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 September 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 |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Rollins, Inc. had 68,313,181 shares of its $1 par value Common Stock outstanding
as of October 14, 2005.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
------------
Item 1. Financial Statements.
Consolidated Statements of Financial Position as of September 30,
2005 and December 31, 2004 2
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2005 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2005 and 2004 4
Consolidated Statements of Stockholders Equity 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 22
Item 4. Controls and Procedures. 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits. 24
SIGNATURES 25
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)
September 30, December 31,
2005 2004
--------------------- ----------------------
(Unaudited)
ASSETS
Cash and Cash Equivalents $ 79,489 $ 56,737
Trade Receivables, Short Term, Net of Allowance for Doubtful Accounts of $4,159
and $3,712, respectively 48,954 45,469
Materials and Supplies 7,358 8,876
Deferred Income Taxes 30,389 28,355
Other Current Assets 9,359 7,368
--------------------- ----------------------
Current Assets 175,549 146,805
Equipment and Property, Net 57,928 49,163
Goodwill 121,054 120,768
Customer Contracts and Other Intangible Assets, Net 68,839 74,702
Deferred Income Taxes 17,441 13,328
Trade Receivables, Long Term, Net of Allowance for Doubtful Accounts of $1,699
and $1,589, respectively 9,866 9,755
Other Assets 4,221 4,259
--------------------- ----------------------
Total Assets $ 454,898 $ 418,780
===================== ======================
LIABILITIES
Accounts Payable $ 14,901 $ 15,438
Accrued Insurance 16,516 14,963
Accrued Compensation and Related Liabilities 38,816 38,453
Unearned Revenue 91,341 81,195
Accrual for Termite Contracts 11,415 11,992
Other Current Liabilities 28,413 25,939
--------------------- ----------------------
Current Liabilities 201,402 187,980
Accrued Insurance, Less Current Portion 18,630 22,667
Accrual for Termite Contracts, Less Current Portion 12,633 13,319
Accrued Pension 27,291 10,579
Long-Term Accrued Liabilities 16,259 16,686
--------------------- ----------------------
Total Liabilities 276,215 251,231
--------------------- ----------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000 shares authorized; 70,003,306
and 69,060,112 shares issued, respectively 70,003 69,060
Treasury Stock, par value $1 per share; 1,620,333 shares at September 30, 2005
and 556,000 shares at December 31, 2004 (1,620) (556)
Additional Paid-In Capital 14,514 10,659
Accumulated Other Comprehensive Loss (26,132) (16,066)
Unearned Compensation (6,242) (3,475)
Retained Earnings 128,160 107,927
--------------------- ----------------------
Total Stockholders' Equity 178,683 167,549
--------------------- ----------------------
Total Liabilities and Stockholders' Equity $ 454,898 $ 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 Nine Months Ended
September 30, September 30,
----------------------------- --------------------------------
2005 2004 2005 2004
------------- ------------- --------------- --------------
REVENUES
Customer Services $ 209,346 $ 203,925 $ 607,587 $ 567,066
COSTS AND EXPENSES
Cost of Services Provided 106,398 105,035 315,630 295,585
Depreciation and Amortization 5,800 6,249 17,808 16,670
Sales, General & Administrative 72,258 70,080 203,835 193,411
Gain on Sale of Assets --- (315) (544) (14,457)
Pension Curtailment --- --- (4,176) ---
Interest Income (489) (68) (1,305) (265)
------------- ------------- --------------- --------------
183,967 180,981 531,248 490,944
------------- ------------- --------------- --------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 25,379 22,944 76,339 76,122
------------- ------------- --------------- --------------
PROVISION FOR INCOME TAXES
Current 9,108 9,502 28,833 24,413
Deferred 1,171 (191) 2,085 7,319
------------- ------------- --------------- --------------
10,279 9,311 30,918 31,732
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 15,100 13,633 45,421 44,390
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAXES
OF $4,017 --- --- --- (6,204)
------------- ------------- --------------- --------------
NET INCOME $ 15,100 $ 13,633 $ 45,421 $ 38,186
============= ============= =============== ==============
INCOME PER SHARE - BASIC
Income Before Cumulative Effect of Change in Accounting
Principle 0.22 0.20 0.67 0.65
Cumulative Effect of Change in Accounting Principle --- --- --- (0.09)
------------- ------------- --------------- --------------
Net Income Per Share - Basic $ 0.22 $ 0.20 $ 0.67 $ 0.56
============= ============= =============== ==============
INCOME PER SHARE - DILUTED
Income Before Cumulative Effect of Change in Accounting
Principle 0.22 0.19 0.65 0.63
Cumulative Effect of Change in Accounting Principle --- --- --- (0.09)
------------- ------------- --------------- --------------
Net Income Per Share - Diluted $ 0.22 $ 0.19 $ 0.65 $ 0.54
============= ============= =============== ==============
Weighted Average Shares Outstanding - Basic 68,117 68,224 67,999 68,101
Weighted Average Shares Outstanding - Diluted 70,042 70,197 70,046 70,113
DIVIDENDS PAID PER SHARE $ 0.05 $ 0.04 $ 0.15 $ 0.12
============= ============= =============== ==============
<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)
Nine Months Ended
September 30,
--------------------------------------------
