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 June 30, 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 incorporation or organization)

(I.R.S. Employer 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 o

 

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

o

Accelerated Filer

x

Non-Accelerated filer

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

o

No

x

 

 

Rollins, Inc. had 67,880,545 shares of its $1 par value Common Stock outstanding as of July 15, 2006.

 

 

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

Table of Contents

 

 

 

 

PART I

FINANCIAL INFORMATION

Page No.

 

 

 

 

 

ITEM 1.

Financial Statements

3

 

 

 

 

 

 

Consolidated Statements of Financial Position as of
June 30, 2006 and December 31, 2005

3

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2006 and 2005.

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 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

21

 

 

 

 

 

Item 1.

Legal Proceedings.

21

 

 

 

 

 

Item 1A.

Risk Factors

21

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

21

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

22

 

 

 

 

 

Item 6.

Exhibits.

22

 

 

 

 

Signatures

 

 

23

 

2

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

PART I FINANCIAL INFORMATION

ITEM 1. FINACIAL STATEMENTS

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF JUNE 30, 2006 AND DECEMBER 31, 2005

(in thousands)

 

June 30,

 

December 31,

 

2006

 

2005

 

(unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

37,221

 

 

$

43,065

 

Trade receivables, short-term, net of allowance for doubtful accounts of $4,381 and $4,534, respectively

 

56,617

 

 

 

47,705

 

Materials and supplies

 

8,545

 

 

 

9,082

 

Deferred income taxes

 

23,983

 

 

 

27,510

 

Prepaid taxes

 

-

 

 

 

3,036

 

Other current assets

 

10,023

 

 

 

6,069

 

Total Current Assets

 

136,389

 

 

 

136,467

 

 

 

 

 

 

 

 

 

Equipment and property, net

 

70,908

 

 

 

65,932

 

Goodwill

 

134,006

 

 

 

133,743

 

Customer contracts and other intangible assets, net

 

71,057

 

 

 

71,841

 

Deferred income taxes

 

16,263

 

 

 

15,946

 

Trade receivables, long-term, net of allowance for doubtful accounts of $1,629 and $1,076, respectively

 

10,170

 

 

 

9,368

 

Other assets

 

4,429

 

 

 

5,123

 

Total Assets

$

443,222

 

 

$

438,420

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Capital leases

$

705

 

 

$

825

 

Accounts payable

 

14,740

 

 

 

17,204

 

Accrued insurance

 

19,143

 

 

 

17,605

 

Accrued compensation and related liabilities

 

39,185

 

 

 

41,822

 

Unearned revenue

 

84,378

 

 

 

79,990

 

Accrual for termite contracts

 

11,335

 

 

 

10,476

 

Other current liabilities

 

23,724

 

 

 

21,746

 

Total Current Liabilities

 

193,210

 

 

 

189,668

 

 

 

 

 

 

 

 

 

Capital leases, less current portion

 

287

 

 

 

560

 

Accrued insurance, less current portion

 

19,226

 

 

 

18,996

 

Accrual for termite contracts, less current portion

 

12,865

 

 

 

12,724

 

Accrued pension

 

15,651

 

 

 

20,651

 

Long-term accrued liabilities

 

13,942

 

 

 

18,870

 

Total Liabilities

 

255,181

 

 

 

261,469

 

Commitments and Contingencies

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Preferred stock, without par value; 500,000 authorized, zero shares issued

 

-

 

 

 

-

 

Common stock, par value $1 per share; 170,000,000 and 99,500,000 shares authorized, respectively; 70,645,337 and 70,079,254 shares issued, respectively

 

70,645

 

 

 

70,079

 

Treasury stock, par value $1 per share; 2,770,768 and 2,068,240 shares respectively

 

(2,771

)

 

 

(2,068

)

Additional paid-in-capital

 

9,651

 

 

 

14,464

 

Accumulated other comprehensive loss

 

(22,355

)

 

 

(23,264

)

Unearned compensation

 

-

 

 

 

(5,881

)

Retained earnings

 

132,871

 

 

 

123,621

 

Total Stockholders’ Equity

 

188,041

 

 

 

176,951

 

Total Liabilities and Stockholders’ Equity

$

443,222

 

 

$

438,420

 

 

The accompanying notes are an integral part of these financial statements.

