,468
--------------------- -------------------
Net Cash Used in Investing Activities (15,689) (69,572)
--------------------- ----------------
FINANCING ACTIVITIES
Dividends Paid (6,858) (5,451)
Common Stock Purchased (11,105) ---
Common Stock Options Exercised 2,889 1,361
Other 756 202
--------------------- -------------------
Net Cash Used in Financing Activities (14,318) (3,888)
--------------------- -------------------
Effect of Exchange Rate Changes on Cash (843) 13
--------------------- -------------------
Net Increase/(Decrease) in Cash and Cash Equivalents 8,442 (37,675)
Cash and Cash Equivalents at Beginning of Period 56,737 59,540
--------------------- -------------------
Cash and Cash Equivalents at End of Period $ 65,179 $ 21,865
===================== ===================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION AND OTHER
Basis of Preparation - The consolidated financial statements included
herein have been prepared by Rollins, Inc. (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission applicable to quarterly reporting on Form 10-Q.
These consolidated financial statements have been prepared in
accordance with Statement of Financial Accounting Standard No. 94,
Consolidation of All Majority-Owned Subsidiaries ("SFAS 94") and Rule
3A-02(a) of Regulation S-X. In accordance with SFAS 94 and with Rule
3A-02(a) of Regulation S-X, the Company's policy is to consolidate all
subsidiaries and investees where it has voting control. The Company
does not have any subsidiaries or investees where it has less than a
100% equity interest or less than 100% voting control, nor does it
have any interest in other investees, joint ventures, or other
variable interest entities that require consolidation under FASB
interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46).
Footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted as permitted by
such rules and regulations. These consolidated financial statements
should be read in conjunction with the financial statements and
related notes contained in the Company's annual report on Form 10-K
for the year ended December 31, 2004.
In the opinion of management, the consolidated financial statements
included herein contain all adjustments necessary to present fairly
the financial position of the Company as of June 30, 2005 and December
31, 2004, the results of its operations for the three and six months
ended June 30, 2005 and 2004 and cash flows for the six months ended
June 30, 2005 and 2004. All such adjustments are of a normal recurring
nature. Operating results for the six months ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
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.
The Board of Directors, at its quarterly meeting on January 25, 2005,
authorized a three-for-two stock split by the issuance on March 10,
2005 of one additional common share for each two common shares held of
record on February 10, 2005. Accordingly, the par value for additional
shares issued was adjusted to common stock, and fractional shares
resulting from the stock split were settled in cash. All share and per
share data appearing throughout this Form 10-Q have been retroactively
adjusted for this stock split.
Estimates Used in the Preparation of Consolidated Financial
Statements--The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the
United States requires Management to make estimates and assumptions
that affect the amounts reported in the accompanying notes and
financial statements. Actual results could differ from those
estimates.
Cash and Cash Equivalents--The Company considers all investments with
an original maturity of three months or less to be cash equivalents.
Short-term investments, all of which are cash equivalents, are stated
at cost, which approximates fair market value.
Marketable Securities--From time to time, the Company maintains
investments held by several large, well-capitalized financial
institutions. The Company's investment policy does not allow
investment in any securities rated less than "investment grade" by
national rating services.
5
Management determines the appropriate classification of debt
securities at the time of purchase and re-evaluates such designations
as of each balance sheet date. Debt securities are classified as
available-for-sale because the Company does not have the intent to
hold the securities to maturity. Available-for-sale securities are
stated at their fair values, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity.
Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in
interest income. In the first quarter of 2004, the Company sold the
balance of its marketable securities, the proceeds of which were used
to pay the primary portion of the Western Industries, Inc. acquisition
completed in the second quarter of 2004. The cost of securities sold
is based on the specific identification method. Interest and dividends
on securities classified as available-for-sale are included in
interest income. The Company's marketable securities generally consist
of United States government, corporate and municipal debt securities.
Comprehensive Income (Loss)--Other Comprehensive Income (Loss) results
from foreign currency translations, unrealized gain/losses on
marketable securities and changes in the minimum pension liability.
New Accounting Standards-- In December 2004, the FASB issued SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which
replaces SFAS No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees." SFAS 123R, as modified by rule of the Securities
and Exchange Commission, requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values
beginning with the next fiscal year that begins after June 15, 2005,
with early adoption encouraged. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative to financial
statement recognition. Rollins is required to adopt SFAS 123R
beginning January 1, 2006. Under SFAS 123R, Rollins must determine the
appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition
methods include prospective and retrospective adoption options. Under
the retrospective option, prior periods may be restated either as of
the beginning of the year of adoption or for all periods presented.
The prospective method requires that compensation expense be recorded
for all unvested stock options and restricted stock at the beginning
of the second quarter of adoption of SFAS 123R, while the
retrospective methods would record compensation expense for all
unvested stock options and restricted stock beginning with the first
period restated. Rollins is evaluating the requirements of SFAS 123R
and expects that the adoption of SFAS 123R will not have a material
impact on Rollins' consolidated results of operations and earnings per
share. Rollins has not yet determined the method of adoption or the
effect of adopting SFAS 123R, and it has not determined whether the
adoption will result in amounts that are similar to the current pro
forma disclosures under SFAS 123.
Cumulative Effect of Change in Accounting Principle - Prior to 2004,
traditional termite treatments were recognized as revenue at the
renewal date and an accrual was established for estimated costs of
reapplications and repairs to be incurred. Beginning fourth quarter
2004, the Company adopted a new accounting method under which the
revenue received 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 and no longer accrued. For noticed 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. The
newly adopted accounting principle eliminates the need to obtain
actuarial estimates of the claim costs to be incurred and management's
estimates of reapplication costs. Also, management believes the newly
adopted accounting method more closely conforms to the current pattern
under which revenues are earned and expenses are incurred, and
conforms the accounting methodology of Orkin and its recently acquired
subsidiary, Western Pest Services. 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.
Due to this change, the Company recorded a cumulative effect
adjustment of $6.2 million (net of income taxes) during the fourth
quarter of 2004.