2005 2004
--------------------- -------------------
OPERATING ACTIVITIES
Net Income $ 45,421 $ 38,186
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Change in Accounting Principle, Net --- 6,204
Depreciation and Amortization 17,808 16,670
Pension Curtailment (4,176) ---
Provision for Deferred Income Taxes 2,085 7,319
Gain on Sale of Assets (544) (14,457)
Other, Net (800) 335
(Increase) Decrease in Assets:
Trade Receivables (3,212) (7,980)
Materials and Supplies 1,536 500
Other Current Assets (2,059) (3,420)
Other Non-Current Assets 233 (1,787)
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 6,417 13,334
Unearned Revenue 10,147 13,201
Accrued Insurance (2,484) (3,103)
Accrual for Termite Contracts (1,263) (2,826)
Long-Term Accrued Liabilities (424) (2,196)
--------------------- -------------------
Net Cash Provided by Operating Activities 68,685 59,980
===================== ===================
INVESTING ACTIVITIES
Purchases of Equipment and Property (16,999) (6,707)
Acquisitions/Dispositions of Companies, Net (3,022) (103,415)
Marketable Securities, Net --- 21,866
Proceeds from Sale of Assets 752 15,473
--------------------- -------------------
Net Cash Used in Investing Activities (19,269) (72,783)
--------------------- -------------------
FINANCING ACTIVITIES
Dividends Paid (10,304) (8,187)
Common Stock Purchased (21,313) ---
Common Stock Options Exercised 3,229 1,734
Other 979 676
--------------------- -------------------
Net Cash Used in Financing Activities (27,409) (5,777)
--------------------- -------------------
Effect of Exchange Rate Changes on Cash 745 (66)
--------------------- -------------------
Net Increase/(Decrease) in Cash and Cash Equivalents 22,752 (18,646)
Cash and Cash Equivalents at Beginning of Period 56,737 59,540
--------------------- -------------------
Cash and Cash Equivalents at End of Period $ 79,489 $ 40,894
===================== ===================
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Rollins, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Treasury Stock Additional Other
--------------- -------------- Paid-in Comprehensive Comprehensive Unearned Retained
(in thousands) Shares Amount Shares Amount Capital Income(Loss) Income(Loss) Compensation Earnings Total
- ------------------------------ -----------------------------------------------------------------------------------------------------
Balance at December 31, 2002 67,779 $67,779 (580) $ (580) $ 299 $ -- $(16,947) $ (278) $ 40,417 $ 90,690
-----------------------------------------------------------------------------------------------------
Net Income 35,761 35,761 35,761
Other Comprehensive Income, Net
of Tax
Minimum Pension Liability
Adjustment 16,182 16,182
Foreign Currency Translation
Adjustments 518 518
Unrealized Loss on Investments (67) (67)
----------
Other Comprehensive Income 16,633 16,633
----------
Comprehensive Income $ 52,394
----------
Cash Dividends (9,010) (9,010)
Issuance of 401(k) Company
Match 72 72 2,087 2,159
Three-for-Two Stock Split-2003 24 24 (99) (99) 75 --
Three-for-Two Stock Split-2005 192 192 (14) (14) (178) --
Unearned Compensation 171 171
Other 361 361 2,022 (13) 2,370
-----------------------------------------------------------------------------------------------------
Balance at December 31, 2003 68,356 $68,356 (621) $(621) $ 4,408 $ -- $ (314) $ (107) $ 67,052 $138,774
-----------------------------------------------------------------------------------------------------
Net Income 52,055 52,055 52,055
Other Comprehensive Income, Net
of Tax
Minimum Pension Liability
Adjustment (18,355) (18,355)
Foreign Currency Translation
Adjustments (1) 2,408 2,408
NSO Stock Options 131 131
Unrealized Gain on Investments 64 64
----------
Other Comprehensive Income/(Loss) (15,752) (15,752)
----------
Comprehensive Income $ 36,303
----------
Cash Dividends (10,924) (10,924)
Common Stock Purchased (38) (38) (899) (937)
Issuance of 401(k) Company Match 83 83 2,052 2,135
Three-for-Two Stock Split-2005 234 234 22 22 (256) --
Unearned Compensation 152 152 3,701 (3,368) 485
Other 318 318 (2) (2) 1,397 1,713
-----------------------------------------------------------------------------------------------------
Balance at December 31, 2004 69,060 $69,060 (556) $(556) $ 10,659 $ -- $(16,066) $ (3,475) $107,927 $167,549
-----------------------------------------------------------------------------------------------------
Net Income 45,421 45,421 45,421
Other Comprehensive Income, Net
of Tax
Minimum Pension Liability
Adjustment (10,680) (10,680)
Foreign Currency Translation
Adjustments 745 745
NSO Stock Options (131) (131)
----------
Other Comprehensive Income/(Loss) (10,066) (10,066)
----------
Comprehensive Income $ 35,355
----------
Cash Dividends (10,304) (10,304)
Common Stock Purchased (990) (990) (5,349) (14,974) (21,313)
Issuance of 401(k) Company Match 90 90 2,109 2,199
Three-for-Two Stock Split-2005 68 68 (164) (164) 30 95 29
Unearned Compensation 150 150 3,544 (2,767) (5) 922
Common Stock Options Exercised 725 725 2,504 3,229
Tax Benefit from Non-Qualified
Stock Options 1,017 1,017
-----------------------------------------------------------------------------------------------------
Balance at September 30, 2005 70,003 $70,003 (1,620)$(1,620) $ 14,514 $ -- $(26,132) $ (6,242) $128,160 $178,683
-----------------------------------------------------------------------------------------------------
<FN>
(1) Includes translation adjustment (net of tax) of $1,683,000 relating to
non-current assets as of December 31, 2003.
