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 September 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 67,780,358 shares of its $1 par value Common Stock outstanding as of October 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
September 30, 2006 and December 31, 2005

3

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2006 and 2005.

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Nine
Months Ended September 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.

21

 

 

 

 

 

ITEM 4.

Controls and Procedures.

21

 

 

 

 

PART II

OTHER INFORMATION

22

 

 

 

 

 

Item 1.

Legal Proceedings.

22

 

 

 

 

 

Item 1A.

Risk Factors

22

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

22

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

22

 

 

 

 

 

Item 6.

Exhibits.

23

 

 

 

 

Signatures

 

 

24

 

2

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

PART I FINANCIAL INFORMATION

ITEM 1. FINACIAL STATEMENTS

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005

(in thousands)

 

September 30,

 

December 31,

 

2006

 

2005

 

(unaudited)

 

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

$

53,787

 

 

$

43,065

 

Trade receivables, short-term, net of allowance for doubtful accounts of $5,354 and $4,534, respectively

 

57,817

 

 

 

47,705

 

Materials and supplies

 

8,398

 

 

 

9,082

 

Deferred income taxes

 

21,053

 

 

 

27,510

 

Prepaid taxes

 

-

 

 

 

3,036

 

Other current assets

 

8,975

 

 

 

6,069

 

Total Current Assets

 

150,030

 

 

 

136,467

 

 

 

 

 

 

 

 

 

Equipment and property, net

 

72,090

 

 

 

65,932

 

Goodwill

 

134,017

 

 

 

133,743

 

Customer contracts and other intangible assets, net

 

67,539

 

 

 

71,841

 

Deferred income taxes

 

16,867

 

 

 

15,946

 

Trade receivables, long-term, net of allowance for doubtful accounts of $1,336 and $1,076, respectively

 

9,111

 

 

 

9,368

 

Other assets

 

4,531

 

 

 

5,123

 

Total Assets

$

454,185

 

 

$

438,420

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Capital leases

$

623

 

 

$

825

 

Accounts payable

 

14,092

 

 

 

17,204

 

Accrued insurance

 

16,633

 

 

 

17,605

 

Accrued compensation and related liabilities

 

42,813

 

 

 

41,822

 

Unearned revenue

 

88,945

 

 

 

79,990

 

Accrual for termite contracts

 

8,495

 

 

 

10,476

 

Other current liabilities

 

23,264

 

 

 

21,746

 

Total Current Liabilities

 

194,865

 

 

 

189,668

 

 

 

 

 

 

 

 

 

Capital leases, less current portion

 

197

 

 

 

560

 

Accrued insurance, less current portion

 

21,366

 

 

 

18,996

 

Accrual for termite contracts, less current portion

 

10,805

 

 

 

12,724

 

Accrued pension

 

15,651

 

 

 

20,651

 

Long-term accrued liabilities

 

12,422

 

 

 

18,870

 

Total Liabilities

 

255,306

 

 

 

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; 70,680,832 and 70,079,254 shares issued, respectively

 

70,681

 

 

 

70,079

 

Treasury stock, par value $1 per share; 2,898,074 and 2,068,240 shares respectively

 

(2,898

)

 

 

(2,068

)

Additional paid-in-capital

 

10,417

 

 

 

14,464

 

Accumulated other comprehensive loss

 

(22,657

)

 

 

(23,264

)

Unearned compensation

 

-

 

 

 

(5,881

)

Retained earnings

 

143,336

 

 

 

123,621

 

Total Stockholders’ Equity

 

198,879

 

 

 

176,951

 

Total Liabilities and Stockholders’ Equity

$

454,185

 

 

$

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 NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(in thousands except per share data)

(unaudited)

 

Three months ended

 

Nine months ended

 

September 30

 

September 30

 

2006

 

2005

 

2006

 

2005

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer services

$

227,816

 

 

$

209,346

 

 

$

654,225

 

 

$

607,587

 