The amounts for the quarter and six months ended June 30, 2004
reported herein have been restated to reflect the effect of this
accounting change as if it had occurred on January 1, 2004. A
reconciliation of the restatement due to the change in accounting
principle is as follows:
6
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share and per share data)
(Unaudited)
Previously Effect of
Reported Accounting As Restated
as of June 30, Change as of June 30,
2004 2004
---------------------- -------------------- ----------------------
Assets
Cash and Short-Term Investments $ 21,865 $ --- $ 21,865
Trade Receivables Short Term, Net 62,765 (10,824) 51,941
Materials and Supplies 12,157 --- 12,157
Deferred Income Taxes 21,633 8,490 30,123
Other Current Assets 10,441 --- 10,441
---------------------- -------------------- ----------------------
Current Assets 128,861 (2,334) 126,527
Equipment and Property, Net 45,313 --- 45,313
Goodwill 113,853 3,900 117,753
Customer Contracts 82,166 (3,900) 78,266
Trade Receivables Long Term, Net --- 10,824 10,824
Deferred Income Taxes 8,860 (3,243) 5,617
Other Assets 30,908 --- 30,908
---------------------- -------------------- ----------------------
Total Assets $ 409,961 $ 5,247 $ 415,208
====================== ==================== ======================
Liabilities
Accounts Payable $ 14,756 $ (58) $ 14,698
Accrued Insurance 13,050 --- 13,050
Accrued Payroll 33,313 57 33,370
Unearned Revenue 58,511 26,425 84,936
Accrual For Termite Contracts 21,704 (7,066) 14,638
Other Current Liabilities 30,306 --- 30,306
---------------------- -------------------- ----------------------
Current Liabilities 171,640 19,358 190,998
Accrued Insurance 26,641 --- 26,641
Accrual For Termite Contracts 23,621 (8,491) 15,130
Long-Term Accrued Liabilities 18,482 2,355 20,837
---------------------- -------------------- ----------------------
Total Liabilities 240,384 13,222 253,606
Stockholder's Equity
Common Stock 45,638 --- 45,638
Retained Earnings and Other Equity 123,939 (7,975) 115,964
---------------------- -------------------- ----------------------
Total Stockholders' Equity 169,577 (7,975) 161,602
---------------------- -------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 409,961 5,247 $ 415,208
====================== ==================== ======================
7
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three months ended
Previously Effect of
Reported Accounting As Restated
June 30, Change June 30,
2004 2004
------------------------- ------------------------ -------------------------
Revenues $ 207,698 $ (4,973) $ 202,725
------------------------- ------------------------ -------------------------
Costs & Expenses
Cost of Services Provided 105,442 (20) 105,422
Depreciation & Amortization 5,764 --- 5,764
Sales General & Administrative 69,155 (6) 69,149
Gain on Sales of Assets (14,143) --- (14,143)
Pension Curtailment --- --- ---
Interest (Income)/Expense (47) --- (47)
------------------------- ------------------------ -------------------------
Total Cost & Expenses $ 166,171 $ (26) $ 166,145
Income Before Taxes 41,527 (4,947) 36,580
Provision for Income Taxes 17,717 (2,028) 15,689
------------------------- ------------------------ -------------------------
Net Income $ 23,810 $ (2,919) $ 20,891
========================= ======================== =========================
8
Franchising Program - Orkin had 56 franchises as of June 30, 2005,
including international franchises in Mexico, established in 2000, and
Panama, established in 2003. Transactions with franchises involve
sales of customer contracts to establish new franchises, initial
franchise fees and royalties. The customer contracts and initial
franchise fees are typically sold for a combination of cash and notes
due over periods ranging up to 5 years. Notes receivable from
franchises aggregated $5.6 million, $5.2 million, and $4.7 million as
of June 30, 2005, December 31, 2004, and June 30, 2004, respectively.
The Company recognizes gains from the sale of customer contracts at
the time they are sold to franchises and collection on the notes is
reasonably assured. The Company had a net loss of approximately $0.1
million in the second quarter of 2005, due to true-up adjustments,
compared to a $41,000 gain in the second quarter of 2004, and was $1.2
million for the six months ended June 30, 2005 compared to $0.9
million for the six months ended June 30, 2004, and is included as
revenues in the accompanying Consolidated Statements of Income.
Initial franchise fees are deferred for the duration of the initial
contract period and are included as unearned revenue in the
Consolidated Statements of Financial Position. Deferred franchise fees
amounted to $1.8 million, $1.6 million, and $1.5 million at June 30,
2005, December 31, 2004, and June 30, 2004, respectively. Royalties
from franchises are accrued and recognized as revenues as earned on a
monthly basis. Revenues from royalties were $575,000 in the second
quarter of 2005 compared to $464,000 in the second quarter of 2004 and
were $1.0 million for the six months ended June 30, 2005 compared to
$819,000 for the six months ended June 30, 2004. The Company's maximum
exposure to loss relating to the franchises aggregated $3.8 million,
$3.6 million, and $3.2 million at June 30, 2005, December 31, 2004 and
June 30, 2004, respectively.
Fair Value of Financial Instruments--The Company's financial
instruments consist of cash, short-term investments, marketable
securities, trade and notes receivables, accounts payable and other
short-term liabilities. The carrying amounts of these financial
instruments approximate their fair values.
Seasonality - The business of the Company is affected by the seasonal
nature of the Company's pest and termite control services. The
increase in pest pressure and activity, as well as the metamorphosis
of termites in the spring and summer (the occurrence of which is
determined by the timing of the change in seasons), has historically
resulted in an increase in the revenue of the Company's pest and
termite control operations during such periods as evidenced by the
following chart. In addition, revenues were favorably impacted in 2004
after the acquisition of Western Pest Services on April 30, 2004.
Total Net Revenues
----------------------------------------------------------
2005 2004 2003
First Quarter $ 183,915 $ 160,416* $ 155,122
Second Quarter 214,326 202,725* 185,105
Third Quarter N/A 203,925* 178,262
Fourth Quarter N/A 183,818 158,524
- --------------------------------------------------------------------------------
* Restated for change in accounting principle.
NOTE 2. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share ("EPS"), the
Company presents basic EPS and diluted EPS. Basic EPS is computed on
the basis of weighted-average shares outstanding. Diluted EPS is
computed on the basis of weighted-average shares outstanding plus
common stock options outstanding and unvested restricted stock awards
during the period which, if exercised, would have a dilutive effect on
EPS. Basic and diluted EPS have been restated for the March 10, 2005,
three-for-two stock split for all periods presented (See Note 1). A
reconciliation of the number of weighted-average shares used in
computing basic and diluted EPS is as follows:
9
Three months ended Six months ended
-------------------------------------------------------
June 30, June 30,
-------------------------------------------------------
(In thousands except per share data amounts) 2005 2004 2005 2004
------------------------------------------------------------------------------------------------------------------------
Net Income available to stockholders
(numerator for basic and diluted earnings per share): $18,724 $20,891 $30,321 $24,553
=======================================================
Shares (denominator):
Weighted-average shares outstanding
(denominator for basic earnings per share) 67,937 68,133 67,940 68,040
Effect of Dilutive securities:
Employee Stock Options and Restricted Stock Awards 2,092 2,047 2,106 2,032
Adjusted Weighted-Average Shares
(adjusted to reflect assumed exercises)
(denominator for diluted earnings per share) 70,029 70,180 70,046 70,072
Per share amounts:
Basic earnings per common share $0.28 $ 0.31 $0.45 $0.36
Diluted earnings per common share $0.27 $ 0.30 $0.43 $0.35
------------------------------------------------------------------------------------------------------------------------
The Company bought back 26,388 shares of the Company's common stock in
the second quarter of 2005 under its authorized repurchase program.
Rollins has had a buyback program in place for a number of years and
has routinely purchased shares when it felt the opportunity was
desirable. With approximately 276,000 shares left under the current
program, the Board authorized the purchase of 4 million additional
shares of the Company's common stock at its quarterly meeting on April
26, 2005. This authorization enables the Company to continue the
purchase of Rollins, Inc. shares when appropriate, which is an
important benefit resulting from the Company's strong cash flows.
Accordingly, 4,249,828 shares remain authorized for purchase. The
stock buy-back program has no expiration date.
NOTE 3. CONTINGENCIES
Orkin, one of the Company's subsidiaries, is a named defendant in Mark
and Christine Butland et al. v. Orkin Exterminating Company, Inc., et
al. pending in the Circuit Court of Hillsborough County, Tampa,
Florida. The plaintiffs filed suit in March of 1999 and are seeking
monetary damages and injunctive relief. The Court ruled in early April
2002, certifying the class action lawsuit against Orkin. Orkin
appealed this ruling to the Florida Second District Court of Appeals,
which remanded the case back to the trial court for further findings.
In December the Court issued a new ruling certifying the class action.
Orkin has appealed this new ruling to the Florida Second District
Court of Appeals. Orkin believes this case to be without merit and
intends to defend itself vigorously through trial, if necessary. At
this time, the final outcome of the litigation cannot be determined.
However, in the opinion of Management, the ultimate resolution of this
action will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
Additionally, in the normal course of business, Orkin is a defendant
in a number of lawsuits, which allege that plaintiffs have been
damaged as a result of the rendering of services by Orkin. Orkin is
actively contesting these actions. Some lawsuits or arbitrations have
been filed (Ernest W. Warren and Dolores G. Warren, et al. v. Orkin
Exterminating Company, Inc., et al.; Francis D. Petsch, et al. v.