(2) $14,974,000 charge to Retained Earnings is from purchases of the Company's
Common Stock.
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
5
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 September 30, 2005 and December 31,
2004, the results of its operations for the three and nine months ended
September 30, 2005 and 2004 and cash flows for the nine months ended
September 30, 2005 and 2004. All such adjustments are of a normal recurring
nature. Operating results for the nine months ended September 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.
6
Marketable Securities--From time to time, the Company maintains investments
held by several large, well-capitalized financial institutions. The
Company's investment policy does not allow investment in any securities
rated less than "investment grade" by national rating services.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designations as of each balance
sheet date. Debt securities are classified as available-for-sale because
the Company does not have the intent to hold the securities to maturity.
Available-for-sale securities are stated at their fair values, with the
unrealized gains and losses, net of tax, reported as a separate component
of stockholders' equity. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are
included 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
September 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. The Company is required to
adopt SFAS 123R in the first quarter of fiscal 2006, beginning January 1,
2006. Under SFAS 123R, the Company 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. The Company 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. The
Company 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.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting Changes
and Error Corrections" ("SFAS 154") which replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, "Reporting Accounting Changes
in Interim Financial Statements". Among other changes, SFAS 154 requires
that voluntary change in accounting principle or a change required by a new
accounting pronouncement that does not include specific transition
provisions be applied retrospectively with all prior period financial
statements presented on the new accounting principle, unless it is
impracticable to do so. SFAS 154 also provides that (1) a change in method
of depreciating or amortizing a long-lived non-financial asset be accounted
for as a change in estimate (prospectively) that was effected by a change
in accounting principle, and (2) correction of errors in previously issued
financial statements should be termed a "restatement." SFAS 154 is
effective for accounting changes and correction of errors made in fiscal
years beginning after June 15, 2005. Accordingly, the Company is required
to adopt the provisions of SFAS 154 in the first quarter of fiscal 2006,
beginning on January 1, 2006. The Company is currently evaluating the
effect that the adoption of SFAS 154 will have on its consolidated results
of operations and financial condition but does not expect SFAS 154 to have
a material impact.
7
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 nine months ended September 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:
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(Unaudited)
Previously Three months ended
Reported Effect of As Restated
September 30, Accounting September 30,
2004 Change 2004
------------------------- ------------------------ -------------------------
Revenues $ 202,257 $ 1,668 $ 203,925
------------------------- ------------------------ -------------------------
Costs & Expenses
Cost of Services Provided 106,748 (1,713) 105,035
Depreciation & Amortization 6,249 - 6,249
Sales General & Administrative 70,080 - 70,080
Gain on Sales of Assets (315) - (315)
Interest (Income)/Expense (68) - (68)
------------------------- ------------------------ -------------------------
Total Cost & Expenses $ 182,694 $ (1,713) $ 180,981
Income Before Taxes 19,563 3,381 22,944
Provision for Income Taxes 7,925 1,386 9,311
------------------------- ------------------------ -------------------------
Net Income $ 11,638 $ 1,995 $ 13,633
========================= ======================== =========================
8
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(Unaudited)
Previously Nine months ended
Reported Effect of As Restated
September 30, Accounting September 30,
2004 Change 2004
------------------------- ------------------------ -------------------------
Revenues $ 568,647 $ (1,581) $ 567,066
------------------------- ------------------------ -------------------------
Costs & Expenses
Cost of Services Provided 297,547 (1,962) 295,585
Depreciation & Amortization 16,670 - 16,670
Sales General & Administrative 193,410 1 193,411
Gain on Sales of Assets (14,457) - (14,457)
Interest (Income)/Expense (265) - (265)
------------------------- ------------------------ -------------------------
Total Cost & Expenses $ 492,905 $ (1,961) $ 490,944
Income Before Taxes 75,742 380 76,122
Provision for Income Taxes 31,576 156 31,732
------------------------- ------------------------ -------------------------
Cumulative effect of change in accounting
principle, net --- (6,204) (6,204)
Net Income $ 44,166 $ (5,980) $ 38,186
========================= ======================== =========================
Franchising Program - Orkin had 57 franchises as of September 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 $5.9 million, $5.2
million, and $5.5 million as of September 30, 2005, December 31, 2004, and
September 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 gain
of approximately $0.5 million in the third quarter of 2005 compared to a
$0.9 million gain in the third quarter of 2004, and was $1.6 million for
