UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
Commission File Number 1-4422
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated filer |_|
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 68,464,235 shares of its $1 par value Common Stock
outstanding as of April 14, 2005.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements 3
Consolidated Statements of Financial Position as of
March 31, 2006 and December 31, 2005 3
Consolidated Statements of Income for the Three Months
Ended March 31, 2006 and 2005. 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2006 and 2005 5
Consolidated Statements of Stockholders Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk. 20
Item 4. Controls and Procedures. 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 21
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds. 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits. 22
Signatures 23
2
PART I FINANCIAL INFORMATION
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands except per share data)
March 31, December 31,
2006 2005
------------------ ------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 53,229 $ 43,065
Trade receivables, short-term, net of allowance for doubtful accounts
of $3,093 and $4,534, respectively 45,315 47,705
Materials and supplies 8,899 9,082
Deferred income taxes 23,904 27,510
Prepaid Taxes
- 3,036
Other current assets 9,276 6,069
------------------ ------------------
Total Current Assets 140,623 136,467
Equipment and property, net 68,314 65,932
Goodwill 133,697 133,743
Customer contracts and other intangible assets, net 73,504 71,841
Deferred income taxes 18,149 15,946
Trade receivables, long-term, net of allowance for doubtful accounts of
$1,382 and $1,076, respectively 8,669 9,368
Other assets 4,368 5,123
------------------ ------------------
Total Assets $ 447,324 $ 438,420
================== ==================
LIABILITIES
Capital leases $ 797 $ 825
Accounts payable 18,146 17,204
Accrued insurance 16,359 17,605
Accrued compensation and related liabilities 31,562 41,822
Unearned revenue 84,020 79,990
Accrual for termite contracts 10,713 10,476
Other current liabilities 31,512 21,746
------------------ ------------------
Total current liabilities 193,109 189,668
Capital leases, less current portion 440 560
Accrued insurance, less current portion 21,211 18,996
Accrual for termite contracts, less current portion 11,887 12,724
Accrued pension 20,651 20,651
Long-term accrued liabilities 15,871 18,870
------------------ ------------------
Total Liabilities 263,169 261,469
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; 99,500,000 shares authorized;
70,552,892 and 70,079,254 shares issued, respectively 70,553 70,079
Treasury stock, par value $1 per share; 2,102,860 shares
and 2,068,240 shares, respectively (2,103) (2,068)
Additional paid-in capital 9,033 14,464
Accumulated other comprehensive loss (23,346) (23,264)
Unearned Compensation - (5,881)
Retained earnings 130,018 123,621
------------------ ------------------
Total Stockholders' Equity 184,155 176,951
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 447,324 $ 438,420
================== ==================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
3
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
(Unaudited)
Three months ended
March 31,
-----------------------------------------------
2006 2005
----------------------- ---------------------
REVENUES
Customer Services $ 194,187 183,915
COSTS AND EXPENSES
Cost of Services Provided 107,014 100,249
Depreciation and Amortization 6,793 5,963
Sales, General & Administrative 62,500 58,671
Gain on Sale of Assets - 3
Interest Income (292) (462)
----------------------- ---------------------
176,015 164,424
----------------------- ---------------------
INCOME BEFORE TAXES 18,172 19,491
----------------------- ---------------------
PROVISION FOR INCOME TAXES
Current 5,865 5,584
Deferred 1,404 2,312
----------------------- ---------------------
7,269 7,896
----------------------- ---------------------
NET INCOME $ 10,903 $ 11,595
======================= =====================
NET INCOME PER SHARE - BASIC $ 0.16 $ 0.17
======================= =====================
NET INCOME PER SHARE - DILUTED $ 0.16 $ 0.17
======================= =====================
Weighted Average Shares Outstanding - Basic 67,675 67,942
Weighted Average Shares Outstanding - Diluted 69,583 70,063
DIVIDENDS PAID PER SHARE $ 0.0625 0.0500
======================= =====================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
4
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
-----------------------------------
2006 2005
----------------- -----------------
OPERATING ACTIVITIES
Net Income $ 10,903 $ 11,595
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 6,793 5,963
Provision for deferred income taxes 1,404 3,347
Gain on sales of assets - 3
Other, net (5) 198
(Increase)/decrease in assets
Trade receivables 3,164 1,097
Materials and supplies 183 277
Other current assets (172) (2,957)
Other non-current assets 777 235
Increase/(decrease) in liabilities:
Accounts payable and accrued expenses 3,275 229
Unearned revenue 4,030 3,700
Accrued insurance 969 (1,940)
Accrual for termite contracts (600) 829
Long-term accrued liabilities (3,236) (3,118)
----------------- -----------------
Net cash provided by operating activities 27,485 19,458
----------------- -----------------
INVESTING ACTIVITIES
Purchase of equipment and property (5,433) (6,417)
Acquisitions of companies (4,313) (1,291)
Cash from sales of franchises 351 270
----------------- -----------------
Net cash used in investing activities (9,395) (7,438)
----------------- -----------------
FINANCING ACTIVITIES
Dividends (4,276) (3,436)
Common stock purchased (4,092) (10,604)
Common stock options exercised 281 1,223
Other 243 (669)
----------------- -----------------
Net cash used in financing activities (7,844) (13,486)
----------------- -----------------
Effect of exchange rate changes on cash (82) 623
----------------- -----------------