Orkin Exterminating Company, Inc., et al.; and Cynthia Garrett v.
Orkin, Inc.) in which the Plaintiffs are seeking certification of a
class. The cases originate in Georgia and Florida. The Company
believes these matters to be without merit and intends to vigorously
contest certification and defend itself through trial or arbitration,
if necessary. In the opinion of Management, the outcome of these
actions will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.
Orkin is involved in certain environmental matters primarily arising
in the normal course of business. The New York Department of
Environmental Conservation filed an administrative proceeding against
Orkin in March 2001, relating to reporting violations in Orkin's
Annual Report to the Department. The Department is seeking the
submission of additional reports and a fine. Orkin is working closely
with the Department to address the violations and finalize the matter.
In the opinion of Management, the Company's liability under any of
these matters would not materially affect its financial condition,
results of operations or liquidity.
10
NOTE 4. STOCKHOLDERS' EQUITY
During the second quarter ended June 30, 2005, the Company repurchased
26,388 shares for $0.5 million under its stock repurchase program.
Also, during the second quarter ended June 30, 2005, approximately
428,000 shares of common stock were issued upon exercise of stock
options by employees. For the six months ended June 30, 2005, the
company has issued approximately 915,000 shares of common stock upon
exercise of stock options by employees. As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company accounts for
employee stock compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. No stock-based employee compensation
cost is reflected in net income, as all options granted had an
exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect
on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three months ended Six months ended
June 30, June 30,
------------- ------------ ------------ -----------
(In thousands, except per share data) 2005 2004 2005 2004
------------- ------------ ------------ -----------
Net income, as reported $18,724 $20,891 $30,321 $24,553
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (146) (202) (292) (404)
------------- ------------ ------------ -----------
Pro forma net income $18,578 $20,689 $30,029 $24,149
Earnings per share:
Basic-as reported $0.28 $0.31 $0.45 $0.36
Basic-pro forma $0.27 $0.30 $0.44 $0.35
Diluted-as reported $0.27 $0.30 $0.43 $0.35
Diluted-pro forma $0.27 $0.29 $0.43 $0.34
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following (in thousands):
Minimum Foreign Other
Pension Currency Unrealized
Liability Translation Gain/(Loss) Total
Balance at December 31, 2004 $ (18,355) $ 2,161 $ 128 $ (16,066)
Change during first six months of 2005:
Before-tax amount.. (17,949) (843) --- (18,792)
Tax benefit 7,269 --- 739 8,008
--------------------------------------------------------------------------
(10,680) (843) 739 (10,784)
Balance at June 30, 2005 $ (29,035) $ 1,318 $ 867 $ (26,850)
- ---------------------------------------------------------------------------------------------------------------------------
11
NOTE 6. ACCRUAL FOR TERMITE CONTRACTS
The Company maintains an accrual for termite contracts representing
the estimated costs of reapplications, repair claims and associated
labor, chemicals, and other costs relative to termite control services
performed prior to the balance sheet date.
Prior to 2004, traditional termite treatments were recognized as
revenue at the renewal date and an accrual was established for
estimated costs of reapplications and repairs to be incurred.
Beginning fourth quarter 2004, the Company adopted a new accounting
method under which, the revenue received 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. The
newly adopted accounting principle eliminates the need to obtain
actuarial estimates of the claim costs to be incurred and management's
estimates of reapplication costs. Also, management believes the newly
adopted accounting method more closely conforms to the current pattern
under which revenues are earned and expenses are incurred, and
conforms the accounting methodology of Orkin and its recently acquired
subsidiary, Western Pest Services. 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.
Due to this change, the Company recorded a cumulative effect
adjustment of $6.2 million (net of income taxes) during the fourth
quarter of 2004.
A reconciliation of the beginning and ending balances of the accrual
for termite contracts is as follows:
Six months ended
June 30,
----------------------------------
(In thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------
Beginning Balance $ 25,311 $ 43,873
Effect of Change in Accounting Principle --- (15,557)
Current Period Provision 9,527 9,793
Settlements, Claims and Expenditures Made During the Period (8,928) (8,734)
Western Pest Acquisition --- 393
- -----------------------------------------------------------------------------------------------------------
Ending Balance $ 25,910 $ 29,768
- -----------------------------------------------------------------------------------------------------------
12
NOTE 7. PENSION AND POST-RETIREMENT BENEFIT PLANS
The following represents the net periodic pension benefit costs and
related components in accordance with SFAS 132 ( R ):
Components of Net Pension Benefit Cost
Three months ended Six months ended
June 30, June 30,
(in thousands) 2005 2004 2005 2004
Service Cost $ 1,397 $ 1,297 $ 2,794 $ 2,594
Interest Cost 2,208 2,074 4,416 4,148
Expected Return on Plan Assets (2,464) (2,394) (4,928) (4,788)
Amortization of:
Prior Service Benefit (217) (217) (434) (434)
Unrecognized Net Loss 1,164 845 2,328 1,690
------------- ------------ -------------- -------------
Net Periodic Benefit Cost $ 2,088 $ 1,605 $ 4,177 $ 3,210
SFAS 88 Curtailment Gain (4,176) --- (4,176) ---
------------- ----------- -------------- -------------
Total $ (2,088) $ 1,605 $ 1 $ 3,210
In June 2005, the Company recorded a $4.2 million non-cash curtailment
adjustment in accordance with SFAS No. 88, "Employer's Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", ("SFAS No. 88") in connection with freezing our
defined benefit pension plan, using actuarial assumptions consistent
with those we used at December 31, 2004. SFAS No. 88 requires
curtailment accounting if an event eliminates, for a significant
number of employees, the accrual of defined benefits for some or all
of their future services. In the event of a curtailment, an adjustment
must be recognized for the unrecognized prior service cost associated
with years of service no longer expected to be rendered.
NOTE 8. RELATED PARTY TRANSACTIONS
On April 28, 2004, the Company sold real estate in Okeechobee County,
Florida to LOR, Inc., a company controlled by R. Randall Rollins,
Chairman of the Board of Rollins, Inc. and Gary W. Rollins, Chief
Executive Officer, President and Chief Operating Officer of Rollins,
Inc. for $16.6 million in cash. The sale resulted in a net gain after
tax of $8.1 million or $0.11 per share since the real estate had
appreciated over approximately 30 years it had been owned by the
Company. The real estate was under a lease agreement with annual
rentals of $131,939 that would have expired June 30, 2007. On May 28,
2004, the Company sold real estate in Sussex County, Delaware to LOR,
Inc. for $111,000 in cash. The sale resulted in an immaterial net gain
after tax. The Board of Directors, at its quarterly meeting on January
27, 2004, approved the formation of a committee (the "Committee") made
up of Messrs. Bill J. Dismuke and James B. Williams, who are
independent directors, to evaluate the transactions. In addition, the
Company on October 22, 2004 purchased real estate located at 2158
Piedmont Road, N.E., Atlanta, Georgia 30324, adjacent to the Company's
headquarters, from LOR, Inc. for $4.6 million. The Committee was
furnished with full disclosure of the transactions, including
independent appraisals, and determined that the terms of the
transactions were reasonable and fair to the Company. The Company sold
an additional piece of real estate in Sussex County, Delaware to LOR,
Inc. or an entity wholly owned by LOR, Inc. for $10.6 million in cash.
The transaction took place on December 29, 2004 and resulted in a $6.3
million gain, net of costs and after taxes.