the nine months ended September 30, 2005 compared to $1.8 million for the
nine months ended September 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 $1.9 million, $1.6 million, and $1.6
million at September 30, 2005, December 31, 2004, and September 30, 2004,
respectively. Royalties from franchises are accrued and recognized as
revenues as earned on a monthly basis. Revenues from royalties were
$549,000 in the third quarter of 2005 compared to $483,000 in the third
quarter of 2004 and were $1.6 million for the nine months ended September
30, 2005 compared to $1.3 million for the nine months ended September 30,
2004. The Company's maximum exposure to loss relating to the franchises
aggregated $4.0 million, $3.6 million, and $3.9 million at September 30,
2005, December 31, 2004 and September 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.
9
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
-------------------------------------
(in thousands) 2005 2004 2003
First Quarter $ 183,915 $ 160,416* $ 155,122
Second Quarter 214,326 202,725* 185,105
Third Quarter 209,346 203,925* 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:
Three months ended Nine months ended
-------------------------------------------------------
September 30, September 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): $15,100 $13,633 $45,421 $38,186
============ ============= ============ ==========
Shares (denominator):
Weighted-average shares outstanding
(denominator for basic earnings per share) 68,117 68,224 67,999 68,101
Effect of Dilutive securities:
Employee Stock Options and Restricted Stock Awards 1,925 1,973 2,046 2,012
Adjusted Weighted-Average Shares
(adjusted to reflect assumed exercises)
(denominator for diluted earnings per share) 70,042 70,197 70,046 70,113
Per share amounts:
Basic earnings per common share $0.22 $ 0.20 $0.67 $0.56
Diluted earnings per common share $0.22 $ 0.19 $0.65 $0.54
------------------------------------------------------------------------------------------------------------------------
The Company bought back 536,597 shares of the Company's common stock in the
third 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, 3,713,231 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
10
Florida Second District Court of Appeals, which remanded the case back to
the trial court for further findings. In December 2004 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.
NOTE 4. STOCKHOLDERS' EQUITY
During the third quarter ended September 30, 2005, the Company repurchased
536,597 shares for $10.5 million under its stock repurchase program. Also,
during the third quarter ended September 30, 2005, approximately 150,000
shares of common stock were issued upon exercise of stock options by
employees. For the nine months ended September 30, 2005, the company has
issued approximately 1.1 million 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 Nine months ended
September 30, September 30,
-------------------------- -------------------------
(in thousands, except per share data) 2005 2004 2005 2004
------------- ------------ ------------ ------------
Net income, as reported $15,100 $13,633 $45,421 $38,186
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects (146) (202) (438) (606)
------------- ------------ ------------ ------------
Pro forma net income $14,954 $13,431 44,983 $37,580
Earnings per share:
Basic-as reported $0.22 $0.20 $0.67 $0.56
Basic-pro forma $0.22 $0.20 $0.66 $0.55
Diluted-as reported $0.22 $0.19 $0.65 $0.54
Diluted-pro forma $0.21 $0.19 $0.64 $0.54
11
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 nine months of 2005:
Before-tax amount.. (17,949) 745 -- (17,204)
Tax benefit 7,269 -- (131) 7,138
-----------------------------------------------
(10,680) 745 (131) (10,066)
Balance at September 30, 2005 $(29,035) $2,906 $ (3) $(26,132)
- ---------------------------------------------------------------------------------------------------
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:
Nine months ended
September 30,
------------------------------
(In thousands) 2005 2004
- --------------------------------------------------------------------------------
Beginning Balance $ 25,311 $ 43,873
Effect of Change in Accounting Principle -- (17,270)
Current Period Provision 11,089 11,682
Settlements, Claims and Expenditures Made
During the Period (12,352) (12,544)
Western Pest Acquisition -- 373
-----------------------------------------------------------------------------
Ending Balance $ 24,048 $ 26,114
-----------------------------------------------------------------------------
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 Nine months ended
September 30, September 30,
(in thousands) 2005 2004 2005 2004
Service Cost $ -- $ 1,297 $ 2,794 $ 3,891
Interest Cost 1,975 2,074 6,392 6,222
Expected Return on Plan Assets (2,468) (2,394) (7,396) (7,182)
Amortization of:
Prior Service Benefit -- (217) (434) (651)
Unrecognized Net Loss 1,112 845 3,440 2,535
--------- -------- -------- --------
Net Periodic Benefit Cost $ 619 $ 1,605 $ 4,796 $ 4,815
SFAS 88 Curtailment Gain -- -- (4,176) --
--------- -------- -------- --------
Total $ 619 $ 1,605 $ 620 $ 4,815
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 the
defined benefit pension plan, and 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
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 all 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 September 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. 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 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. The Committee was furnished with full
disclosure of all related party transactions, including independent
appraisals, and determined that the terms of the transactions were
reasonable and fair to the Company.