COSTS AND EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services provided

 

119,206

 

 

 

110,083

 

 

 

345,255

 

 

 

324,626

 

Depreciation and amortization

 

6,662

 

 

 

5,800

 

 

 

20,400

 

 

 

17,808

 

Sales, general and administrative

 

74,472

 

 

 

68,574

 

 

 

211,340

 

 

 

194,839

 

Pension curtailment gain

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,176

)

Gain on sales of assets

 

(17

)

 

 

(1

)

 

 

(15

)

 

 

(544

)

Interest income

 

(332

)

 

 

(489

)

 

 

(968

)

 

 

(1,305

)

 

 

199,991

 

 

 

183,967

 

 

 

576,012

 

 

 

531,248

 

INCOME BEFORE TAXES

 

27,825

 

 

 

25,379

 

 

 

78,213

 

 

 

76,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

8,854

 

 

 

9,108

 

 

 

25,799

 

 

 

28,833

 

Deferred

 

1,934

 

 

 

1,171

 

 

 

5,144

 

 

 

2,085

 

 

 

10,788

 

 

 

10,279

 

 

 

30,943

 

 

 

30,918

 

NET INCOME

$

17,037

 

 

$

15,100

 

 

$

47,270

 

 

$

45,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME PER SHARE - BASIC

$

0.25

 

 

$

0.22

 

 

$

0.70

 

 

$

0.67

 

NET INCOME PER SHARE - DILUTED

$

0.25

 

 

$

0.22

 

 

$

0.69

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – basic

 

67,068

 

 

 

68,117

 

 

 

67,184

 

 

 

67,999

 

Weighted average shares outstanding – diluted

 

68,700

 

 

 

70,042

 

 

 

68,926

 

 

 

70,046

 

DIVIDENDS PAID PER SHARE

$

0.0625

 

 

$

0.0500

 

 

$

0.1875

 

 

$

0.1500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(in thousands)

(unaudited)

 

Nine months ended

 

September 30,

 

2006

 

2005

OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net Income

$

47,270

 

 

$

45,421

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

20,400

 

 

 

17,808

 

Pension curtailment gain

 

-

 

 

 

(4,176

)

Provision for deferred income taxes

 

5,144

 

 

 

2,085

 

Gain on sales of assets

 

(15

)

 

 

(544

)

Other, net

 

3

 

 

 

(1,309

)

(Increase)/decrease in assets:

 

 

 

 

 

 

 

Trade receivables

 

(9,747

)

 

 

(3,186

)

Materials and supplies

 

685

 

 

 

1,536

 

Other current assets

 

138

 

 

 

(2,059

)

Other non-current assets

 

735

 

 

 

233

 

Increase/(decrease) in liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

3,461

 

 

 

9,212

 

Unearned revenue

 

8,955

 

 

 

8,885

 

Accrued insurance

 

1,398

 

 

 

(2,484

)

Accrual for termite contracts

 

(3,900

)

 

 

(1,263

)

Accrued pension

 

(5,000

)

 

 

-

 

Long-term accrued liabilities

 

(6,666

)

 

 

380

 

Net cash provided by operating activities

 

62,861

 

 

 

70,539

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

Purchase of equipment and property

 

(15,657

)

 

 

(16,999

)

Acquisitions of companies, net of cash acquired

 

(5,050

)

 

 

(3,022

)

Cash from sales of franchises

 

550

 

 

 

340

 

Proceeds from sales of assets

 

20

 

 

 

752

 

Net cash used in investing activities

 

(20,137

)

 

 

(18,929

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

Dividends paid

 

(12,790

)

 

 

(10,304

)

Common stock purchased

 

(19,452

)

 

 

(21,313

)

Common stock options exercised

 

435

 

 

 

3,229

 

Principal payments on capital leases

 

(566

)

 

 

-

 

Other

 

(236

)

 

 

(1,215

)

Net cash used in financing activities

 

(32,609

)

 

 