13
NOTE 9. ACQUISITIONS
On April 30, 2004, the Company acquired substantially all of the
assets and assumed certain liabilities of Western Pest Services
("Western"), and the Company's consolidated financial statements
include the operating results of Western from the date of the
acquisition. Neither Western nor its principals had any prior
relationship with the Company or its affiliates. Western was engaged
in the business of providing pest control services and the Company has
continued this business. The acquisition was made pursuant to an Asset
Purchase Agreement (the "Western Agreement") dated March 8, 2004,
between Rollins, Inc. and Western Industries, Inc. and affiliates. The
consideration for the assets and certain noncompetition agreements
(the "Purchase Price") was approximately $106.6 million, including
approximately $7.0 million of assumed liabilities. The Purchase Price
was funded with cash on hand, the sale of property located in
Okeechobee County, Florida and a $15.0 million senior unsecured
revolving credit facility.
Pursuant to the Western Agreement, the Company acquired substantially
all of Western's property and assets, including accounts receivable,
real property leases, seller contracts, governmental authorizations,
data and records, intangible rights and property and insurance
benefits. As described in the Western Agreement, the Company assumed
only specified liabilities of Western and obligations under disclosed
assigned contracts.
The Company engaged an independent valuation firm to determine the
allocation of the purchase price to Goodwill and identifiable
Intangible assets. Such valuation resulted in the allocation of $41.3
million to Goodwill and $55.2 million to other intangible assets,
principally customer contracts. The finite-lived intangible assets,
principally customer contracts, are being amortized over periods
principally ranging from 8 to 12.5 years on a straight-lined basis.
On April 30, 2004, in a transaction ancillary to the Western
acquisition, the Company acquired Residex Corporation ("Residex"), a
company that distributes chemicals and other products to pest
management professionals, pursuant to an Asset Purchase Agreement (the
"Residex Agreement") dated March 8, 2004, between Rollins, Inc. and
Western Industries, Inc., JBD Incorporated and Residex Corporation.
Subsequently on April 30, 2004, the Company sold Residex to an
industry distribution group. The amounts involved were not material
and no gain or loss was recognized on the transaction.
Prior to the acquisition, Western Pest Services was recognized as a
premier pest control business and ranked as the 8th largest company in
the industry. Based in Parsippany, NJ, the Company provides pest
elimination and prevention to homes and businesses to over 130,000
customers from New York to Virginia with additional operations in
Georgia and Florida. Western is primarily a commercial pest control
service company and its existing businesses complement most of the
services that Orkin offers, in an area of the country in which Orkin
has not been particularly strong, the Northeast. The Company's
consolidated statements of income include the results of operations of
Western for all periods after May 1, 2004.
14
NOTE 10. PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below gives effect to
the Western acquisition as if it had occurred as of the beginning of
our fiscal year 2004. The information presented below is for
illustrative purposes only and is not necessarily indicative of
results that would have been achieved if the acquisition actually had
occurred as of the beginning of such years or results, which may be
achieved in the future.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2005 2004 2005 2004
---------------- ---------------- ---------------- -----------------
REVENUES
Customer Services $ 214,326 $ 210,267 $ 398,241 $ 389,819
================ ================ ================ =================
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 31,469 41,071 50,960 56,137
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 18,724 23,549 30,321 32,513
NET INCOME $ 18,724 $ 20,630 $ 30,321 $ 24,538
EARNINGS PER SHARE - BASIC $ 0.28 $ 0.30 $ 0.45 $ 0.36
================ ================ ================ =================
EARNINGS PER SHARE - DILUTED $ 0.27 $ 0.29 $ 0.43 $ 0.35
Average Shares Outstanding - Basic 67,937 68,133 67,940 68,040
Average Shares Outstanding - Diluted 70,029 70,180 70,046 70,072
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company reported that revenue for the second quarter grew 5.7% to $214.3
million, compared to $202.7 million for the second quarter ended June 30, 2004.
Western Pest Services, acquired April 30, 2004, had second quarter 2005 revenues
of $21.2 million versus $14.3 million in 2004. Excluding revenues attributable
to the Western Pest Services operations, revenues increased by 2.5%.
The Company recorded net income of $18.7 million or $0.27 per diluted share for
the second quarter ended June 30, 2005, compared to $20.9 million or $0.30 per
diluted share for the same period in 2004. In the second quarter of 2005, the
Company curtailed Rollins, Inc.'s pension plan effective June 30, 2005 and
recognized an additional $2.5 million, net of taxes, or $0.04 per diluted share
in the quarter. In second quarter 2004, the Company recorded gains from sale of
assets, net of taxes, of $8.1 million or $0.11 per diluted share. Excluding the
impacts of the pension curtailment in 2005 and the gains on sale of assets, the
Company's adjusted income for second quarter 2005 was $15.9 million, or $0.23
per diluted share, an increase of 21.1%, compared to adjusted income of $12.8
million, or $0.19 per diluted share for the same period last year. See below for
a detailed reconciliation. After the adjustments described above, Rollins, Inc.
continued improvement in profit over last year's second quarter, marking the
Company's 22nd quarter of improved earnings results.
The Company is investing and working diligently to take Rollins and Orkin to
their next level for the benefit of the Company's customers, employees and
shareholders.
Training and Media Center
The Company continues to benefit from Orkin's State of the Art Training and
Media Center located in Atlanta, Georgia. This center is not only used in
training for the Company's people, but as a resource by various regulatory
agencies and industry organizations. Recently, the Insecticide-Rodenticide
Product Labeling Branch of the U.S. Environmental Protection Agency spent a day
at the facility where members of the Company's staff participated with the
Agency in their meeting with leading state industry regulators and the National
Pest Management Association. Following their visit, all participants were very
15
complimentary of the Company's facility and appreciative of the opportunity to
use it. Rollins, Inc. is already seeing many opportunities of multi-functional
consensus building as a result of the Training Center.
Centers for Disease Control
In June of last year, we announced our collaboration with the Centers for
Disease Control and Prevention focusing on educational projects targeting
pest-related health risks. This collaboration has gone extremely well. Earlier
this year the Company worked together on publishing a Guide on Dangerous Pests
that has recently been made available to all of Rollins, Inc.'s operations as a
point of sale customer hand out, and it is also available to the general public
as well via a web download. You can obtain a copy by accessing the Learning
Center on the Orkin web site, www.orkin.com. The CDC is distributing copies to
local health departments as well, and is very pleased with the results of the
Company's first project.
A second initiative with the CDC involved assisting an Arizona community that
was experiencing an outbreak of tick-transmitted Rocky Mountain Spotted Fever.
Together with the CDC and other volunteer organizations, the Company spent three
and a half days providing the services needed to control the ticks in the area.
The Company feels that these are all wonderful opportunities to do beneficial
work while building the Orkin brand. Orkin is extremely pleased to have been
part of this effort to protect human lives from this dangerous disease.
And lastly, the Company recently completed a public opinion survey with the CDC
that was directed to get feedback on important questions regarding the public's
concern over pest-related diseases. More than 1,500 individuals participated in
the survey, in which 7 out of 10 Americans (70%) expressed some level of concern
over the health ramifications of pests, with more than half stating that they
needed more pest-related information.
Rollins, Inc. looks forward to Orkin's ongoing work with the CDC and to
providing the American public with more vitally important information regarding
diseases carried by rodents and pests, while at the same time using this
information to further enhance the knowledge and training of Orkin's technicians
Industry Recognition
Orkin was awarded the National Pest Management Association's highest Quality
Control designation on July 14. Recognized as a QualityPro company, Orkin had to
meet all of their quality standards, including those for hiring, training,
employee safety, Integrated Pest Management (IPM) practices, safe pesticide
handling practices, advertising, service warranties, customer communication and
state licensing. It is always reassuring when an outside authority confirms that
Orkin's various company initiatives are hitting the mark. Orkin is the first
large pest control company to receive the designation.