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.
13
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.
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 Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2005 2004 2005 2004
---------------- ---------------- ---------------- -----------------
REVENUES
Customer Services $ 209,346 $ 203,925 $ 607,587 $ 593,744
================ ================ ================ =================
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE
25,379 22,944 76,339 79,081
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 15,100 13,633 45,421 46,146
NET INCOME $ 15,100 $ 13,633 $ 45,421 $ 38,171
================ ================ ================ =================
EARNINGS PER SHARE - BASIC $ 0.22 $ 0.20 $ 0.67 $ 0.56
================ ================ ================ =================
EARNINGS PER SHARE - DILUTED $ 0.22 $ 0.19 $ 0.65 $ 0.54
================ ================ ================ =================
Average Shares Outstanding---Basic 68,117 68,224 67,999 68,101
Average Shares Outstanding---Diluted 70,042 70,197 70,046 70,113
14
NOTE 11. SUBSEQUENT EVENTS
On October 1, 2005, the Company, announced it completed the
acquisition of The Industrial Fumigant Company, (IFC). The acquisition
was an all cash transaction that cost approximately $24.3 million
including the assumption of debt. IFC is recognized as a premier pest
management company serving the Food and Commodity Industries and
ranked as the 24th largest company in the industry. Based in Olathe,
Kansas, the Company provides nationwide coverage through its 25
offices and 17 warehouses.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
In the third quarter, the Company reported its 23rd consecutive quarter of
improved earnings results.
Rollins, Inc. also continued to improve revenues during the quarter. However, as
reported in the Company's press release dated October 26, 2005, these revenues
were negatively impacted by approximately $1 million (half of which came from
three branches in New Orleans) as a result of damage done by Katrina and Rita in
Louisiana, Mississippi, Alabama, and Texas. Sixteen of Orkin's branches were
affected, some to a minor degree and others quite severely, impacting over 220
of the Company's employees. Within days of Katrina's devastation the Company had
dispatched 2 trucks to the area with food, water, generators and other supplies.
Orkin, Inc. has provided employment for these employees in other branches. The
Company has established a Rollins/Employee Relief fund to assist employees and
have generated at this time approximately $125,000 to distribute to the
employees with the greatest need.
It is difficult to estimate exactly when the Company will begin to reverse these
shortfalls since the ultimate status of many impacted customer homes is
uncertain. Some branches will recover sooner than others. The Company expects to
see an impact on our fourth quarter.
During the quarter Rollins, Inc. continued to make progress with its commercial
pest control business initiatives and are positive concerning the roll out this
project. The processes, products and technology that will be implemented in the
future will make it easier for customers in this service offering to do business
with Orkin, while at the same time making it more efficient and profitable for
the Company.
The acquisition of Industrial Fumigant Company on October 1st is consistent with
the Company's plan to accelerate the growth of its commercial business. IFC is
an outstanding company and Rollins, Inc. is extremely pleased to have them as
part of the Rollins family of companies. Located in Olathe, Kansas IFC has been
dedicated to pest management in the food and commodity industries since it's
founding over 60 years. Their concentration on these industries has made IFC a
leader in food plant pest management as well as related auditing and training.
They provide nationwide service through their 25 offices and 17 warehouses. Tom
Walters the Vice President of Rollins, Inc.'s wholly owned subsidiary, Western
Pest Services, will be overseeing this acquisition. The Company plans to keep
IFC as a stand-alone operation. Rollins, Inc. looks forward to working with and
learning from IFC's team of professionals and better understanding how they have
penetrated this very desirable market. Additionally, the Company believes IFC
will help Rollins, Inc. with the technology used for high-end Food processing
customers.
The Company continues to invest in new payroll initiative and training to
improve our service and sales to customers while enhancing employee retention.