(29,603

)

Effect of exchange rate changes on cash

 

607

 

 

 

745

 

Net increase in cash and cash equivalents

 

10,722

 

 

 

22,752

 

Cash and cash equivalents at beginning of period

 

43,065

 

 

 

56,737

 

Cash and cash equivalents at end of period

$

53,787

 

 

$

79,489

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for interest

$

43

 

 

$

130

 

Cash paid for income taxes

$

21,338

 

 

$

21,025

 

 

 

 

 

 

 

 

 

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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47,270

 

 

 

 

 

 

 

 

47,270

 

 

47,270

 

Other Comprehensive Income, Net of Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

607

 

 

 

 

 

 

 

 

 

 

 

607

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

607

 

 

607

 

 

 

 

 

 

 

 

 

 

Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

47,877

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,790

)

 

(12,790

)

Common Stock Purchased (2)

 

 

 

 

 

 

 

(1,007

)

 

(1,007

)

 

 

 

 

(3,655

)

 

 

 

 

 

 

 

 

 

 

(14,790

)

 

(19,452

)

Issuance of 401(k) Company Match

 

 

 

 

 

 

 

177

 

 

177

 

 

 

 

 

3,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,832

 

FAS 123R adoption

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,881

)

 

 

 

 

 

 

 

 

 

 

5,881

 

 

 

 

 

-

 

Stock Compensation

 

286

 

 

286

 

 

 

 

 

 

 

 

1,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

2,284

 

Common Stock Options Exercised

 

316

 

 

316

 

 

 

 

 

 

 

 

(189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

127

 

Non-Qualified Stock Options

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

Balance at September 30, 2006

 

70,681

 

$

70,681

 

 

(2,898

)

$

(2,898

)

$

10,417

 

$

-

 

$

-

 

$

(22,657

)

$

-

 

$

143,336

 

 

198,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 46R).

 

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

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, 2006. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill or other intangible assets was indicated.

 

7

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 had 57 franchises as of September 30, 2006, including international franchises in Mexico, established in 2000, Panama, established in 2003, and Costa Rica, established in 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 5 years. Notes receivable from franchises aggregated $5.1 million, $5.5 million, and $5.9 million as of September 30, 2006, December 31, 2005, and September 30, 2005, respectively. The Company recognizes gains from the sale of customer contracts at the time they are sold to franchisees and collection on the notes is reasonably assured. Such amounts are included as a component of revenues in the accompanying Consolidated Statements of Income. The Company incurred losses from sale of pest control customers of approximately $32,000 in the third quarter of 2006, compared to a $0.5 million gain in the third quarter of 2005, and a $0.7 million gain for the nine months ended September 30, 2006 compared to a $1.6 million gain for the nine months ended September 30, 2005. 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 $1.9 million at September 30, 2006, December 31, 2005, and September 30, 2005, respectively. Royalties from franchises are accrued and recognized as revenues as earned on a monthly basis. Revenues from royalties were $572,000 in the third quarter of 2006 compared to $549,000 in the third quarter of 2005 and were $1.7 million for the nine months ended September 30, 2006 compared to $1.5 million for the nine months ended September 30, 2005. The Company’s maximum exposure to loss relating to the franchises notes aggregated $3.1 million, $3.5 million, and $4.0 million at September 30, 2006, December 31, 2005 and September 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.

 

 

Consolidated Net Revenues

(in thousands)

 

Net Revenues

 

 

2006

 

 

 

2005

 

 

 

2004

 

First Quarter

$

194,187

 

 

$

183,915

 

 

$

160,416

*

Second Quarter

 

232,222

 

 

 

214,326

 

 

 

202,725

*

Third Quarter

 

227,816

 

 

 

209,346

 

 

 

203,925

*

Fourth Quarter

 

N/A

 

 

 

194,830

 

 

 

183,818

 

Year ended December 31,

$

654,225

 

 

$

802,417

 

 

$

750,884

 

 

 

 

 

 

 

 

 

 

 

 

 

* Restated for change in accounting principle.