Stock Repurchase Program
In April 2005, Rollins, Inc. announced that as a result of having only 276,000
shares left under the Company's stock buyback program, the Company's Board of
Directors authorized the purchase of an additional 4 million shares of our
common stock. Under the Company's buy back program, on July 7, Rollins, Inc.
announced that the company had purchased 26,388 shares.
Management remains focused on growing the company. Our strong balance sheet and
cash flow help maintain our ability to make important acquisitions while also
supporting organic growth. Rollins, Inc. continues to evaluate opportunities and
make investments in the Company to ensure its employees have the best resources
available to provide extraordinary service to the Company's commercial and
residential customers.
Reconciliation
As noted above, in the second quarter Rollins, Inc. reported net income of $18.7
million, or $0.27 per diluted share, compared to $20.9 million or $0.30 per
diluted share for the same period in 2004. Excluding an adjustment in the second
quarter of 2005 related to our pension plan curtailment, as the Company froze
future benefit accruals effective June 30, 2005, and a substantial gain in the
second quarter of 2004 related to the sales of assets the Company's net income
for the second quarter was $15.9 million, or $.23 per diluted share, an increase
of 21.1%, compared to net income of $12.8 million, or $ .19 per diluted share
for the same period last year. To help the reader better compare prior year to
current year we have provided the reconciliation of earnings less adjustments:
16
Reconciliation
Income Before Income Taxes, Adjusted Income and Earnings Per Share,
Excluding Gain on Sale of Assets and Pension Plan Curtailment
Second Quarter $ Better/ % Better/
-----------------------
2005 2004 (Worse) (Worse)
-----------------------------------------------
Income Before Income Taxes $ 31,469 $ 36,580 $ (5,111) (14.0)%
Less:
Pension Curtailment 4,176 --- 4,176
Gain on Sale of Assets 546 14,143 (13,597)
-----------------------------------------------
Income Before Income Taxes, Excluding Gain on Sale of Assets
and Pension Plan Curtailment $ 26,747 $ 22,437 $ 4,310 19.2%
===============================================
Net Income $ 18,724 $ 20,891 $ (2,167) (10.4)%
Less:
Gain on Sale of Assets 546 14,143 (13,597)
Pension Curtailment 4,176 --- 4,176
Provision for Income Taxes on Gains (1,912) (6,063) 4,151
-----------------------------------------------
Adjusted Income, Excluding Gain on Sale of Assets and Pension
Plan Curtailment $ 15,914 $ 12,811 $ 3,103 24.2%
===============================================
Earnings Per Share - Diluted $ 0.27 $ 0.30 $ (0.03) (10.0)%
Less:
Gain on Sale of Assets 0.00 0.20 (0.20)
Pension Curtailment 0.06 --- 0.06
Provision for Income Taxes on Gains (0.02) (0.09) 0.07
-----------------------------------------------
Earnings Per Share - Diluted, Excluding Gain on Sale of
Assets and Pension Plan Curtailment $ 0.23 $ 0.19 $ 0.04 21.1%
===============================================
Average Shares Outstanding - Diluted 70,029 70,180 (151)
The Company's revenue for second quarter 2005, including Western Pest Services
rose 5.7% to $214.3 million, compared to $202.7 million for the second quarter
of 2004. Western acquired on April 30, 2004 had revenues of $21.2 million for
Rollins, Inc.'s second quarter 2005, compared to revenues of $14.3 million for
second quarter 2004. Excluding Western, revenues increased 2.5% quarter over
quarter.
Revenue, excluding that attributable to Western Pest Services, Rollins Supply
and Dettelbach, is presented and deemed useful by management in order to present
the Company's 2005 results as more readily comparable to its 2004 results. The
Company's 2004 numbers do not include revenue attributable to the Western
operations prior to April 30, 2004, the date it was acquired, and include
revenue attributable to Rollins Supply, which was partially divested during the
third quarter 2004 and Dettelbach, which was divested during the third quarter
of 2004.
17
Reconciliation
Revenue Excluding Western Pest Services and Rollins Supply/Dettelbach
Second Quarter $ Better/ % Better/
----------------------------------------
2005 2004 (Worse) (Worse)
-------------------------------------------------------------
Total Net Revenues $ 214,326 $ 202,725 $ 11,601 5.7%
Less:
Western Acquisition 21,170 14,286 6,884 48.2
-------------------- ----------------- ----------- ----------
Revenue Excluding Western Pest Services $ 193,156 $ 188,439 $ 4,717 2.5%
Less:
Rollins Supply/Dettelbach 32 840 (807) (96.1)
-------------------- ----------------- ----------- ----------
Revenue Excluding Western Pest Services
and Rollins Supply/Dettelbach $ 193,124 $ 187,599 $ 5,524 2.9%
Year to date Rollins, Inc.'s commercial revenue represents 39.6% of total
revenues, residential pest control 37.1% and termite 22.4%
This quarter's growth in Rollins, Inc.'s business excluding Western saw revenues
from the Company's Commercial business increase 6.5%.
Rollins, Inc.'s residential pest control business growth was 1.9 %. The slower
growth in pest control was impacted by several items. The quarter got off to a
slow start due to unusually cold weather. As reported by SDI/Weather Trends
Inc., the nation experienced the coldest April in 5 years and the coldest May in
22 years. Additionally the Company's revenue was negatively impacted by a
strategic decision, involving the reduction of the Company's summer sales
program. The summer creative solicitation program is a high cost sales program
that management has chosen to scale back. The Company also reduced Orkin's sales
team in the Mid-West, by transferring more customer inquiries to their new call
center. This action substantially reduced Orkin's cost of sales at the cost of
giving up some marginal business.
The termite business declined .5% this quarter. Even with the cold weather Orkin
saw an increase in new completions but this was offset by a decrease in
renewals. The Company has a team reviewing termite offerings and is addressing
action steps to reverse this decline.
Gross margin for the second quarter 2005 was 48.4%, compared to gross margin of
48.0% for second quarter 2004. The improved margins are mainly attributable to
continued reductions in our Material and Supply cost, the result of our Univar
national distribution agreement. This was partially offset by an increase in our
insurance, claims and litigation expense, as well as by Western's higher Cost of
Services Provided as a percentage of revenues particularly in their fleet and
material and supply cost.
Sales and Administrative cost declined as a percentage of revenue from 34.1% of
revenue to 33.3%. The remainder of the improvement was mainly attributable to
lower sales costs due to both reductions in our summer sales program as well as
organizational changes as we have reduced the sales force in some areas as the
Company added regional call centers.
The quarter was also impacted by the Company's decision to curtail its pension
plan. In 2002, the Company closed new employee entry into our pension plan while
improving the 401(k) company match. After exploring a variety of ways to better
deliver employee retirement benefits, and based on feedback from employees as
well as the Company's Human Resource consultants, Rollins, Inc. decided to make
some changes to its retirement plans. As a result the Company has ceased all
further benefit accruals in the Rollins, Inc. Retirement Income Plan, while at
the same time the Company has chosen to further increase the company matching
contribution to the 401(k) plan. In addition, special consideration will be
given to the Company's older and longer termed employees that are in the pension
plan with an additional company contribution for a period up to five years.
Depreciation and amortization increased, reflecting a full quarter this year of
additional amortization of intangibles related to the Western acquisition. The
amortization represents a significant non-cash charge to the income statement.
Total amortization expense for 2005 is expected to be approximately $12.3
million, versus $10.9 million in 2004. It will represent a
18
charge of approximately 18 cents pre-tax and 11 cents after tax to GAAP EPS this
year, and as a result our cash flow is substantially greater than reported net
income.