Net increase/(decrease) in cash and cash equivalents 10,164 (843)
Cash and cash equivalents at beginning of period 43,065 56,737
----------------- -----------------
Cash and cash equivalents at end of period $ 53,229 $ 55,894
----------------- -----------------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Rollins, Inc. and Subsidiaries
(In thousands)
Accumulated
Common Stock Treasury Treasury Compre- Other Unearned
----------------------------- Paid- Paid-In hensive Comprehensive Compen- Retained
Shares Amount Stock Amount In-Capital Capital Income(Loss) Income (Loss) sation Earnings Total
-------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 68,356 $68,356 (621) $ (621) $2,321 $ 2,087 $ - $ (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
Realized Loss on Investments 64 64
------------
Other Comprehensive Income (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 (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) $7,419 $ 3,240 $ - $(16,066) $(3,475) $107,927 $167,549
-------------------------------------------------------------------------------------------------------
Net Income 52,773 52,773 52,773
Other Comprehensive Income, Net of Tax
Minimum Pension Liability Adjustment (8,181) (8,181)
Foreign Currency Translation Adjustments 1,114 1,114
NSO Stock Options (131) (131)
------------
Other Comprehensive Income (7,198) (7,198)
------------
Comprehensive Income $ 45,575
------------
Cash Dividends (13,714) (13,714)
Common Stock Purchased (2) (1,438) (1,438) (5,349) (23,446) (30,233)
Issuance of 401(k) Company Match 90 90 2,109 2,199
Three-for-Two Stock Split-2005 68 68 (164) (164) 10 86 -
Unearned Compensation 146 146 - - 3,490 (2,406) (5) 1,225
Common Stock Options Exercised 805 805 - - 2,523 3,328
Non-Qualified Stock Options 1,022 1,022
-------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 70,079 $70,079(2,068)$(2,068) $14,464 $ - $ - $(23,264) $(5,881) $123,621 $176,951
-------------------------------------------------------------------------------------------------------
Net Income 10,903 10,903 10,903
Other Comprehensive Income, Net of Tax
Foreign Currency Translation Adjustments (82) (82)
------------
Other Comprehensive Income (82) (82)
------------
Comprehensive Income $ 10,821
------------
Cash Dividends (4,276) (4,276)
Common Stock Purchased (2) - - (211) (211) (3,655) (225) (4,091)
Issuance of 401(k) Company Match - - 176 176 3,655 3,831
FAS 123R adoption - - - - (5,881) 5,881 -
Stock Compensation 295 295 - - 386 (5) 676
Common Stock Options Exercised 179 179 - - 81 260
Non-Qualified Stock Options - - - - (17) (17)
-------------------------------------------------------------------------------------------------------
Balance at March 31, 2006
(Unaudited) 70,553 $70,553(2,103)$(2,103) $ 9,033 $ - $ - $(23,346) $ - $130,018 $184,155
<FN>
(1) Includes translation adjustment (net of tax) of $1,683,000 relating to
non-current assets as of December 31, 2003.
(2) Amounts charge to Retained Earnings are from purchases of the
Company's Common Stock.
The accompanying notes are an integral part of these consolidated
financial statements.
</FN>
6
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, 2005.
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 March 31, 2006 and
December 31, 2005, the results of its operations for the three months
ended March 31, 2006 and 2005 and cash flows for the three months
ended March 31, 2006 and 2005. All such adjustments are of a normal
recurring nature. Operating results for the three months ended March
31, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
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.
Estimates Used in the Preparation of Consolidated Financial
Statements--The preparation of the consolidated financial statements
in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions
that affect the amounts reported in the accompanying notes and
financial statements. Actual results could differ from those
estimates.
Cash and Cash Equivalents--The Company considers all investments with
an original maturity of three months or less to be cash equivalents.
Short-term investments, all of which are cash equivalents, are stated
at cost, which approximates fair market value.
Marketable Securities--From time to time, the Company maintains
investments held by several large, well-capitalized financial
institutions. The Company's investment policy does not allow
investment in any securities rated less than "investment grade" by
national rating services.
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. 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.
7
New Accounting Standards-- Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payments" ("SFAS 123R"), which requires the
Company to measure the cost of employee services received in exchange
for all equity awards. See Note 4 for further discussion.
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 has adopted
SFAS 154 and it had no effect on its consolidated results of
operations and financial condition.
Franchising Program - Orkin had 57 franchises as of March 31, 2006,
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 $5.2 million, $5.5 million, and $6.4 million as
of March 31, 2006, December 31, 2005, and March 31, 2005,
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. Related to these recognized gains,
the Company had a net gain of approximately $0.4 million in the first
quarter of 2006 compared to a $1.3 million gain in the first quarter
of 2005 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 $2.0 million, $1.9 million, and $1.8
million at March 31, 2006, December 31, 2005, and March 31, 2005,
respectively. Royalties from franchises are accrued and recognized as
revenues as earned on a monthly basis. Revenues from royalties were
$571,000 in the first quarter of 2006 compared to $427,000 in the
first quarter of 2005. The Company's maximum exposure to loss relating
to the franchises aggregated $3.2 million, $3.6 million, and $4.6
million at March 31, 2006, December 31, 2005 and March 31, 2005,
respectively.