 

 

 

8

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 or vested, 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. A reconciliation of the number of weighted-average shares used in computing basic and diluted EPS is as follows:

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

(in thousands except per share data)

2006

 

2005

 

2006

 

2005

Basic and diluted earnings available to stockholders (numerator):

$

17,037

 

 

$

15,100

 

 

$

47,270

 

 

$

45,421

 

Shares (denominator):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding - Basic

 

67,068

 

 

 

68,117

 

 

 

67,184

 

 

 

68,000

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options and restricted shares

 

1,632

 

 

 

1,925

 

 

 

1,742

 

 

 

2,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding – Diluted

 

68,700

 

 

 

70,042

 

 

 

68,926

 

 

 

70,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

$

0.25

 

 

$

0.22

 

 

$

0.70

 

 

$

0.67

 

Diluted income per common shares

$

0.25

 

 

$

0.22

 

 

$

0.69

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the third quarter of 2006, the Company announced that it repurchased 127,306 shares of common stock with a total of 1,006,680 shares repurchased year to date. 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 October 26, 2005. Approximately 2.3 million shares remain authorized for purchase. The stock buy-back program has no expiration date.

 

NOTE 3.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 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 assessing the impact of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures of fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognize changes in the funded status in the year in which the changes occur. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company is currently assessing the impact of SFAS No. 158 on its consolidated financial statements.

 

9

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of effects of the prior year misstatement in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in a material misstatement, when all relevant quantitative and qualitative factors are considered. SAB 108 is effective for the first annual period ending after November 15, 2006 with early application encouraged. The Company plans to adopt SAB 108 at its fiscal year-end December 31, 2006. The Company does not believe the adoption of SAB 108 will have a material impact on its Consolidated Financial Statements.

 

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.  The Plaintiffs have moved for a rehearing from the Florida Second District Court of Appeals, which Orkin has opposed. 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 Warren, the Superior Court of Cobb County, Marietta, Georgia, ruled in August 2006, certifying the class action against Orkin. Orkin is appealing this ruling to the Georgia Court of Appeals. Orkin believes these cases 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 these matters 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.

 

 

10

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 5.

STOCKHOLDERS’ EQUITY

 

During the third quarter ended September 30, 2006, the Company repurchased 127,306 shares for $2.5 million under its stock repurchase program. Also, during the third quarter ended September 30, 2006, approximately 0.1 million shares of common stock were issued upon exercise of stock options by employees. For the three months ended September 30, 2005, the Company issued approximately 0.1 million shares of common stock upon exercise of stock options by employees. For the nine months ended September 30, 2006, the Company has purchased over 1.0 millions shares of common shares at a weighted average price of $19.32 per share. Also, the nine months ended September 30, 2006, the Company has issued approximately 0.5 million shares of common stock upon exercise of stock options by employees. For the nine months ended September 30, 2005, the Company issued approximately 1.1 million shares of common stock upon exercise of stock options by employees.

Stock options and time lapse restricted shares (TLRS’s) 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.

TLRS’s 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 TLRS’s that vest over ten years prior to 2004. TLRS’s 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 September 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 TLRS’s 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 third 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 TLRS’s 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 nine months ended September 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.

 

 

11

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The only options outstanding at September 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.