The Company's balance sheet remains strong with cash and cash equivalents of
$65.2 million. This is after having reinvested the $10.3 million gain from the
sale of land in fourth quarter 2004 by purchasing twelve properties through 1031
tax-free exchanges. The Company purchased these leased branch locations and a
building to house our West Coast division office, reducing the Company's tax on
the transaction greatly.
Rollins, Inc.'s strong cash positions enables the Company to invest in its
business infrastructure and to take advantage of future acquisitions that meet
the Company's requirements.
Results of Operations
% Better/ % Better/
Three months ended (Worse) as Six months ended (Worse) as
June 30, Compared to June 30, Compared to
Same Quarter Same Quarter
in Prior Year in Prior Year
(in thousands) 2005 2004 2005 2004
Revenues $214,326 $202,725 5.7% $398,241 $363,141 9.7%
Costs:
Cost of Services Provided 110,594 105,422 (4.9) 209,232 191,964 (9.0)
Depreciation and Amortization 6,045 5,764 (4.9) 12,008 10,421 (15.2)
Sales, General and Administrative 71,294 69,150 2.9 131,577 121,918 (4.5)
Gain on Sale of Assets (546) (14,143) (96.1) (544) (14,142) (96.2)
Pension Curtailment (4,176) --- 100.0 (4,176) --- 100.0
Interest Income (354) (48) N/M (816) (198) N/M
--------------- ------------- --------------- -------------- ------------- --------------
Income Before Income Taxes 31,469 36,580 (14.0) 50,960 53,178 (4.2)
Provision for Income Taxes 12,745 15,689 18.8 20,639 22,421 7.9
--------------- ------------- --------------- -------------- ------------- --------------
Income Before Cumulative Effect of Change
in Accounting Principle 18,724 20,891 (10.4) 30,321 30,757 (1.4)
Cumulative Effect of Change in Accounting
Principle --- --- --- --- (6,204) 100.0
--------------- ------------- --------------- -------------- ------------- --------------
Net Income $18,724 $20,891 (10.4)% $30,321 $24,553 23.5%
=============== ============= =============== ============== ============= ==============
Revenues for the quarter ended June 30, 2005 increased to $214.3 million, an
increase of $11.6 million or 5.7% inclusive of the Western acquisition completed
on April 30, 2004, from last year's second quarter revenues of $202.7 million.
For the second quarter of 2005 the primary revenue drivers were Western, which
contributed $21.2 million for an increase of $6.9 million, as well as Orkin's
pest control business, which increased $2.9 million while growing 2.3%.
Every-other-month service, the Company's primary residential pest control
service offering, continues to grow in importance, comprising 58.2% of new
residential pest control sales for the second quarter of 2005 compared to 55.3%
in the second quarter 2004. The Company's foreign operations accounted for less
than 7% of total revenues during the second quarter 2005 compared to
approximately 6% of the total during the second quarter 2004.
The revenues of the Company are affected by the seasonal nature of the Company's
pest and termite control services as, described in Note 1 to the Company's
financial statements above. The Company's revenues as a historical matter tend
to peak during the second and third quarters, as evidenced by the following
chart.
Total Net Revenues
----------------------------------------------------------
2005 2004 2003
First Quarter $ 183,915 $ 160,416* $ 155,122
Second Quarter 214,326 202,725* 185,105
Third Quarter N/A 203,925* 178,262
Fourth Quarter N/A 183,818 158,524
- --------------------------------------------------------------------------------
* Restated for change in accounting principle.
19
Cost of Services Provided for the second quarter ended June 30, 2005 increased
$5.2 million or 4.9%, compared to the quarter ended June 30, 2004, although the
expense expressed as a percentage of revenues decreased by 0.4 percentage
points, representing 51.6% of revenues for the second quarter 2005 compared to
52.0% of revenues in the prior year's second quarter. Cost of Services Provided
as a percentage of revenues decreased primarily due to lower materials and
supplies costs, and from employee productivity improvements at Orkin. These were
partially offset by Western's higher Cost of Services Provided as a percentage
of revenues and higher insurance and claims due to higher insurance premiums
which are being addressed.
Sales, General and Administrative for the quarter ended June 30, 2005 increased
$2.1 million or 3.1% as compared to the second quarter 2004. As a percentage of
revenues, Sales General and Administrative decreased 0.8 percentage point or
2.3%, representing 33.3% of total revenues compared to 34.1% for the prior year
quarter. The decrease in Sales, General and Administrative as a percentage of
revenue was mainly attributable to lower sales payroll costs due to
organizational changes including the expansion of the Company's call centers.
The savings were partially offset by the higher Sales, General and
Administrative costs of Western.
Depreciation and Amortization expenses for the second quarter ended June 30,
2005 increased by $281,000 or 4.9% to $6.0 million versus the prior year
quarter. The increase was due to the addition of depreciation and amortization
from the acquisition of Western ($1.5 million) partially offset by certain
technology assets becoming fully depreciated in the last twelve months. As part
of the Western acquisition, $55.2 million of finite-lived intangible assets,
principally customer contracts, were acquired. They will be amortized over
periods principally ranging from 8 to 12.5 years. This represents a non-cash
charge and will increase the Company's amortization by approximately $2.0
million in 2005. For the quarter ended June 30, 2005 amortization of $3.9
million was 10.4% higher than in the prior period quarter.
Income Taxes. The Company's tax provision of $12.7 million for the second
quarter ended June 30, 2005 reflects increased pre-tax income over the prior
year period and a slight decrease in the effective tax rate. The effective tax
rate was 40.5% for the second quarter ended June 30, 2005, down from 42.9% for
the second quarter ended June 30, 2004.
Critical Accounting Policies
We view 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 performed prior to the balance sheet date. It is
significant that the actual number of claims has decreased in recent years due
to changes in the Company's business practices. Positive changes to our business
practices include revisions made to our contracts, more effective treatment
methods that include a directed-liquid and baiting program, more effective
termiticides, and expanding training.
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 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 an 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 practices and existing claims
compared to current balances. The reserve is established based on all these
factors. Due to the uncertainty associated with the estimation of future loss
and expense payments and inherent limitations of the data, actual developments
may vary from the Company's projections. This is particularly true since
critical assumptions regarding the parameters used to develop reserve estimates
are largely based upon judgment. Therefore, changes in estimates may be
sufficiently material. 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. It
should be noted that the number of claims has been decreasing due to the
Company's proactive risk management to develop and maintain ongoing programs.
Initiatives that have been implemented include pre-employment screening and an
annual motor vehicle report required on all its drivers, utilization of a Global
Positioning System that has been fully deployed to our Company vehicles,
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
20
performing services, certain accounting estimates are utilized. Residential and
commercial pest control services are primarily recurring in nature on a monthly
or bi-monthly 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 delivery of the monitoring
stations, initial directed liquid termiticide treatment and installation of the
monitoring services. The amount deferred is the fair value of monitoring
services to be rendered after the initial service. The amount deferred for the
undelivered monitoring element is then 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.
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.
Prior to 2004, traditional termite treatments were recognized as revenue at the
renewal date and an accrual was established for estimated costs of
reapplications and repairs to be incurred. Beginning fourth quarter 2004, the
Company adopted a new accounting method under which, the revenue received 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 and are no longer accrued. For
noticed 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. The newly adopted accounting
principle eliminates the need to obtain actuarial estimates of the claim costs
to be incurred and management's estimates of reapplication costs. Also,
management believes the newly adopted accounting method more closely conforms to
the current pattern under which revenues are earned and expenses are incurred,
and conforms the accounting methodology of Orkin and its recently acquired
subsidiary, Western Pest Services. 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.
Due to this change, the Company recorded a cumulative effect adjustment of $6.2
million (net of income taxes) during the fourth quarter of 2004.