 

 

3

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(in thousands except per share data)

(unaudited)

 

Three months ended

 

Six months ended

 

June 30

 

June 30

 

2006

 

2005

 

2006

 

2005

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer services

$

232,222

 

 

$

214,326

 

 

$

426,408

 

 

$

398,241

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services provided

 

119,035

 

 

 

114,294

 

 

 

226,049

 

 

 

214,544

 

Depreciation and amortization

 

6,945

 

 

 

6,045

 

 

 

13,738

 

 

 

12,008

 

Sales, general and administrative

 

74,368

 

 

 

67,594

 

 

 

136,868

 

 

 

126,265

 

Pension curtailment gain

 

-

 

 

 

(4,176

)

 

 

-

 

 

 

(4,176

)

(Gain)/loss on sales of assets

 

2

 

 

 

(546

)

 

 

1

 

 

 

(544

)

Interest income

 

(344

)

 

 

(354

)

 

 

(636

)

 

 

(816

)

 

 

200,006

 

 

 

182,857

 

 

 

376,020

 

 

 

347,281

 

INCOME BEFORE TAXES

 

32,216

 

 

 

31,469

 

 

 

50,388

 

 

 

50,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

11,079

 

 

 

14,144

 

 

 

16,945

 

 

 

19,725

 

Deferred

 

1,807

 

 

 

(1,399

)

 

 

3,210

 

 

 

914

 

 

 

12,886

 

 

 

12,745

 

 

 

20,155

 

 

 

20,639

 

NET INCOME

$

19,330

 

 

$

18,724

 

 

$

30,233

 

 

$

30,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE - BASIC

$

0.29

 

 

$

0.28

 

 

$

0.45

 

 

$

0.45

 

NET INCOME PER SHARE - DILUTED

$

0.28

 

 

$

0.27

 

 

$

0.44

 

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

67,556

 

 

 

67,937

 

 

 

67,243

 

 

 

67,940

 

Weighted average shares outstanding – diluted

 

69,243

 

 

 

70,029

 

 

 

69,040

 

 

 

70,046

 

DIVIDENDS PAID PER SHARE

$

0.0625

 

 

$

0.0500

 

 

$

0.1250

 

 

$

0.1000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

4

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(in thousands)

(unaudited)

 

Six months ended

 

June 30,

 

2006

 

2005

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net Income

$

30,233

 

 

$

30,321

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

13,738

 

 

 

12,008

 

Pension curtailment gain

 

-

 

 

 

(4,176

)

Provision for deferred income taxes

 

3,210

 

 

 

914

 

(Gain)/loss on sales of assets

 

1

 

 

 

(544

)

Other, net

 

(770

)

 

 

205

 

(Increase)/decrease in assets:

 

 

 

 

 

 

 

Trade receivables

 

(9,605

)

 

 

(3,801

)

Materials and supplies

 

537

 

 

 

761

 

Other current assets

 

(910

)

 

 

(3,594

)

Other non-current assets

 

747

 

 

 

297

 

Increase/(decrease) in liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

130

 

 

 

5,951

 

Unearned revenue

 

4,388

 

 

 

5,142

 

Accrued insurance

 

1,768

 

 

 

(1,967

)

Accrual for termite contracts

 

1,000

 

 

 

599

 

Accrued pension

 

(5,000

)

 

 

-

 

Long-term accrued liabilities

 

(5,146

)

 

 

(1,717

)

Net cash provided by operating activities

 

34,321

 

 

 

40,399

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchase of equipment and property

 

(11,351

)

 

 

(14,203

)

Acquisitions of companies, net of cash acquired

 

(5,020

)

 

 

(1,606

)

Cash from sales of franchises

 

401

 

 

 

295

 

Marketable securities, net

 

-

 

 

 

(629

)

Proceeds from sales of assets

 

-

 

 

 

749

 

Net cash used in investing activities

 

(15,970

)

 

 

(15,394

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Dividends paid

 

(8,556

)

 

 

(6,858

)

Common stock purchased

 

(16,987

)

 

 

(11,105

)

Common stock options exercised

 

381

 

 

 

2,889

 

Principal payments on capital leases

 

(393

)

 

 

-

 

Other

 

451

 

 

 

(646

)

Net cash used in financing activities

 

(25,104

)

 

 

(15,720

)

Effect of exchange rate changes on cash

 

909

 

 

 

(843

)

Net increase/(decrease) in cash and cash equivalents

 

(5,884

)

 

 

8,442

 

Cash and cash equivalents at beginning of period

 

43,065

 

 

 

56,737

 

Cash and cash equivalents at end of period

$

37,221

 

 

$

65,179

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

$

90

 

 

$

20

 

Cash paid for income taxes

$

14,064

 

 

$

12,228

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

5

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury

Comprehensive

Other

 

 

 

 

 

 

 

 

 

 