Fair Value of Financial Instruments--The Company's financial
instruments consist of cash, short-term investments, marketable
securities, trade and notes receivables, accounts payable and other
short-term liabilities. The carrying amounts of these financial
instruments approximate their fair values.
Seasonality-- The business of the Company is affected by the seasonal
nature of the Company's pest and termite control services. The
increase in pest pressure and activity, as well as the metamorphosis
of termites in the spring and summer (the occurrence of which is
determined by the timing of the change in seasons), has historically
resulted in an increase in the revenue of the Company's pest and
termite control operations during such periods as evidenced by the
following chart. In addition, revenues were favorably impacted in 2004
after the acquisition of Western Pest Services on April 30, 2004.
Total Net Revenues
-----------------------------------------------
(in thousands) 2006 2005 2004
- --------------------------------------------------------------------------------
First Quarter $ 194,187$ 183,915 $ 160,416*
Second Quarter N/A 214,326 202,725*
Third Quarter N/A 209,346 203,925*
Fourth Quarter N/A 194,830 183,818
-----------------------------------------------
Year ended December 31, $ 194,187$ 802,417 $ 750,884
- --------------------------------------------------------------------------------
* Restated for change in accounting principle.
8
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
March 31,
--------------------------
(in thousands, except per share data) 2006 2005
- --------------------------------------------------------------------------------
Basic and diluted earnings available to stockholders
(numerator): $ 10,903 $ 11,595
============ ============
Shares (denominator):
Weighted-average shares outstanding - Basic 67,675 67,942
Effect of dilutive securities:
Employee Stock Options and Restricted Shares 1,908 2,121
------------ ------------
Weighted-average shares outstanding - Diluted 69,583 70,063
Per share amounts:
Basic income per common share $ 0.16 $ 0.17
Diluted income per common share $ 0.16 $ 0.17
- --------------------------------------------------------------------------------
The Company bought back 211,466 shares of the Company's common stock
in the first quarter of 2006 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. 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, 3,053,858 shares remain authorized for purchase. The
stock buy-back program has no expiration date.
NOTE 3. CONTINGENCIES
Orkin, one of the Company's subsidiaries, is a named defendant in Mark
and Christine Butland et al. v. Orkin Exterminating Company, Inc., et
al. pending in the Circuit Court of Hillsborough County, Tampa,
Florida. The plaintiffs filed suit in March of 1999 and are seeking
monetary damages and injunctive relief. The Court ruled in early April
2002, certifying the class action lawsuit against Orkin. Orkin
appealed this ruling to the Florida Second District Court of Appeals,
which remanded the case back to the trial court for further findings.
In December 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. In the opinion of management, the
Company's liability under any of these matters would not materially
affect its financial condition or results of operations. Consistent
with the Company's responsibilities under these
9
matters, the Company undertakes environmental assessments and
remediation of hazardous substances from time to time as the Company
determines its responsibilities for these purposes. As these
situations arise, the Company accrues management's best estimate of
future costs for these activities. Based on management's current
estimates of these costs, management does not believe these costs are
material to the Company's financial condition or operating results or
liquidity.
NOTE 4. STOCKHOLDERS' EQUITY
During the first quarter ended March 31, 2006, the Company repurchased
211,466 shares for $4.1 million under its stock repurchase program.
Also, during the first quarter ended March 31, 2006, approximately 0.3
million shares of common stock were issued upon exercise of stock
options by employees. For the three months ended March 31, 2005, the
Company issued approximately 0.5 million shares of common stock upon
exercise of stock options by employees.
Stock options and time lapse restricted shares (TLRSs) have been
issued to officers and other management employees under the Company's
Employee Stock Incentive Plans. The stock options generally vest over
a five-year period and expire ten years from the issuance date.
TLRSs provide for the issuance of a share of the Company's Common
Stock at no cost to the holder and generally vest after a certain
stipulated number of years from the grant date, depending on the terms
of the issue. The Company issued TLRSs that vest over ten years prior
to 2004. TLRSs issued 2004 and later vest in 20 percent increments
starting with the second anniversary of the grant, over six years from
the date of grant. During these years, grantees receive all dividends
declared and retain voting rights for the granted shares. The
agreements under which the restricted stock is issued provide that
shares awarded may not be sold or otherwise transferred until
restrictions established under the plans have lapsed.
The Company issues new shares from its authorized but unissued share
pool. At March 31, 2006, approximately 4.1 million shares of the
Company's common stock were reserved for issuance.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment
("SFAS 123R"), which requires the Company to measure the cost of
employee services received in exchange for all equity awards granted
including stock options and TLRSs based on the fair market value of
the award as of the grant date. SFAS 123R supersedes Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company has
adopted SFAS 123R using the modified prospective application method of
adoption which requires the Company to record compensation cost
related to unvested stock awards as of December 31, 2005 by
recognizing the unamortized grant date fair value of these awards over
the remaining service periods of those awards with no change in
historical reported earnings. Awards granted after December 31, 2005
are valued at fair value in accordance with provisions of SFAS 123R
and recognized on a straight line basis over the service periods of
each award. The Company estimated forfeiture rates for the first
quarter of 2006 based on its historical experience.