Earlier this year, the Company announced its investment in a company wide
satellite training delivery system, which will enable employees to receive
training at a faster rate, reduce training costs over the next several years and
provide more consistent training products. The majority of the equipment for
production and broadcast of the Company's satellite training programs has been
installed and the communication channels for the broadcast programs to remote
sites have been successfully tested at this time. The Company expects the
complete installation of satellite equipment in by the end of the year. Rollins,
Inc. is the first company to install a new satellite technology known as
Interactive Video-On-Demand (IVOD). This capability is included in the satellite
receiver that is being installed at each of the Company's branches. In addition
to broadcasting live programs, the receiver has the ability to provide stored
programming (such as Interactive Distributed Learning or Employee
Communications) to Rollins, Inc.'s associates at any time (24 X 7). After the
live session has been broadcast, other viewers can interact with the system
later as if they were attending the live session. The functionality is similar
to TiVo, but has the added capability of capturing interactive responses.
Examples of how the system can be used: associates can complete tests of their
knowledge of what has been presented; respond to multiple choice questions; etc.
The receiver also contains 120 Gigabytes of storage (up to 80 hours of video
programming) and has technologies that we can activate later that will allow us
to deliver our satellite signal to any computer with a monitor on our IT
network.
15
Rollins, Inc. and the Rollins Family continue to work nationally to promote
Orkin and pest control awareness and professionalism. Recently, the O.Wayne
Rollins Foundation pledged $150,000 to the University of Florida's Institute of
Food and Agricultural Sciences to help establish the Orkin Termite Training
Facility at the Mid-Florida Research and Education Center located in Apopka, FL.
The training center will support integrated pest management programs developed
by the University's entomologists and Orkin pest professionals, and will be made
available to the entire industry. The University's faculty and staff, along with
other industry professionals, will provide statewide training to a wide range of
individuals including pest control professionals, regulators, government
employees and students.
Rollins, Inc. takes great pleasure in the recognition that both individuals and
companies within Rollins receive. Earlier this month Rollins wholly owned
subsidiary, Orkin/PCO Service Corporation, was named one of the Best Employers
for Canadians over age 50. CARP, Canada's largest advocacy group for Canadians
over 50, sponsored the competition. Additionally, Pest Control Magazine inducted
Paul Hardy, Orkin's Termite Technical Director as a member of the Industries
Hall of Fame at its national conference in Nashville. Tom Walters, Rollins,
Inc.'s Vice President and General Manager of Western Pest Services, was named by
Pest Control Technology magazine's winner of the 2005 Leadership Award and Glen
Rollins, Orkin, Inc.'s President, was honored as Professional of the Year at the
same National meeting.
The Company's commercial project, the routing and scheduling initiative and
automated payroll development are on schedule and budget. While there is
significant up front cost involved, these three investments will have a large
impact on the future of the company. Rollins, Inc. is committed to advancing and
the Company believes the initiatives that have been put into place will enable
the Company to accomplish this going forward.
Rollins, Inc.'s third quarter net income grew 10.8% to $15.1 million or $.22 per
diluted share, compared to $13.6 million or $0.19 per diluted share for the
third quarter ended September 30, 2004. The Company's revenue for the third
quarter grew 2.7% to $209.3 million compared to $203.9 million for the third
quarter ended September 30, 2004. The timing of the Western acquisition last
year no longer impacts the comparison; both quarters include full quarter
results from Western. This is the last quarter the sale of Dettelbach impacts
the quarter to previous year's quarter comparison, as that business contributed
$400k in revenue last year decreasing our revenue growth comparison by .2%. A
bigger impact on the revenue were the hurricanes. The Company was impacted to
varying degrees in 16 branches located in the Gulf States. In total the revenue
in these 16 branches were down from the comparable periods last year $1.0
million or .5%. Rollins, Inc. expects business to be close to normal service
levels in 11 of these branches in the fourth quarter. However, it will be some
time before Orkin, Inc.'s three branches in New Orleans and the branches in
Gulfport, Mississippi and Lake Charles, Louisiana., return to the full service
levels experienced prior to the hurricanes. These branches were impacted varying
degrees but experienced revenue decreases from 45% to 87%.
Rollins, Inc.'s commercial pest control which contributed almost 40% of the
Company's revenue grew at 5.7%, with both Western Pest Services and PCO Orkin
Canada contributing greatly. The Company's residential pest control which is
also almost 40% of our revenue along with our Termite business which represents
roughly 20%, both grew by a little over 1.0%.
Gross margin for the quarter was 49.2% versus 48.5% last year. The improved
margins continue to be mainly attributable to continued reductions in our
Material and Supply cost, which has been favorably impacted by the Company's
Univar national distribution agreement. This margin improvement was partially
offset by an increase in our insurance, claims and litigation expense. The
number of the Company's new termite claims and general litigation continues to
decline and the backlog of open claims is at its lowest number in the recent
history of the company. Also affecting margins this quarter was fleet expenses.
While the Company has fewer vehicles, driving fewer miles than last year, the
Company could not overcome the 31% increase in the average gas price per gallon,
and total fleet expenses rose $600k, or 7.9%.
Depreciation and amortization totaled $5.8 million for the 3rd quarter
depreciation of $2.9 million and amortization of intangibles at $2.9 million .