 

As a result of adopting SFAS 123R, the impact to the Consolidated Financial Statements for Net Income for the nine months ended September 30, 2006 was $0.4 million (net of $0.3 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 September 30, 2006. Pro forma net income as if the fair value based method had been applied to all awards is as follows:

 

 

Three months ended

 

Nine months ended

 

September 30,

 

June 30,

(in thousands except per share data)

2006

 

2005

Pro forma

 

2006

 

2005

Pro forma

Net income as reported

$

17,037

 

 

$

15,100

 

 

$

47,270

 

 

$

45,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

461

 

 

 

185

 

 

 

1,361

 

 

 

555

 

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

 

(461

)

 

 

(332

)

 

 

(1,361

)

 

 

(1,008

)

Pro forma net income

$

17,037

 

 

$

14,953

 

 

$

47,270

 

 

$

44,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per common share

$

0.25

 

 

$

0.22

 

 

$

0.70

 

 

$

0.67

 

Diluted income per common shares

$

0.25

 

 

$

0.22

 

 

$

0.69

 

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro forma basic income per common share

$

0.25

 

 

$

0.22

 

 

$

0.70

 

 

$

0.66

 

Pro forma diluted income per common shares

$

0.25

 

 

$

0.21

 

 

$

0.69

 

 

$

0.64

 

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

 

 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

2006

 

2005

 

2006

 

2005

Time Lapse Restricted Stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax compensation expense

$

525

 

 

$

311

 

 

$

1,569

 

 

$

932

 

Tax benefit

 

(204

)

 

 

(126

)

 

 

(621

)

 

 

(377

)

Restricted stock expense, net of tax

$

321

 

 

$

185

 

 

$

948

 

 

$

555

 

 

 

 

 

Stock options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax compensation expense

$

228

 

 

$

-

 

 

$

684

 

 

$

-

 

Tax benefit

 

(88

)

 

 

-

 

 

 

(271

)

 

 

-

 

Stock option expense, net of tax

$

140

 

 

$

-

 

 

$

413

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Share-Based Compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-tax compensation expense

$

753

 

 

$

311

 

 

$

2,253

 

 

$

932

 

Tax benefit

 

(292

)

 

 

(126

)

 

 

(892

)

 

 

(377

)

Total share-based compensation expense, net of tax

$

461

 

 

$

185

 

 

$

1,361

 

 

$

555

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 



ROLLINS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

As of September 30, 2006, $10.4 million and $0.6 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 4.6 years for TLRS’s and 1.3 years for stock options.

Options activity outstanding under the Company’s stock option plan as of September 30, 2006 and changes during the nine months ended September 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

 

 

(547

)

 

 

8.88

 

 

 

N/A

 

 

 

 

 

Forfeited

 

 

(58

)

 

 

8.84

 

 

 

N/A

 

 

 

 

 

Outstanding at September 30, 2006

 

 

1,934

 

 

 

9.36

 

 

 

3.09

 

 

 

22,721

 

Exercisable at September 30, 2006

 

 

1,552

 

 

 

8.99

 

 

 

2.38

 

 

 

18,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 third 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 September 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 September 30, 2006 and September 30, 2005 was $0.7 million and $1.7 million, respectively. Exercise of options during the third quarter of 2006 and 2005 resulted in cash receipts of $37 thousand and $0.7 million, respectively. The Company recognized a tax benefit of approximately $0.3 million in the quarter ended September 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 September 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

  

(9

)

 

 

15.91

Vested

  

(55

)

 

 

15.51

Granted

  

296

 

 

 

21.17

Unvested at end of quarter

  

709

 

 

 

18.26

 

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

 

 

-

 

 

 

1,000

 

 

 

-

 

 

 

1,000

 

Tax benefit (expense)

 

 

-

 

 

 

(393

)

 

 

-

 

 

 

(393

)

 

 

 

-

 

 

 

607

 

 

 

-

 

 

 

607

 

Balance at September 30, 2006

 

$

(26,536

)

 

$

3,882

 

 

$

(3

)

 

$

(22,657

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

Nine months ended

 

 

September 30,

(in thousands)

 

2006

 

2005

Beginning balance

 

$

23,200

 

 

$

25,311

 

Current year provision

 

 

14,906

 

 

 

11,089

 

Settlements, claims and expenditures

 

 

(18,806

)

 

 

(12,352

)

Ending balance

 

$

19,300

 

 

$

24,048

 

 

 

 

 

 

 

 

 

 

 

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

 

Nine months ended

 