Prior to 2006, the Company accounted for stock-based compensation in
accordance with APB 25 using the intrinsic value method, which did not
require that compensation cost be recognized for the Company's stock
options provided the option exercise price was established at 100% of
the common stock fair market value on the date of grant. Under APB 25,
the Company was required to record expense over the vesting period for
the fair value of TLRSs granted. Prior to 2006, the Company provided
pro forma disclosure, as if the fair value method defined by SFAS No.
123 had been applied to its stock-based compensation. The Company's
net income and net income per share for the three months ended March
31, 2005 would have been reduced if compensation cost related to stock
options had been recorded in the financial statements based on fair
value at the grant dates.
The following pro forma net income and earnings per share (or "EPS")
were determined as if the Company had accounted for employee stock
options and stock issued under its employee stock plans using the fair
value method prescribed by SFAS 123.
10
In order to estimate the fair value of stock options, the Company used
the Black-Scholes option valuation model, which was developed for use
in estimating the fair value of publicly traded options which have no
vesting restrictions and are fully transferable. Option valuation
models require the input of highly subjective assumptions and these
assumptions can vary over time.
The only options outstanding at March 31, 2006 for SFAS 123R purposes
are the grants issued during the first quarters of 2002 and 2003. The
per-share weighted-average fair value of stock options granted during
2003 was $2.70 on the date of grant. The Company did not grant any
stock options in any years following the 2003 grant, therefore no
Black-Scholes calculation was necessary. The 2003 grant was valued
using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
- ----------------------------------------------------------------
Risk-free interest rate 3.96%
Expected life, in years Range from 4 to 8
Expected volatility 10.70%
Expected dividend yield 1.07%
- ----------------------------------------------------------------
As a result of adopting SFAS 123R, the impact to the Consolidated
Financial Statements for Net Income for the three months ended March
31, 2006 was $0.1 million (net of $0.1 million tax benefit) lower,
than if the Company had continued to account for stock - based
compensation under APB 25. There was no impact to both basic and
diluted earnings per share for the three months ended March 31, 2006.
Pro forma net income as if the fair value based method had been
applied to all awards for the three month period ended March 31, 2005,
along with a comparison to the March 31, 2006 actual results after the
application of FAS 123 r is as follows:
(In thousands, except for per share amounts)
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
----------------- -----------------
Net income as reported $ 10,903 $ 11,595
Add: Stock-based compensation programs recorded as expense, net of tax 404 187
Deduct: Total stock-based employee compensation expense, net of tax (404) (358)
----------------- -----------------
Pro forma net income $ 10,903 $ 11,424
================= =================
Earnings per share:
Basic - as reported $ 0.16 $ 0.17
Basic - pro forma $ 0.16 $ 0.17
Diluted - as reported $ 0.16 $ 0.17
Diluted - pro forma $ 0.16 $ 0.16
<FN>
The following table summarizes the components of the Company's
stock-based compensation programs recorded as expense ($ in
thousands):
</FN>
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
----------------- -----------------
Time Lapse Restricted Stock:
Pre-tax compensation expense $ 522 $ 311
Tax benefit (209) (124)
----------------- ---------------
Restricted stock expense, net of tax $ 313 $ 187
11
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
----------------- ----------------
Stock Options:
Pre-tax compensation expense $ 152 $ --
Tax benefit (61) --
----------------- ----------------
Stock option expense, net of tax $ 91 $ --
Three Months Three Months
Ended Ended
March 31, 2006 March 31, 2005
----------------- ----------------
Total Share-Based Compensation:
Pre-tax compensation expense $ 674 $ 311
Tax benefit (270) (124)
----------------- ----------------
Total share-based compensation expense, net of tax $ 404 $ 187
As of March 31, 2006, $11.5 million and $1.1 million of total
unrecognized compensation cost related to time lapse restricted shares
and stock options, respectively, is expected to be recognized over a
weighted average period of approximately 5.0 years for TLRSs and 1.6
years for stock options.
Option activity under the Company's stock option plan as of March 31,
2006 and changes during the three months ended March 31, 2006 were as
follows:
Weighted
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Shares Price (in Years) Value
----------- ----------- --------------- -------------
Outstanding at December 31, 2005 2,539 $ 9.24 3.98
Granted --- N/A N/A
Exercised (300) 8.78 N/A
Forfeited (11) 8.63 N/A
-----------
Outstanding at March 31, 2006 2,229 $ 9.31 3.70 $ 24,365
----------- --------- --------------- -------------
Exercisable at March 31, 2006 1,836 $ 8.98 3.11 $ 20,677
----------- --------- --------------- -------------
The aggregate intrinsic value in the table above represents the total
pre-tax intrinsic value (the difference between the Company's closing
stock price on the last trading day of the first quarter of 2006 and
the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option
holders exercised their options on March 31, 2006. The amount of
aggregate intrinsic value will change based on the fair market value
of the Company's stock.
The aggregate intrinsic value of options exercised during the quarters
ended March 31, 2006 and March 31, 2005 was $3.4 million and $4.9
million, respectively. Exercise of options during the first quarter of
2006 and 2005 resulted in cash receipts of $0.3 million and $1.2
million, respectively. The Company recognized a tax benefit of
approximately $0.2 million in the quarter ended March 31, 2006 related
to the exercise of employee stock options, which has been recorded as
an increase to additional paid-in capital.