Common stock

Treasury Stock

Paid

Paid

Income/

Comprehensive

Unearned

Retained

 

 

Shares

Amount

Shares

Amount

In-capital

In-capital

(Loss)

Income/(Loss)

Compensation

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

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,233

 

 

 

 

 

 

 

 

30,233

 

 

30,233

 

Other Comprehensive Income, Net of Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

909

 

 

 

 

 

 

 

 

 

 

 

909

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

909

 

 

909

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

31,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,556

)

 

(8,556

)

Common Stock Purchased (2)

 

 

 

 

 

 

 

(879

)

 

(879

)

 

 

 

 

(3,655

)

 

 

 

 

 

 

 

 

 

 

(12,452

)

 

(16,986

)

Issuance of 401(k) Company Match

 

 

 

 

 

 

 

176

 

 

176

 

 

 

 

 

3,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,831

 

FAS 123R adoption

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,881

)

 

 

 

 

 

 

 

 

 

 

5,881

 

 

 

 

 

-

 

Stock Compensation

 

293

 

 

293

 

 

 

 

 

 

 

 

1,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

1,531

 

Common Stock Options Exercised

 

273

 

 

273

 

 

 

 

 

 

 

 

(195

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78

 

Non-Qualified Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

Balance at June 30, 2006

 

70,645

 

$

70,645

 

 

(2,771

)

$

(2,771

)

$

9,651

 

$

-

 

$

-

 

$

(22,355

)

$

-

 

$

132,871

 

 

188,041

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes translation adjustment (net of tax) of $1,683,000 relating to non-current assets as of December 31, 2003.

(2) Amounts charged to Retained Earnings are from purchases of the Company’s Common Stock.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

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 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 June 30, 2006 and December 31, 2005, the results of its operations for the three and six months ended June 30, 2006 and 2005 and cash flows for the six months ended June 30, 2006 and 2005. All such adjustments are of a normal recurring nature. Operating results for the six months ended June 30, 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.

 

7

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 does not amortize intangible assets with indefinite lives and goodwill. Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if events or circumstances indicate the assets might be impaired. Such conditions may include an economic downturn or a change in the assessment of future operations. The Company performs impairment tests of goodwill at the company level. Such impairment tests for goodwill include comparing the fair value of the appropriate reporting unit (the Company) 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 was indicated.

Impairment of Long-Lived Assets - In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company’s long-lived assets, such as property and equipment and intangible assets with definite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Based upon the results of these analyses, the Company has concluded that no impairment of its long-lived assets was indicated.

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.

Franchising Program – Orkin began its franchising program in 1994 and had 56 franchises as of June 30, 2006, including international franchises in Mexico, established in 2000, Panama, established in 2003 and a new franchise in Costa Rica, established in June 2006. 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 five years. Notes receivable from franchises aggregated $5.5 million, $5.5 million, and $5.6 million as of June 30, 2006, December 31, 2005, and June 30, 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. The Company had a net gain of approximately $0.3 million in the second quarter of 2006, compared to a $0.1 million net loss in the second quarter of 2005, and $0.7 million for the six months ended June 30, 2006 compared to $1.1 million for the six months ended June 30, 2005, and 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 June 30, 2006, December 31, 2005, and June 30, 2005, respectively. Royalties from franchises are accrued and recognized as revenues as earned on a monthly basis. Revenues from royalties were $0.6 million in the second quarter of 2006 compared to $0.6 million in the second quarter of 2005 and were $1.1 million for the six months ended June 30, 2006 compared to $1.0 million for the six months ended June 30, 2005. The Company’s maximum exposure to loss relating to the franchises aggregated $3.5 million, $3.5 million, and $3.8 million at June 30, 2006, December 31, 2005 and June 30, 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.

 

 

8

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Consolidated Net Revenues

(in thousands)

 

Net Revenues

 

 

2006

 

 

 

2005

 

 

 

2004

 

First Quarter

$

194,186

 

 

$

183,915

 

 

$

160,416

*

Second Quarter

 

232,222

 

 

 

214,326

 

 

 

202,725

*

Third Quarter

 

N/A

 

 

 

209,346

 

 

 

203,925

*

Fourth Quarter

 

N/A

 

 

 

194,830

 

 

 

183,818

 

Year ended December 31,

$

426,408

 

 

$

802,417

 

 

$

750,884

 

 

 

 

 

 

 

 

 

 

 

 

 

* 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

 

Six months ended

 

June 30,

 

June 30,

(in thousands except per share data)

2006

 

2005

 

2006

 

2005

Basic and diluted earnings available to stockholders (numerator):