September 30,

 

September 30,

(in thousands)

2006

 

2005

 

2006

 

2005

Service Cost

$

-

 

 

$

-

 

 

$

-

 

 

$

2,794

 

Interest Cost

 

2,035

 

 

 

1,975

 

 

 

6,104

 

 

 

6,392

 

Expected return on plan assets

 

(2,684

)

 

 

(2,468

)

 

 

(8,052

)

 

 

(7,396

)

Amortization of prior service benefit

 

-

 

 

 

-

 

 

 

-

 

 

 

(434

)

Unrecognized Net Loss

 

890

 

 

 

1,112

 

 

 

2,672

 

 

 

3,440

 

Net periodic benefit cost

 

241

 

 

 

619

 

 

 

724

 

 

 

4,796

 

SFAS 88 Curtailment Gain

 

-

 

 

 

 

 

 

 

-

 

 

 

(4,176

)

Total

$

241

 

 

$

619

 

 

$

724

 

 

$

620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 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 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.

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 adverse impact on the Company’s financial condition or results of operations.

 

14

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

 

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

                            

Overview

The Company experienced revenue growth of 8.8% for the third quarter ended September 30, 2006 as compared to the third quarter 2005. Revenues in the third quarter of 2006 were $227.8 million compared to $209.3 million for the third quarter of 2005. Excluding the $8.8 million revenue contribution of the Industrial Fumigant Company (IFC) for third quarter of 2006, the Company’s organic revenues grew 4.6%. IFC contributed revenue of $8.8 million, up from $7.6 million in the second quarter of 2006. The Company’s investment in sales and marketing are the driving force behind this growth. This past quarter’s organic sales growth was the Company’s best in a number of years.

 

The Company experienced increased revenues in the three primary areas of business with the principal contributor being Commercial Pest Control. The primary reason for the increase in revenue is the commitment of our employees to implementing the initiatives that we have put in place over the past few years. As our increase in revenues indicate these initiatives are taking root. The Company’s newly hired sales and management team continues to share in increasing the growth of the Company’s revenues. The Company has also continued to emphasize technician sales which are up 16% in 2006 and are on track to have technicians add over 50,000 customers and over $20 million of related revenue for the year ended December 31, 2006.

 

Commercial business, which represented almost 43% of the Company’s overall business in the third quarter, grew 17.1% including the impact of the IFC acquisition and grew 5.5% excluding the contribution of IFC, as compared to the Company’s third quarter 2005. Residential Pest Control which represents almost 39% of the business, showed the greatest growth, increasing 6.1%, up from the second quarter when it grew 4.7%. Pest control gross contract revenue (GCR) is the Company’s monthly recurring revenue. Going into the fourth quarter the Company doesn’t expect to net add new customers, so the amount of GCR carry into this slow period is important. With the growth of the last three quarters the Company will carry a 5.2% GCR advantage into the fourth quarter versus 1.2% a year ago. One of the strengths of our Company is the amount of recurring revenue it enjoys. Termite revenue which contributed around 18% of the business was basically flat.

 

Gross margin for the quarter improved to 47.7% in the third quarter of 2006 versus 47.4% last year. The increase in margins is due to favorable group medical costs, reduced material and supply costs, and reduced service salaries. This was partially offset by increased fleet, claim experience and the addition of IFC.

 

Rollins recorded net income of $17.0 million, or $0.25 per diluted share for the third quarter ended September 30, 2006, compared to $15.1 million, or $0.22 per diluted share for the third quarter ended September 30, 2005. For the nine months ended September 30, 2006 the Company recorded net income of $47.3 million with diluted earnings per share of $0.69 compare to net income $45.4 million with diluted earnings per share of $0.65 for the nine months ended September 30, 2005. Excluding the impact of the non-cash pension curtailment gain in 2005, the Company’s earnings per share increased $0.08, or 13.1% compared to the prior nine month period.