Contingency Accruals-- The Company is a party to legal proceedings with respect
to matters in the ordinary course of business. In accordance with Statement of
Financial Accounting Standards No. 5, Accounting for Contingencies, the Company
estimates and accrues for its liability and costs associated with the
litigation. Estimates and accruals are determined in consultation with outside
counsel. It is not possible to accurately predict the ultimate result of the
litigation. 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.
Stock-Based Compensation-- In December 2004, the FASB issued SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123") and supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the next fiscal year that begins after June 15, 2005, with early
adoption encouraged. The pro forma disclosures previously permitted under SFAS
123 no longer will be an alternative to financial statement recognition. Rollins
is required to adopt SFAS 123R beginning January 1, 2006. Under SFAS 123R,
Rollins must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retrospective adoption options. Under the retrospective option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS 123R, while the retrospective
methods would record compensation expense for all unvested stock options and
restricted stock beginning with the second period restated. Rollins is
evaluating the requirements of SFAS 123R and expects that the adoption of SFAS
123R will not have a material impact on Rollins' consolidated results of
operations and earnings per share. Rollins has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and it has not determined whether
the adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
21
Liquidity and Capital Resources
Cash and Cash Flow
Six months ended June 30,
----------------------------------------
(in thousands) 2005 2004
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 39,292 $ 35,772
Net Cash Provided By/(Used) in Investing Activities (15,689) (69,572)
Net Cash Used in Financing Activities (14,318) (3,888)
Effect of Exchange Rate on Cash (843) 13
------------- ----------------
Net Increase/(Decrease) in Cash and Cash Equivalents $ 8,442 $(37,675)
- -------------------------------------------------------------------------------------------------
The Company believes its current cash and cash equivalents balances, future cash
flows from operating activities and available borrowings under its $70.0 million
credit facilities will be sufficient to finance its current operations and
obligations, and fund expansion of the business for the foreseeable future and
the acquisition of other select pest control businesses. The Company's operating
activities generated net cash of $39.2 million for the six months ended June 30,
2005, compared with cash provided by operating activities of $35.8 million for
the same period in 2004.
At the April 26, 2005 meeting of the Board of Directors, as part of the
Company's active management of equity capital, the Board of Directors authorized
the purchase of up to 4 million additional shares of the Company's common stock.
The Company plans to repurchase shares at times and prices considered
appropriate by the Company. There is no expiration date for the share repurchase
program. The share repurchase program is in addition to the Company's existing
plan to repurchase 4.5 million shares, of which 249,828 shares remain available
for repurchase.
The Company invested approximately $14.2 million in capital expenditures during
the first six months ended June 30, 2005, compared to $3.8 million during the
same period in 2004, and expects to invest between $11.0 million and $13.0
million for the remainder of 2005. Capital expenditures for the first six months
consisted primarily of building purchases and the purchase of equipment
replacements and upgrades and improvements to the Company's management
information systems. During the first six months, the Company made acquisitions
totaling $1.6 million, compared to $103.2 million during the same period in 2004
when the Company purchased Western Pest. Acquisitions were funded by cash on
hand. A total of $6.9 million was paid in cash dividends ($0.10 per share)
during the first six months of 2005, compared to $5.5 million or $0.08 per share
during the same period in 2004. The Company repurchased 667,698 shares of Common
Stock in the first six months of 2005 and there remain 249,828 shares authorized
to be repurchased, in addition to the 4 million shares. The capital expenditures
and cash dividends were funded entirely through existing cash balances and
operating activities. The Company maintains $70.0 million of credit facilities
with commercial banks, of which no borrowings were outstanding as of June 30,
2005 or July 15, 2005. The Company maintains approximately $34.5 million in
Letters of Credit, which reduced its borrowing capacity under the credit
facilities. These Letters of Credit are required by the Company's fronting
insurance companies and/or certain states, due to the Company's self-funded
status, to secure various workers' compensation and casualty insurance
contracts. These letters of credit are established by the bank for the Company's
fronting insurance companies as collateral, although the Company believes that
it has adequate liquid assets, funding sources and insurance accruals to
accommodate such claims.
On April 28, 2004, the Company entered into a $15.0 million senior unsecured
revolving credit facility. The entire amount of the credit facility was used to
fund a portion of the Western Industries, Inc. acquisition that the Company
closed on April 30, 2004. The Company repaid the full amount of the credit
facility in May 2004.
On April 28, 2004, the Company sold real estate in Okeechobee County, Florida to
LOR, Inc., a company controlled by R. Randall Rollins, Chairman of the Board of
Rollins, Inc. and Gary W. Rollins, Chief Executive Officer, President and Chief
Operating Officer of Rollins, Inc. for $16.6 million in cash. The sale resulted
in a net gain after tax of $8.1 million or $0.11 per share since the real estate
had appreciated over approximately 30 years it had been owned by the Company.
The real estate was under a lease agreement with annual rentals of $131,939 that
would have expired June 30, 2007. On May 28, 2004, the Company sold real estate
in Sussex County, Delaware to LOR, Inc. for $111,000 in cash. The sale resulted
in an immaterial net gain after tax. The Board of Directors, at its quarterly
meeting on January 27, 2004, approved the formation of a committee (the
"Committee") made up of Messrs. Bill J. Dismuke and James B. Williams, who are
independent directors, to evaluate the transactions. In addition, the Company on
October 22, 2004 purchased real estate located at 2158 Piedmont Road, N.E.,
Atlanta, Georgia 30324, adjacent to the Company's headquarters, from LOR, Inc.
for $4.6 million. The Committee was furnished with full disclosure of the
transactions, including independent appraisals, and determined that the terms of
the transactions were reasonable and fair to the Company. The Company sold an
additional piece of real estate in Sussex County, Delaware to LOR, Inc. or an
entity wholly owned by LOR, Inc. for $10.6 million in cash. The transaction took
place on December 29, 2004 and resulted in a $6.3 million gain, net of costs and
after taxes.
22
On April 30, 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Western Pest Services ("Western"), and the
Company's consolidated financial statements include the operating results of
Western from the date of the acquisition. Neither Western nor its principals had
any prior relationship with the Company or its affiliates. Western was engaged
in the business of providing pest control services and the Company has continued
this business. The acquisition was made pursuant to an Asset Purchase Agreement
(the "Western Agreement") dated March 8, 2004, between Rollins, Inc. and Western
Industries, Inc. and affiliates. The consideration for the assets and certain
noncompetition agreements (the "Purchase Price") was for approximately $106.6
million, including approximately $7.0 million of assumed liabilities. The
Purchase Price was funded with cash on hand, the sale of property located in
Okeechobee County, Florida and a $15.0 million senior unsecured revolving credit
facility.
Pursuant to the Western Agreement, the Company acquired substantially all of
Western's property and assets, including accounts receivable, real property
leases, seller contracts, governmental authorizations, data and records,
intangible rights and property and insurance benefits. As described in the
Western Agreement, the Company assumed only specified liabilities of Western and
obligations under disclosed assigned contracts.
The Company engaged an independent valuation firm to determine the allocation of
the purchase price to Goodwill and identifiable Intangible assets. Such
valuation resulted in the allocation of $41.3 million to Goodwill and $55.2
million to other intangible assets, principally customer contracts. The
finite-lived intangible assets, principally customer contracts, are being
amortized over periods principally ranging from 8 to 12.5 years on a
straight-lined basis.
On April 30, 2004, in a transaction ancillary to the Western acquisition, the
Company acquired Residex Corporation ("Residex"), a company that distributes
chemicals and other products to pest management professionals, pursuant to an
Asset Purchase Agreement (the "Residex Agreement") dated March 8, 2004, between
Rollins, Inc. and Western Industries, Inc., JBD Incorporated and Residex
Corporation. Subsequently on April 30, 2004, the Company sold Residex to an
industry distribution group. The amounts involved were not material and no gain
or loss was recognized on the transaction.