12
The following table summarizes information on unvested restricted
stock units outstanding as of March 31, 2006:
Number of Weighted-Average
Shares Grant-Date Fair
(in thousands) Value
-------------- ----------------
Unvested Restricted Stock Units
Unvested at start of quarter 477 $ 16.10
Forfeited (1) 8.56
Vested (10) 9.28
Granted 296 21.17
-------------- ----------------
Unvested at end of quarter 762 $ 18.16
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, 2005 $ (26,536)$ 3,275 $ (3)$ (23,264)
----------------------------------------------------------
Change during 2006:
Before-tax amount - (82) - (82)
----------------------------------------------------------
- (82) - (82)
----------------------------------------------------------
Balance at March 31, 2006 $ (26,536)$ 3,193 $ (3)$ (23,346)
- ------------------------------------------------------------------------------------------------
NOTE 6. ACCRUAL FOR TERMITE CONTRACTS
In accordance with SFAS 5, "Accounting for Contingencies," 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.
A reconciliation of the beginning and ending balances of the accrual
for termite contracts is as follows:
Three months ended
March 31,
------------------------------------
(in thousands) 2006 2005
- ------------------------------------------------------------ ------------------
Beginning balance $ 23,200 $ 25,311
Current year provision 2,336 4,250
Settlements, claims, and expenditures (2,936) (3,421)
----------------- ------------------
Ending balance $ 22,600 $ 26,140
- -------------------------------------------------------------------------------
13
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
March 31,
---------------------------------
(in thousands) 2006 2005
---------------- ----------------
Service Cost $ - $ 1,397
Interest Cost 2,035 2,208
Expected Return on Plan Assets (2,610) (2,464)
Amortization of
Prior Service Benefit - (217)
Unrecognized Net Loss 890 1,164
---------------- ----------------
Net Periodic Benefit Cost $ 315 $ 2,088
In June 2005, the Company recorded a $4.2 million non-cash curtailment
gain 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. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
the Company classifies intangible assets into three categories: (1)
intangible assets with definite lives subject to amortization; (2)
intangible assets with indefinite lives not subject to amortization;
and (3) goodwill. The Company will test intangible assets with
definite lives for impairment if a condition exists that indicates the
carrying value may not be recoverable. The Company reviews such
property and equipment and intangible assets with definite lives for
impairment by comparing the fair value of asset to the current
carrying value, to ensure these assets are appropriately valued. Such
conditions may include an economic downturn in a market or a change in
the assessment of future operations. The Company does not amortize
intangible assets with indefinite lives and goodwill. Goodwill and
other intangible assets with indefinite useful lives are tested
annually, or more frequently if events or circumstances indicate the
assets might be impaired. Goodwill is assigned to the reporting unit
that benefits from the synergies arising from each business
combination. The Company performs impairment tests of goodwill at the
reporting unit level. Such impairment tests for goodwill include
comparing the fair value of the reporting unit with its carrying
value. The Company performs impairment tests for indefinite-lived
intangible assets by comparing the fair value of each indefinite-lived
intangible asset unit to its carrying value. The Company recognizes an
impairment charge if the asset's carrying value exceeds its estimated
fair value. 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 other
intangible assets has occurred.
NOTE 9. PERIODIC INCOME TAX RATE
The Company determines its periodic income tax expense based upon the
current period income and the annual estimated tax rate for the
Company adjusted for any change to prior year estimates. The estimated
tax rate is revised, if necessary, as of the end of each successive
interim period during the fiscal year to the Company's current annual
estimated tax rate."
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company is encouraged, but not content, with the 5.6% revenue improvement
the Company made during the first quarter of 2006 over first quarter 2005.
Rollins's organic revenue growth of 3.7% (which exclude the $3.4 million first
quarter revenue contribution resulting from the Industrial Fumigant Company
("IFC") acquisition) compares favorably versus the 2.6% improvement in our
fourth quarter. The "real" growth this quarter was the best since 2000. The
message that the Company intends to accelerate our growth rate is resonating
throughout our organization and is reflected in our investments, commitments and
effort.
The primary growth driver for the quarter continues to be the commercial pest
control business; however, the Company had increases in its termite and
residential pest control business as well.
Commercial business represented just over 43% of our overall business in the
first quarter, and grew 10.8% including IFC revenues and 6.3% excluding IFC
revenues, as compared to the Company's commercial revenues in the first quarter
of 2005. The Company's other service lines, Residential Pest Control (which
represents almost 36% of the overall business) increased 3.3% and Termite (which
contributed around 20% of the overall business) grew 2.3%, its best quarter in
some time due to a significant increase in new customer completions.
The Company is especially pleased by the improvement experienced in pest control
gross contract revenue or GCR (this is the Company's monthly recurring revenue).
The first quarter is always a difficult time to add business because of
seasonality, but Rollins saw a 1% growth in GCR this year in March, while last
year it declined 0.7%. This positive momentum should build and contribute
throughout the year.
First quarter net income was $10.9 million with diluted earnings per share of
$0.16. This compares to $11.6 million or $0.17 per diluted share for the first
quarter of 2005, representing a 6% decrease in net income.
The Company's net income came in lower than first quarter 2005; however Rollins
did exceed its internal profit plan. There were three primary factors behind
this lower profitability.