 

SG&A expense decreased to 32.7% of revenues in the third quarter of 2006 from 32.8% of revenues in the third quarter of 2005 as the lower SG&A of IFC as well as favorable group medical costs, reduced cost of our summer sales program and lower bad debt expense more than offset the higher salary expense related to approximately 100 plus associates the Company added to its sales force.

 

Depreciation and amortization totaled $6.7 million for the third quarter ended September 30, 2006 with amortization of intangibles at $3.5 million and depreciation at $3.2 million. The amortization of intangibles (primarily customer contracts valued at time of the acquisition) represents a significant non-cash charge to the income statement. Under generally accepted accounting principles (GAAP), the Company writes off the value assigned to customer contracts acquired in acquisitions over their economic life while fully expensing all costs in acquiring new customers internally. In 2006 total amortization of intangibles expense should be approximately $14.0 million. Based upon our fully diluted shares outstanding, it will represent a non cash after tax charge of $0.12 to GAAP earnings per share this year.

 

The tax provision for the third quarter was 38.8% down from 40.5% for the third quarter 2005.

 

 

15

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

The Company’s balance sheet remains strong. Cash and cash equivalents are $53.8 million with practically no debt. Cash flow remains very strong. Net cash provided by operating activities for the nine months ended September 30, 2006 totaled $62.9 million, decreasing $7.7 million over the same period last year. The decrease was due primarily to two factors. One factor was an increase in accounts receivable of $6.6 million. This was primarily due to the increase in revenues and a system conversion for the Company’s Canadian operations which delayed billing and collections. The Company is working to bring that back in line. The other factor was a decision made to fund the Company’s frozen pension plan earlier this year. The Company added a full contribution of $5.0 million in the second quarter this year, while the 2005 contribution was made in the fourth quarter.

 

Customer Service

 

The Company’s Pest Control customer retention is tracking to achieve the best year ever. The Company has improvement in termite customer retention as well, primarily as a result of our new “term contract” sales program. Thousands of Orkin termite customers have guarantees that are expiring, and Orkin has a great opportunity to renew their protection and keep them as a customer. In support of increasing the Company’s termite control growth rate, Rollins has formed a Termite Advisory Counsel involving some of our best field and home office employees to develop additional ways to increase termite revenue and ensure excellence in new related products and services. At the same time, our worker retention continues to improve as it has for the past 5 years or more.

 

The Company recognizes that an important piece of customer service is adapting to our customers’ needs, lifestyles and desires. The first steps in this regard are to make it easy for them to find Orkin, to provide easy access to the services they want, and to be the first company they think of when they are considering any type of pest control service. To that end, many customers are finding Orkin on the internet, and as a result, the Company is receiving an ever increasing number of inquiries concerning its programs and services. Currently, the Company is projecting its web site will generate a seventy percent increase in leads over the Company’s 2005 web leads. Additionally this year two-thirds of the Company’s pest control leads will come from divisional call centers and branches, while the remaining one-third will come via 1-800 phone numbers and web inquires handled by our National Orkin Customer Service Center. Today a growing amount, though still less than half, of our termite control leads will also come to us through the Orkin Customer Service Center as well.

 

The Company is using the internet to market to commercial customers as well. Recently the Company launched email campaigns to current customers and prospective customers to further demonstrate our expertise in targeted industry service lines. Rollins is learning, as other companies, that the internet provides numerous opportunities to attain and retain customers. One of the Company’s national accounts with a large franchise network has created a web site so their franchisees can purchase Orkin services directly through their company’s internal intranet site. An important way for Orkin to create faster growth is by doing a better job of converting phone and web leads to customers through quicker response, more effective communication, and customized service offerings.