Prior to the acquisition, Western Pest Services was recognized as a premier pest
control business and ranked as the 8th largest company in the industry. Based in
Parsippany, NJ, the Company provides pest elimination and prevention to homes
and businesses to over 130,000 customers from New York to Virginia with
additional operations in Georgia and Florida. Western is primarily a commercial
pest control service company and its existing businesses complement most of the
services that Orkin offers, in an area of the country in which Orkin has not
been particularly strong, the Northeast. The Company's consolidated statements
of income include the results of operations of Western for the period beginning
after May 1, 2004 through June 30, 2005.
Orkin, one of the Company's subsidiaries, is aggressively defending a class
action lawsuit filed in Hillsborough County, Tampa, Florida. In early April
2002, the Circuit Court of Hillsborough County certified the class action status
of Butland et al. v. Orkin Exterminating Company, Inc. et al. Other lawsuits
against Orkin, and in some instances the Company, are also being vigorously
defended, including the Warren and Petsch cases and the Garrett arbitration. For
further discussion, see the Contingencies section in the notes to the Company
financial statements set forth under Item 1 of Part I above.
Impact of Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values beginning with the first interim
or annual period after December 15, 2005, with early adoption encouraged. The
pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Rollins is required to adopt
SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006. Under
SFAS 123R, Rollins must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for compensation cost
and the transition method to be used at date of adoption. The transition methods
include prospective and retrospective adoption options. Under the retrospective
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of SFAS 123R, while the
retrospective methods would record compensation expense for all unvested stock
options and restricted stock beginning with the second period restated. Rollins
is evaluating the requirements of SFAS 123R and expects that the adoption of
SFAS 123R will not have a material impact on Rollins' consolidated results of
operations and earnings per share. Rollins has not yet determined the method of
adoption or the effect of adopting SFAS 123R, and it has not determined whether
the adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
23
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 statements regarding future contributions of Western,
expected contributions of the commercial business segment and the success of the
pilot program using hand-held computers and software, and the outcome of
litigation arising in the ordinary course of business and the outcome of other
litigation, as discussed in the Contingencies section, on the Company's
financial position, results of operations and liquidity; the adequacy of the
Company's resources to fund operations and obligations; the Company's projected
2005 capital expenditures; the impact of recent accounting pronouncements; the
expected outcome of the growth of national account revenue. The actual results
of the Company could differ materially from those indicated by the
forward-looking statements because of various risks, timing and uncertainties
including, without limitation, the possibility of an adverse ruling against the
Company in pending litigation; general economic conditions; market risk; changes
in industry practices or technologies; the degree of success of the Company's
termite process reforms and pest control selling and treatment methods; the
Company's ability to identify potential acquisitions; climate and weather
trends; competitive factors and pricing practices; potential increases in labor
costs; and changes in various government laws and regulations, including
environmental regulations. All of the foregoing risks and uncertainties are
beyond the ability of the Company to control, and in many cases the Company
cannot predict the risks and uncertainties that could cause its actual results
to differ materially from those indicated by the forward-looking statements. A
more detailed discussion 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, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2005, the Company maintained an investment portfolio (included in
Cash and Cash Equivalents) subject to short-term interest rate risk exposure.
The Company has been affected by the impact of lower interest rates on interest
income from its short-term investments. The Company is also subject to interest
rate risk exposure through borrowings on its $70.0 million credit facilities.
Due to the absence of such borrowings as of June 30, 2005, this risk was not
significant in the first six months of 2005 and is not expected to have a
material effect upon the Company's results of operations or financial position
going forward. The Company is also exposed to market risks arising from changes
in foreign exchange rates. The Company believes that this foreign exchange rate
risk will not have a material effect upon the Company's results of operations
going forward. There have been no material changes to the Company's market risk
exposure since the end of fiscal year 2004.
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 of June 30, 2005. 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 such that the material information relating to Rollins, Inc.,
including our consolidated subsidiaries, and required to be included in our
Securities and Exchange Commission ("SEC") reports is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms
and was made known to them by others within those entities, particularly during
the period when this report was being prepared.
In addition, Management's quarterly evaluation identified no changes in our
internal control over financial reporting during the second quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. As of June 30, 2005, we did not identify any
material weaknesses in our internal controls, and therefore no corrective
actions were taken.
We have identified several internal control deficiencies at Western Pest
Control, which was acquired on April 30, 2004, and the Company has initiated a
project to identify internal control deficiencies and implement changes. Most of
these identified deficiencies center around IT controls and organizational
issues that affect smaller companies, such as separation of duties, management
reviews, and documentation of policies and procedures.
24
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to Part I, Item 1 for discussion of certain litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Month Total Number of
Shares Purchased as Maximum Number of
Total Number Part of Publicly Shares that May Yet
of Shares Average Price Announced Be Purchased Under
Purchased (1) Paid per Share Repurchase Plan(2) the Repurchase Plan(2)
April 1 to 30, 2005 60,344 $19.40 --- 4,276,216
May 1 to 31, 2005 16,592 $20.15 --- 4,276,216
June 1 to 30, 2005 42,492 $19.29 26,388 4,249,828
--------------- ---------------- --------------------- ----------------------
Total 119,428 $19.46 26,388 4,249,828
(1) Includes repurchases in connection with exercise of employee
stock options in the following amounts: April 2005: 60,344; May
2005: 16,592; June 2005: 16,104.
(2.) These shares were repurchased under the plan to repurchase
up to 4.5 million shares (post all stock splits) announced
October 28, 1997. At the April 26, 2005 Board of Directors
meeting, the Board of Directors of Rollins, Inc. authorized the
purchase of an additional number of up to 4 million shares of the
Company's common stock. These plans have no expiration dates.
Item 4. Submission of Matters to a Vote of Security Holders.
Because the Company's directors have staggered three-year terms,
Messrs. Wilton Looney, Bill J. Dismuke, Gary W. Rollins and Henry
B. Tippie continue to serve as directors of the Company but were
not up for reelection at the Company's Annual Meeting of
Stockholders on April 26, 2005.
The Company's Annual Meeting of Stockholders was held on April
26, 2005. At the meeting, stockholders voted on a proposal to
elect two Class I Directors for the three-year term expiring in
2008. Each nominee for Class I Director was elected by a vote of
the stockholders as follows:
Election of Class I Directors: For Withheld
------------------------------ ----------------- ----------------
R. Randall Rollins 63,606,183 982,832
James B. Williams 63,262,739 1,326,276
25
Item 6. Exhibits.
(a) Exhibits
(3) (i) (A) Restated Certificate of Incorporation of Rollins, Inc.
dated July 28, 1981.
(B) Certificate of Amendment of Certificate of Incorporation of Rollins,
Inc. dated August 20, 1987, incorporated herein by reference to
Exhibit (3)(i)(B) to the registrant's Form 10-K for the year ended
December 31, 2004.
(C) Certificate of Change of Location of Registered Office and of
Registered Agent dated March 22, 1994.
(ii) Amended and Restated By-laws of Rollins, Inc., incorporated
herein by reference to Exhibit (3) (iii) as filed with the
registrant's Form 10-Q for the quarterly period ended June
30, 2004.
(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)(j) Rollins, Inc. Deferred Compensation Plan
(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.
26
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.
(Registrant)
Date: July 29, 2005 By: /s/ Gary W. Rollins
----------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
(Principal Executive Officer)
Date: July 29, 2005 By: /s/ Harry J. Cynkus
----------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
27