The first situation concerned the expected loss experienced by the Industrial
Fumigant Company in this quarter of a little over $1 million. IFC has long term
relationships with their major food processing customers; however, the service
they provide is not spread out evenly throughout the year. Historically the
first quarter of the year is their slowest quarter. However, this was further
worsened by the shift of Easter from March to April (one quarter to another).
Many IFC customers desire services over the Easter holiday, when plants are
closed. IFC was a contributor in the fourth quarter, and the Company likewise
expects a meaningful revenue and profit contribution in the Company's second
quarter of this year. Incidentally, there are plans underway with the IFC
management team to lessen the negative impact of their first quarter.
IFC contributed revenue of $3.4 million in the first quarter of 2005.
Historically the first quarter of the year is IFC's slowest quarter, in fact
only 1/8 of their annual revenue typically falls in the first quarter. To put it
in a better perspective, IFC's revenue this quarter was just over half of last
quarter IFC revenue of $6.3 million. Excluding the revenue contribution of IFC
in the quarter, revenue increased 3.7% in the quarter over first quarter 2005
revenue.
The second factor contributing to the Company's first quarter 1(cent) profit
decrease related to the Company's planned investment and buildup of Orkin's
sales force. During the first quarter, Orkin hired 100 additional new sales
people, which accounted for an increase in sales expense of approximately $1.0
million. As in any organization, the bringing on of new personnel requires
training and "getting them up to speed" productivity wise; however, Rollins is
confident that the investment it is making in sales and marketing will result in
the Company achieving higher revenue levels and related profitability.
The last negative impact on the quarter was the adoption of SFAS 123R and the
expensing of stock options and restricted stock grants which increased the
Company's expense approximately $400,000 over last year.
Gross margin for the quarter was 44.9% versus 45.5% last year. The decrease in
margins is due to the impact of IFC, which had a significantly greater Cost of
Services Provided ("CSP") than the remainder of our business. Due to IFC's low
revenue, their first quarter CSP was in excess of 82% this quarter. In addition
the Company continues to feel the impact of substantially greater fuel costs
than a year ago, with total fuel cost increasing $400,000. This is an area that
the Company's routing and scheduling project should ultimately have a big impact
on.
Selling, general and administrative expense increased to 32.2% from 31.9%. While
the Company incurred an approximately $1.0 million in additional cost related to
the expansion of the sales effort as well as additional stock option expense of
approximately $0.4 million, the Company was favorably impacted by a decrease in
sales cost runoff from last year's summer sales program as well as reductions in
bad debt expenses.
15
Depreciation and amortization totaled $6.8 million for the first quarter with
amortization of intangibles at $3.5 million and depreciation at $3.3 million.
The amortization of intangibles represents a significant non-cash charge to the
income statement. In 2006 total amortization of intangibles expense should be
approximately $14 million, versus $12.8 million in 2005.
Rollins' tax provision for the quarter was 40.0%, a slight improvement.
The Company's balance sheet remains strong with cash and cash equivalents of
$53.2 million as of March 31st and practically no debt. Rollins' cash flow
remains very strong. Net cash provided by operating activities totaled $27.5
million this quarter, increasing $8.0 million or 41.3% over same period last
year. This continuing strong cash flow will allow the Company to continue to
reinvest in its business, whether it be further acquisitions, stock purchases,
expanding our sales or capital projects such as routing and scheduling.
Rollins had some notable positive events during the quarter, the first being
that the Company has successfully moved the Rollins Customer Care Center from
Atlanta to Covington, Georgia, which is approximately 40 miles east of Atlanta.
At the same time, the Company renamed the Center to Orkin Customer Service
Center, which will make it easier for customers to associate the center with
their Orkin service versus the former reference to Rollins.
The Company's decision on where to locate the call center was assisted by a
professional site selection company, which researched over 600 labor markets in
the U.S. to make their recommendations. The new site was one of three finalists,
and the Company made its decision based on several factors, including the
county's high percentage of well-educated people that are interested in both
professional and second-income jobs. The area has a much improved workforce
availability compared to the former situation where we were located with over 60
call centers competing for employees in the immediate proximity. The Covington
location is in easy access to Orkin's home office, and the Company knew there
would be minimum disruption to business as a result of the move. The Company
relocated approximately 150 people over a weekend and not one phone call was
lost, and to date employee turnover has been at a minimum.
The effective management of Orkin's phone leads, web contacts and our use of
customer outbound calling is a very important part of our growth strategy. This
new state-of-the art facility is currently responsible for about $20 million in
annual sales, with prospective customer contacts this year, through the first
quarter, running over 15% greater than 2005.
Additionally, the Company is making good progress on our Routing and Scheduling
initiatives. Rollins has some technological hurdles to cross but is still
targeted to begin an extensive "conference room pilot" with live data in July.
Following the launch on January 20, 2006 of the Company's national satellite
training delivery system (or Orkin TV), Rollins has completed three, two-week
long Commercial Pest Control introduction technician training classes and three,
two-week long Residential Pest Control introduction technician training classes.
Each of these classes consists of four one-hour long broadcasts per day. The
Company also produced two one-hour live events on bed bugs, which were broadcast
to the entire network.