 

Industry Recognition

 

The Company is dedicating more time and effort to select and hire good people, and our award winning training is helping us keep them. In addition to helping the Company retain employees, our training initiatives are a key component to improving customer service and customer tenure. The Company continues to expand and improve its training programs, whose centerpiece is the launch of “Orkin TV”, our interactive satellite television communications. This company-wide network links 8,000 employees through a live, and “video on demand” broadcast technology. In recognition of this tremendous training investment, Orkin’s Vice President of Learning was recognized with the Learning Practice “Silver Award” in the Learning Innovation category. The Learning Practice award competition is sponsored by Chief Learning Officer magazine.

 

Stock Repurchase Program

 

During the third quarter Rollins purchased an additional 127,306 shares of common shares at a weighted average price of $19.36 per share. In total, 2.3 million additional shares may be purchased under programs previously approved by the Board of Directors. For the nine months ended September 30, 2006, the Company has purchased over 1.0 millions shares of common shares at a weighted average price of $19.32 per share.

 

16

 



ROLLINS, INC. AND SUBSIDIARIES

 

 

Results of Operations

 

 

Three months ended
September 30,

 

%Better/
(Worse) as Compared to Same Quarter in

 

Nine months ended
September 30,

 

%Better/
(Worse) as Compared to Same Period in

(in thousands)

 

2006

 

2005

 

Prior Year

 

2006

 

2005

 

Prior Year

Revenues

 

$

227,816

 

 

$

209,346

 

 

 

8.8

%

 

$

654,225

 

 

$

607,587

 

 

 

7.7

%

Cost of services provided

 

 

119,206

 

 

 

110,083

 

 

 

(8.3

)

 

 

345,255

 

 

 

324,626

 

 

 

(6.4

)

Depreciation and amortization

 

 

6,662

 

 

 

5,800

 

 

 

(14.9

)

 

 

20,400

 

 

 

17,808

 

 

 

(14.6

)

Sales, general and administrative

 

 

74,472

 

 

 

68,574

 

 

 

(8.6

)

 

 

211,340

 

 

 

194,839

 

 

 

(8.5

)

Pension curtailment gain

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,176

)

 

 

(100.0

)

Gain on sale of assets

 

 

(17

)

 

 

(1

)

 

 

N/M

 

 

 

(15

)

 

 

(544

)

 

 

(97.2

)

Interest income

 

 

(332

)

 

 

(489

)

 

 

(32.1

)

 

 

(968

)

 

 

(1,305

)

 

 

(25.8

)

Income before income taxes

 

 

27,825

 

 

 

25,379

 

 

 

9.6

 

 

 

78,213

 

 

 

76,339

 

 

 

2.5

 

Provision for income taxes

 

 

10,788

 

 

 

10,279

 

 

 

(5.0

)

 

 

30,943

 

 

 

30,918

 

 

 

(0.1

)

Net Income

 

$

17,037

 

 

$

15,100

 

 

 

12.8

%

 

$

47,270

 

 

$

45,421

 

 

 

4.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues for the quarter ended September 30, 2006 increased to $227.8 million, an increase of $18.5 million or 8.8%. For the third quarter of 2006 the primary revenue drivers were the addition of the IFC, which was purchased on October 1, 2005 and contributed $8.8 million in revenue, as well as an increase in Orkin revenues of $6.8 million. The Company’s foreign operations accounted for less than 8% of total revenues during the third quarter 2006 compared to less than 8% of the total during the third quarter 2005.

 

Year to Date revenues have increased 7.7% to $654.2 million, an increase of $46.6 million, of this the IFC acquisition contributed $19.8 million. Excluding revenues resulting from the IFC acquisition, revenues grew 4.4%.

 

The revenues of the Company are 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.

 

Consolidated Net Revenues

(in thousands)

 

Net Revenues

 

 

2006

 

 

 

2005

 

 

 

2004

 

First Quarter

$

194,187

 

 

$

183,915

 

 

$

160,416

*

Second Quarter

 

232,222

 

 

 

214,326

 

 

 

202,725

*

Third Quarter

 

227,816

 

 

 

209,346

 

 

 

203,925

*

Fourth Quarter

 

N/A

 

 

 

194,830