The amortization represents a significant non-cash charge to the Statement of
Income. In 2005 total amortization of intangibles expense will be approximately
$12.3 million, versus $10.9 million in 2004. Based upon our fully diluted shares
outstanding as of September 30, 2005, it will represent a charge of almost 18
cents pre-tax, and 11 cents after tax to GAAP EPS this year.
Tax provision for the quarter remained at 40.5%.
Rollins, Inc.'s balance sheet remains strong with cash and cash equivalents of
$79.5 million as of September 30, 2005. Rollins, Inc.'s strong balance sheet and
cash, positions the Company to take advantage of any future acquisitions that
meet the Company's requirements. Subsequent to quarter end Rollins, Inc. closed
on the IFC acquisition that was all cash deal that cost approximately $24.3
million including the assumption of debt.
16
On April 27, 2005, Rollins, Inc. announced that the Company's Board of Directors
had authorized the purchase of an additional 4 million shares of the Company's
stock. During the third quarter, Rollins, Inc. repurchased 536,597 shares.
Results of Operations
% Better/ % Better/
(Worse) as (Worse) as
Compared to Compared to
Same Same
Three months ended Quarter in Nine months ended Quarter in
September 30, Prior Year September 30, Prior Year
(in thousands) 2005 2004 2005 2004
Revenues $ 209,346 $ 203,925 2.7 % $ 607,587 $ 567,066 7.1 %
Costs:
Cost of Services Provided 106,398 105,035 (1.3) 315,630 295,585 (6.8)
Depreciation and Amortization 5,800 6,249 7.2 17,808 16,670 (5.4)
Sales, General and Administrative 72,258 70,080 (3.1) 203,835 193,411 (5.4)
Gain on Sale of Assets --- (315) (100.0) (544) (14,457) (96.2)
Pension Curtailment --- --- --- (4,176) --- 100.0
Interest Income (489) (68) N/M (1,305) (265) N/M
------------------------------------------------------------------------------------------
Income Before Income Taxes 25,379 22,944 10.6 76,339 76,122 0.3
Provision for Income Taxes 10,279 9,311 (10.4) 30,918 31,732 2.6
------------------------------------------------------------------------------------------
Income Before Cumulative Effect of
Change in Accounting Principle 15,100 13,633 10.8 45,421 44,390 2.3
Cumulative Effect of Change in
Accounting Principle --- --- --- --- (6,204) 100.0
------------------------------------------------------------------------------------------
Net Income $ 15,100 $ 13,633 10.8 % $ 45,421 $ 38,186 18.9 %
==========================================================================================
Revenues for the quarter ended September 30, 2005 increased to $209.3 million,
an increase of $5.4 million or 2.7%. For the third quarter of 2005 the primary
revenue drivers were Orkin Canada, which contributed $16.1 million for an
increase of $2.4 million, Western, which contributed $19.1 million for an
increase of $1.2 million, as well as Orkin's pest control business, which
increased $1.6 million while growing 1.2%. Every-other-month service, the
Company's primary residential pest control service offering, continues to grow
in importance, comprising 59.5% of new residential pest control sales for the
third quarter of 2005 compared to 57.9% in the third quarter 2004. The Company's
foreign operations accounted for less than 8% of total revenues during the third
quarter 2005 compared to less than 7% of the total during the third 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
-------------------------------------
(in thousands) 2005 2004 2003
First Quarter $ 183,915 $ 160,416* $ 155,122
Second Quarter 214,326 202,725* 185,105
Third Quarter 209,346 203,925* 178,262
Fourth Quarter N/A 183,818 158,524
- ---------------------------------------------------------
* Restated for change in accounting principle.
Cost of Services Provided for the third quarter ended September 30, 2005
increased $1.4 million or 1.3%, compared to the quarter ended September 30,
2004, although the expense expressed as a percentage of revenues decreased by
0.7 percentage points, representing 50.8% of revenues for the third quarter 2005
compared to 51.5% of revenues in the prior year's third quarter. Cost of
Services Provided as a percentage of revenues decreased primarily due to lower
personnel related costs, and from employee productivity improvements at Orkin.
These were partially offset by higher service salaries and insurance and claims
due to higher insurance premiums. Management believes that it is addressing the
cause of the insurance increases.
Sales, General and Administrative for the quarter ended September 30, 2005
increased $2.2 million or 3.1% as compared to the third quarter 2004. As a
percentage of revenues, Sales General and Administrative remained flat with an
increase of only 0.1 percentage point or 0.3%, representing 34.5% of total
revenues compared to 34.4% for the prior year quarter. The increase in Sales,
General and Administrative as a percentage of revenue was mainly attributable to
higher administrative salaries and advertising costs. The costs were partially
offset by the lower personnel related costs.