In addition, Orkin produced a new DVD for termite inspectors to show prospective
customers when providing their initial termite inspection.
During the first quarter, the Company repurchased an additional 211,466 shares
of its common stock under its repurchase plan at an average price of $19.35 per
share. In total, over 3.0 million additional shares may be purchased in the
future under the previously approved programs by the Board of Directors.
16
Results of Operations
Three months ended % Better/(Worse)
March 31, as Compared to Same
----------------------------- Quarter in
(in thousands) 2006 2005 Prior Year
-------------- ------------- --------------------
Revenues $ 194,187 $ 183,915 5.6%
Cost of services provided 107,014 100,249 (6.7)
Depreciation and amortization 6,793 5,963 (13.9)
Sales, general and administrative 62,500 58,671 (6.5)
(Gain) on sales of assets - 3 (100.0)
Interest income (292) (462) (36.8)
-------------- ------------- --------------------
Income before income taxes 18,172 19,491 (6.8)
Provision for income taxes 7,269 7,896 7.9
-------------- ------------- --------------------
Net income $ 10,903 $ 11,595 (0.1)%
============== ============= ====================
Revenues for the quarter ended March 31, 2006 increased to $194.2 million, an
increase of $10.3 million or 5.6%. For the first quarter of 2006 the primary
revenue drivers were the addition of the Industrial Fumigant Company (IFC),
which was purchased on October 1, 2005 and contributed $3.4 million in revenue,
as well as increases in Orkin's Pacific and Atlantic regions which had increases
of $2.0 million and $1.9 million respectively. Orkin Canada, which contributed
$13.6 million for an increase of $1.6 million, Western Pest, which contributed
$19.1 million for an increase of $1.6 million, as well as Orkin's pest control
business, which increased $3.6 million while growing 2.4%. Every-other-month
service, the Company's primary residential pest control service offering,
continues to grow in importance, comprising 61.3% of new residential pest
control sales for the first quarter of 2006 compared to 60.0% in the first
quarter 2005. The Company's foreign operations accounted for less than 7% of
total revenues during the first quarter 2006 compared to less than 7% of the
total during the first quarter 2005.
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) 2006 2005 2004
- --------------------------------------------------------------------------------
First Quarter $ 194,187$ 183,915 $ 160,416*
Second Quarter N/A 214,326 202,725*
Third Quarter N/A 209,346 203,925*
Fourth Quarter N/A 194,830 183,818
-----------------------------------------------
Year ended December 31, $ 194,187$ 802,417 $ 750,884
- --------------------------------------------------------------------------------
* Restated for change in accounting principle.
Cost of Services Provided for the first quarter ended March 31, 2006 increased
$6.8 million or 6.7%, compared to the quarter ended March 31, 2005, and expense
expressed as a percentage of revenues increased by 0.6 percentage points,
representing 55.1% of revenues for the first quarter 2006 compared to 54.5% of
revenues in the prior year's first quarter. Cost of Services Provided as a
percentage of revenues increased primarily due to higher service salaries,
administrative salaries and personnel related costs, due to the addition of the
Industrial Fumigant Company.
Increases in Cost of Services Provided were partially offset by a decrease in
the Company's 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. Decreases in termite
claims were due to positive changes to our business practices include revisions
made to our contracts, more effective treatment methods that include a
directed-liquid baiting program, more effective termiticides, and expanding
training methods and techniques.
Depreciation and Amortization expenses for the first quarter ended March 31,
2006 increased by $0.8 million or 13.9% to $6.8 million versus the prior year
quarter. The increase was due in part to the addition of the Industrial Fumigant
Company.
Sales, General and Administrative Expenses for the quarter ended March 31, 2006
increased $3.8 million or 6.5% as compared to the first quarter 2005. As a
percentage of revenues, Sales General and Administrative increased 0.3
percentage
17
points or 0.9%, representing 32.2% of total revenues compared to 31.9% for the
prior year quarter. The increase in Sales, General and Administrative Expenses
as a percentage of revenue was mainly attributable to higher administrative
salaries and sales salaries related to the addition of 100 sales employees and
higher advertising costs as well increases in personnel related costs with
higher compensation expense due to the adoption of SFAS 123R.
Income Taxes. The Company's tax provision of $7.3 million for the first quarter
ended March 31, 2006 reflects increased pre-tax income over the prior year
period and a slight decrease in the effective tax rate. The effective tax rate
was 40.0% for the first quarter ended March 31, 2006 and 40.5% for the first
quarter ended March 31, 2005.
Critical Accounting Policies
The Company views critical accounting policies to be those policies that are
very important to the portrayal of our financial condition and results of
operations, and that require management's most difficult, complex or subjective
judgments. The circumstances that make these judgments difficult or complex
relate to the need for management to make estimates about the effect of matters
that are inherently uncertain. We believe our critical accounting policies to be
as follows:
Accrual for Termite Contracts-- The Company maintains an accrual for termite
claims representing the estimated costs of reapplications, repairs and
associated labor and chemicals, settlements, awards and other costs relative to
termite control services. Factors that may impact future cost include chemical
life expectancy and government regulation. It is significant that the actual
number of claims has decreased in recent years due to changes in the Company's
business practices. However, it is not possible to precisely predict future
significant claims. 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 existing and future claims under the self-insurance
program are accrued based upon historical trends as incidents occur, whether
reported or unreported (although actual settlement of the claims may not be made
until future periods) and may be subsequently revised based on developments
relating to such claims. The Company contracts an independent third party
actuary on 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
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.