$

19,330

 

 

$

18,724

 

 

$

30,233

 

 

$

30,321

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding - Basic

 

67,556

 

 

 

67,937

 

 

 

67,243

 

 

 

67,940

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options and restricted shares

 

1,687

 

 

 

2,092

 

 

 

1,797

 

 

 

2,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding – Diluted

 

69,243

 

 

 

70,029

 

 

 

69,040

 

 

 

70,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

$

0.29

 

 

$

0.28

 

 

$

0.45

 

 

$

0.45

 

Diluted income per common shares

$

0.28

 

 

$

0.27

 

 

$

0.44

 

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company bought back 667,908 shares of the Company’s common stock in the second 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. A total of 2,385,950 shares remain authorized for purchase. The stock buy-back program has no expiration date.

 

NOTE 3.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effects of FIN 48. The potential impact on the consolidated financial condition or results of operations has not been determined.

 

 

9

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 4.

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 appealed this new ruling to the Florida Second District Court of Appeals. In June 2006, the Florida Second District Court of Appeals issued a ruling denying certification of the class. In the opinion of management, the ultimate resolution of this matter 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.; and Francis D. Petsch, et al. v. Orkin Exterminating Company, Inc., et al.) in which the plaintiffs are seeking certification of a class. The cases originate in Georgia and Florida. In Cynthia Garrett v. Orkin, Inc., an arbitration originating in Florida in which the plaintiff was seeking certification of a class, the arbitrators, in July 2006, issued a ruling denying certification of the class.  

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 regulations, 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 5.

STOCKHOLDERS’ EQUITY

 

During the second quarter ended June 30, 2006, the Company repurchased 667,908 shares for $12.9 million under its stock repurchase program. Also, during the second quarter ended June 30, 2006 and June 30, 2005, approximately 0.2 million shares and 0.4 millions shares, respectively, of common stock were issued upon exercise of stock options by employees. For the six months ended June 30, 2006 and six months ended June 30, 2005, the Company has issued approximately 0.5 million shares and 0.9 million shares, respectively, 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.

 

10

 

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company issues new shares from its authorized but unissued share pool. At June 30, 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 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 and six months ended June 30, 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.

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 June 30, 2006 for SFAS 123R purposes are the grants issued during the first quarters of 2002 and 2003. The Company did not grant any stock options in any years following the 2003 grant; therefore no Black-Scholes calculation was necessary.

 

11

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

As a result of adopting SFAS 123R, the impact to the Consolidated Financial Statements for Net Income for the three and six months ended June 30, 2006 was $0.2 million (net of $0.1 million tax benefit) and $0.3 million (net of $0.2 million tax benefit) lower, respectively, 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 June 30, 2006. Pro forma net income for 2005 as if the fair value based method had been applied to all awards is as follows:

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

(in thousands except per share data)

2006

 

2005

Pro forma

 

2006

 

2005

Pro forma

Net income as reported

$

19,330

 

 

$

18,724

 

 

$

30,233

 

 

$

30,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add: Stock-based compensation programs recorded as expense, net of tax

 

-

 

 

 

186

 

 

 

-

 

 

 

373

 

Deduct: Total stock-based employee compensation expense, net of tax

 

-

 

 

 

(332

)

 

 

-

 

 

 

(665

)

Pro forma net income

$

19,330

 

 

$

18,578

 

 

$

30,233

 

 

$

30,029

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

$

0.29

 

 

$

0.28

 

 

$

0.45

 

 

$

0.45

 

Diluted income per common shares

$

0.28

 

 

$

0.27

 

 

$

0.44

 

 

$

0.43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma basic income per common share

$

0.29

 

 

$

0.27

 

 

$

0.45

 

 

$

0.44

 

Pro forma diluted income per common shares

$

0.28

 

 

$

0.27

 

 

$

0.44

 

 

$

0.43

 

The following table summarizes the components of the Company’s stock-based compensation programs recorded as expense ($ in thousands):

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2006

 

2005

 

2006

 

2005

Time Lapse Restricted Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax compensation expense

$

522

 

 

$

310

 

 

$

1,044

 

 

$

621

 

Tax benefit

 

(211

)

 

 

(124

)

 

 

(423

)

 

 

(248

)

Restricted stock expense, net of tax

$

311

 

 

$

186

 

 

$

621

 

 

$

373

 

 

 

 

 

Stock options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax compensation expense

$

304

 

 

$

-

 

 

$

456

 

 

$

-

 

Tax benefit

 

(123

)

 

 

-

 

 

 

(185

)

 

 

-

 

Stock option expense, net of tax

$

181

 

 

$

-

 

 

$

271

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Share-Based Compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax compensation expense

$

826

 

 

$

310

 

 

$

1,500

 

 

$

621

 

Tax benefit

 

(334

)

 

 

(124

)

 

 

(608

)

 

 

(248

)

Total share-based compensation expense, net of tax

$

492

 

 

$

186

 

 

$

892

 

 

$

373

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2006, $11.0 million and $0.8 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 4.9 years for TLRSs and 1.5 years for stock options.