17
Depreciation and Amortization expenses for the third quarter ended September 30,
2005 decreased by $0.4 million or 7.2% to $5.8 million versus the prior year
quarter. The decrease was due in part to the revaluation of intangible assets
acquired in the Western Pest acquisition. 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.
Income Taxes. The Company's tax provision of $10.3 million for the third quarter
ended September 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 third quarter ended September 30, 2005 and 40.6% for the third
quarter ended September 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 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.
18
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.
Goodwill and Other Intangible Assets - On January 1, 2002, the Company adopted
FASB Statement No. 142, Goodwill and Other Intangible Assets. As of January 1,
2002, amortization of goodwill and trademarks was terminated, and instead the
assets are subject to periodic testing for impairment. The Company completed its
annual impairment analyses as of September 30, 2005. Based upon the results of
these analyses, the Company has concluded that no impairment of its goodwill or
trademarks has occurred.
Federal Income Tax Audit - The Company is currently under audit by the Internal
Revenue Service (IRS) for tax years 2002 and 2003. The IRS has issued Notices of
Proposed Adjustment with respect to various issues. The Company is currently
reviewing its position regarding the adjustments and plans to defend against
those adjustments that are without merit. The Company does not expect the
resolution of these issues, taken individually or in the aggregate, to have a
material effect on the results of operations, cash flows or financial position
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 September 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.
The Company is required to adopt SFAS 123R in the first quarter of fiscal 2006,
beginning January 1, 2006. Under SFAS 123R, the Company 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. The Company 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. The Company 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.
19
Liquidity and Capital Resources
Cash and Cash Flow
Nine months ended
September 30,
--------------------------
(in thousands) 2005 2004
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 68,685 $ 59,980
Net Cash Provided By/(Used) in Investing Activities (19,269) (72,783)
Net Cash Used in Financing Activities (27,409) (5,777)
Effect of Exchange Rate on Cash 745 (66)
--------------------------
Net Increase/(Decrease) in Cash and Cash Equivalents $ 22,752 $(18,646)
- --------------------------------------------------------------------------------
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 $68.7 million for the nine months ended
September 30, 2005, compared with cash provided by operating activities of $60.0
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 Company invested approximately $17.0 million in capital expenditures during
the first nine months ended September 30, 2005, compared to $6.7 million during
the same period in 2004, and expects to invest between $4.0 million and $5.0
million for the remainder of 2005. Capital expenditures for the first nine
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 nine months, the Company made acquisitions
totaling $3.0 million, compared to $103.4 million during the same period in 2004
when the Company purchased Western Pest. Acquisitions for the first nine months
of 2005 were funded by cash on hand. A total of $10.3 million was paid in cash
dividends ($0.15 per share) during the first nine months of 2005, compared to
$8.2 million or $0.12 per share during the same period in 2004. The Company
repurchased 1,204,295 shares of Common Stock in the first nine months of 2005
and there remain 3,713,231 shares authorized to be repurchased. 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
September 30, 2005 or October 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 September 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.
20
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
May 1, 2004 through September 30, 2005.
The Company is currently under audit by the Internal Revenue Service (IRS) for
tax years 2002 and 2003. The IRS has issued Notices of Proposed Adjustment with
respect to various issues. The Company is currently reviewing its position
regarding the adjustments and plans to defend against those adjustments that are
without merit. The Company does not expect the resolution of these issues, taken
individually or in the aggregate, to have a material effect on the results of
operations, cash flows or financial position
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
See Note 1 of the Notes to Consolidated Financial Statements for a description
of recent accounting pronouncements, including the expected dates of adoption
and estimated effects on results of operations and financial condition.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding future contributions of Western;
expected contributions of the commercial business segment; the expected effects
of the IFC acquisition; the success of the pilot program using hand-held
computers and software; 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
21
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 September 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 September 30, 2005, this
risk was not significant in the first nine 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 September 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 third quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. As of September 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.
22
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
Total Number of Maximum Number of
Shares Purchased Shares that May
Total Number as Part of Yet Be Purchased
of Shares Average Price Publicly Announced Under the
Period Purchased (1) Paid per Share Repurchase Plan(2) Repurchase Plan(2)
-------------------------- ---------------- ---------------- -------------------- --------------------
July 1 to 30, 2005 10,546 $ 21.36 --- 4,249,828
August 1 to 31, 2005 240,489 $ 19.63 238,780 4,011,048
September 1 to 30, 2005 310,003 $ 19.48 297,817 3,713,231
---------------- --------------------
Total 561,038 $ 19.58 536,597 3,713,231
================ ====================
<FN>
(1) Includes repurchases in connection with exercise of employee
stock options in the following amounts: July 2005: 10,546; August
2005: 1,709; September 2005: 12,186.
(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.
</FN>
Item 4. Submission of Matters to a Vote of Security Holders.
None
23
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
September 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.
(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.
24
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: October 28, 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: October 28, 2005 By: /s/Harry J. Cynkus
--------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
25