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.
Liquidity and Capital Resources
Cash and Cash Flow
Three months
ended March 31,
------------------------------------
(in thousands) 2006 2005
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 27,485 $ 19,458
Net cash used in investing activities (9,395) (7,438)
Net cash used in financing activities (7,844) (13,486)
Effect of exchange rate changes on cash (82) 623
------------------------------------
Net increase/(decrease) in cash and cash equivalents $ 10,164 $ (843)
Cash and cash equivalents at end of period $ 53,225 $ 55,894
- --------------------------------------------------------------------------------------------------
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 planned investments for expansion of the business for the
foreseeable future. The Company's operating activities generated net cash of
$27.5 million for the three months ended March 31, 2006, compared with cash
provided by operating activities of $19.5 million for the same period in 2005.
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 $5.4 million in capital expenditures during
the first three months ended March 31, 2006, compared to $6.4 million during the
same period in 2005, and expects to invest between $14.0 million and $17.0
million for the remainder of 2006. Capital expenditures for the first three
months consisted primarily of building purchases and the purchase of equipment
replacements. During the first three months ended March 31, 2006, the Company
made expenditures for acquisitions totaling $4.3 million, compared to $1.3
million during the same period in 2005. Expenditures for acquisitions for the
first three months of 2006 were funded by cash on hand. A total of $4.3 million
was paid in cash dividends ($0.0625 per share) during the first three months of
2006, compared to $3.4 million or $0.05 per share during the same period in
2005. The Company repurchased 211,466 shares of Common Stock in the first three
months of 2006 and there remain 3,053,858 shares authorized to be repurchased.
The capital expenditures and cash dividends were funded entirely through
existing cash balances and operating activities. The Company received cash from
the sale of franchise of $0.4 million for the first three months of 2006
compared to $0.3 million in 2005. The Company maintains $70.0 million of credit
facilities with commercial banks, of which no borrowings were outstanding as of
March 31, 2006 or April 15, 2006. 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-insured 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.
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
19
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. Orkin appealed
this ruling to the Florida Second District Court of Appeals, which remanded the
case back to the trial court for further findings. In December 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. 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, without limitation, statements regarding management's
expectation regarding the effect of the ultimate resolution of pending legal
actions on the Company's financial position, results of operation and liquidity;
management's belief that future costs of the Company for environmental matters
will not be material to the Company's financial condition, operating results,
and liquidity; the Company's expectation that IFC will provide a meaningful
revenue and profit contribution to the Company's second quarter of 2006;
management's belief that the Company's routing and scheduling project will
ultimately have a big impact on reducing fuel costs; management's expectation
regarding the Company's expense for amortization of intangibles during 2006;
management's expectation that continuing strong cash flows will allow the
Company to reinvest in its business; management's belief that it will begin an
extensive conference room pilot for its routing and scheduling initiatives with
live data in July 2006; management's opinion that the outcome of litigation will
not have a material adverse impact on the Company's financial condition or
results of operation; the Company's belief that its current cash and cash
equivalent balances, future cash flows from operating activities and available
borrowings will be sufficient to finance its current operations and obligations,
and fund planned investments for expansion of the business for the foreseeable
future; the Company's belief that it has adequate liquid assets, funding sources
and insurance accruals to accommodate various workers compensation and casualty
insurance contracts; and the Company's expectation that adjustments resulting
from an audit by the IRS for tax years 2002 and 2003 will not have a material
effect on the Company's results of operations, cash flows or financial position.
The actual results of the Company could differ materially from those indicated
by the forward-looking statements because of various risks and uncertainties
including, without limitation, the possibility of an adverse ruling against the
Company in pending litigation; general economic conditions; 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 and integrate potential acquisitions; climate and
weather conditions; 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, 2005. The
Company does not undertake to update its forward looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of March 31, 2006, 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 March 31, 2006, this risk was not
significant in the first three months of 2006 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 2005.
20
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 March 31, 2006. 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 first quarter that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. As of March 31, 2006, we did not identify any
material weaknesses in our internal controls, and therefore no corrective
actions were taken.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to Part I, Item 1 for discussion of certain litigation.
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors
disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005. 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
Shares repurchased by Rollins, Inc. during the three months ended
March 31, 2006 were as follows:
Total Number of Maximum Number
Shares Purchased of Shares that
Weighted Average as Part of Publicly May Yet Be
Total Number of Price Paid Announced Repurchase Purchased Under
Period Shares Purchased (1) per Share Plans (2) the Repurchase Plans (2)
January 1 to 31, 2006 16,067 $21.10 - 3,265,324
February 1 to 28, 2006 46,065 $20.92 - 3,265,324
March 1 to 31, 2006 264,490 $19.63 211,466 3,053,858
-------------------- --------------- ------------------ --------------------
Total 327,436 $19.83 211,466 3,053,858
==================== =============== ================== ====================
Item 4. None
21
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.
22
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: May 1, 2006 By: /s/Gary W. Rollins
---------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Principal Executive Officer)
Date: May 1, 2006 By: /s/Harry J. Cynkus
---------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
23