 

12

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Option activity under the Company’s stock option plan as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows:

 

 

 

Shares

 

Weighted Average Exercise Price

 

Weighted Average Remaining Contractual Term
(in years)

 

Aggregate Intrinsic Value

Outstanding at December 31, 2005

 

 

2,539

 

 

$

9.24

 

 

 

3.98

 

 

 

 

 

Granted

 

 

-

 

 

 

N/A

 

 

 

N/A

 

 

 

 

 

Exercised

 

 

(484

)

 

 

8.80

 

 

 

N/A

 

 

 

 

 

Forfeited

 

 

(20

)

 

 

9.84

 

 

 

N/A

 

 

 

 

 

Outstanding at June 30, 2006

 

 

2,035

 

 

$

9.34

 

 

 

3.43

 

 

$

20,951

 

Exercisable at June 30, 2006

 

 

1,649

 

 

$

8.99

 

 

 

2.79

 

 

$

17,569

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 second 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 June 30, 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 June 30, 2006 and June 30, 2005 was $2.0 million and $5.1 million, respectively. Exercise of options during the second quarter of 2006 and 2005 resulted in cash receipts of $0.8 million and $1.7 million, respectively. The Company recognized a tax benefit of approximately $0.3 million in the quarter ended June 30, 2006 related to the exercise of employee stock options, which has been recorded as an increase to additional paid-in capital.

The following table summarizes information on unvested restricted stock units outstanding as of June 30, 2006:

 

 

 

 

  

Number of

Shares

(in thousands)

 

 

Weighted-Average

Grant-Date Fair

Value

Unvested Restricted Stock Units

  

 

 

 

 

 

Unvested as of December 31, 2005

  

477

 

 

$

16.10

Forfeited

  

(3

)

 

 

13.48

Vested

  

(55

)

 

 

15.51

Granted

  

296

 

 

 

21.17

Unvested at end of quarter

  

715

 

 

$

18.25

 

NOTE 6.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

 

Accumulated other comprehensive loss consists of the following (in thousands):

 

 

 

Minimum Pension Liability

 

Foreign Currency Translation

 

Other Unrealized Loss

 

Total

Balance at December 31, 2005

 

$

(26,536

)

 

$

3,275

 

 

$

(3

)

 

$

(23,264

)

Change during 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Before-tax amount

 

 

-

 

 

 

909

 

 

 

-

 

 

 

909

 

Tax benefit (expense)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

909

 

 

 

-

 

 

 

909

 

Balance at June 30, 2006

 

$

(26,536

)

 

$

4,184

 

 

$

(3

)

 

$

(22,355

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 7.

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:

 

 

 

Six months ended

 

 

June 30,

(in thousands)

 

2006

 

2005

Beginning balance

 

$

23,200

 

 

$

25,311

 

Current year provision

 

 

8,292

 

 

 

9,527

 

Settlements, claims and expenditures

 

 

(7,292

)

 

 

(8,928

)

Ending balance

 

$

24,200

 

 

$

25,910

 

 

 

 

 

 

 

 

 

 

 

NOTE 8.

PENSION AND POST RETIREMENT BENEFIT PLANS

 

The following represents the net periodic pension benefit costs and related components in accordance with SFAS 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits:

 

Components of Net Pension Benefit Cost

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

(in thousands)

2006

 

2005

 

2006

 

2005

Service Cost

$

-

 

 

$

1,397

 

 

$

-

 

 

$

2,794

 

Interest Cost

 

2,035

 

 

 

2,208

 

 

 

4,069

 

 

 

4,416

 

Expected return on plan assets

 

(2,684

)

 

 

(2,464

)

 

 

(5,368

)

 

 

(4,928

)

Amortization of prior service benefit

 

-

 

 

 

(217

)

 

 

-

 

 

 

(434

)

Unrecognized Net Loss

 

890

 

 

 

1,164

 

 

 

1,782

 

 

 

2,328

 

Net periodic benefit cost

 

241

 

 

 

2,088

 

 

 

483