Annual report pursuant to Section 13 and 15(d)

EMPLOYEE BENEFIT PLANS

v3.3.1.900
EMPLOYEE BENEFIT PLANS
12 Months Ended
Dec. 31, 2015
Description of New Accounting Pronouncements Recently Adopted  
EMPLOYEE BENEFIT PLANS
13. EMPLOYEE BENEFIT PLANS

 

Defined Benefit Pension Plans

 

Rollins, Inc. Retirement Income Plan

 

The Company maintains several noncontributory tax-qualified defined benefit pension plans (the “Plans”) covering employees meeting certain age and service requirements. The Plans provide benefits based on the average compensation for the highest five years during the last ten years of credited service (as defined) in which compensation was received, and the average anticipated Social Security covered earnings. The Company funds the Plans with at least the minimum amount required by ERISA. The Company made contributions of $5.0 million, $5.3 million and $5.0 million to the Plans during the years ended December 31, 2015, 2014 and 2013 respectively.

 

In 2005, the Company ceased all future benefit accruals under the Rollins, Inc. Retirement Income Plan, although the Company remains obligated to provide employees benefits earned through June 2005.  In 2014, the Plan was amended to allow certain vested participants the ability to elect for a limited time the commencement of their benefit in the form of a single-sum payment, not to exceed $22,000, or an annuity starting date of December 1, 2014.  In total $6.3 million was paid by the Plan during the year ended December 31, 2014, under this program.  The Plan did not offer any options for the years ended December 31, 2015 and 2013.

 

The Company includes the Waltham Services, LLC Hourly Employee Pension Plan in the Company’s financial statements. The Company accounts for these defined benefit plans in accordance with the FASB ASC Topic 715 “Compensation- Retirement Benefits”, and engages an outside actuary to calculate its obligations and costs. With the assistance of the actuary, the Company evaluates the significant assumptions used on a periodic basis including the estimated future return on plan assets, the discount rate, and other factors, and makes adjustments to these liabilities as necessary.

 

In June 2005, the Company froze the Rollins, Inc. defined benefit pension plan. The Company currently uses December 31 as the measurement date for its defined benefit post-retirement plans. The funded status of the Plans and the net amount recognized in the statement of financial position are summarized as follows as of:

 

December 31,   2015   2014
(in thousands)        
CHANGE IN ACCUMULATED BENEFIT OBLIGATION                
Accumulated Benefit obligation at beginning of year   $ 221,721     $ 185,947  
Service cost     86       74  
Interest cost     8,915       9,427  
Actuarial (gain) loss     (20,283 )     42,056  
Benefits paid     (10,064 )     (15,783 )
Accumulated Benefit obligation at end of year     200,375       221,721  
CHANGE IN PLAN ASSETS                
Market value of plan assets at beginning of year     192,163       192,368  
Actual return on plan assets     3,541       10,328  
Employer contribution     5,000       5,250  
Benefits paid     (10,064 )     (15,783 )
Fair value of plan assets at end of year     190,640       192,163  
Funded status   $ (9,735 )   $ (29,558 )

 

Amounts Recognized in the Statement of Financial Position consist of:    
     
December 31,   2015   2014
(in thousands)        
Noncurrent liabilities   $ (9,735 )   $ (29,558 )

 

Amounts Recognized in Accumulated Other Comprehensive Income consists of:
 
December 31,   2015   2014
(in thousands)        
Net actuarial loss   $ 83,667     $ 98,462  

 

The accumulated benefit obligation for the defined benefit pension plans were $200.4 million and $221.7 million at December 31, 2015 and 2014, respectively. Accumulated benefit obligation and projected benefit obligation are materially the same for the Plans. Pre-tax (increases)/decreases in the pension liability which were (charged, net of tax) credited to other comprehensive income/ (loss) were $14.8 million, $(41.7) million, and $45.7 million in 2015, 2014, and 2013, respectively.

 

The following weighted-average assumptions were used to determine the accumulated benefit obligation and net benefit cost:

 

December 31,   2015   2014   2013
ACCUMULATED BENEFIT OBLIGATION                        
Discount rate     4.70 %     4.15 %     5.20 %
Rate of compensation increase     N/A       N/A       N/A  
                         
NET BENEFIT COST                        
Discount rate     4.15 %     5.20 %     4.17 %
Expected return on plan assets     7.00 %     7.00 %     7.00 %
Rate of compensation increase     N/A       N/A       N/A  

 

The return on plan assets reflects the weighted-average of the expected long-term rates of return for the broad categories of investments held in the plan. The expected long-term rate of return is adjusted when there are fundamental changes in the expected returns on the plan investments.

 

The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year.  In estimating this rate, for fiscal year’s 2015, 2014, and 2013 the Company utilized a yield curve analysis.

 

The components of net periodic benefit cost are summarized as follows:

 

Years ended December 31,   2015   2014   2013
(in thousands)            
Service cost   $ 86     $ 74     $ 112  
Interest cost     8,915       9,427       8,551  
Expected return on plan assets     (12,788 )     (12,431 )     (11,589 )
Amortization of net loss     3,761       2,439       3,910  
Net periodic loss/(benefit)   $ (26 )   $ (491 )   $ 984  

 

The benefit obligations recognized in other comprehensive income for the years ended December 31, 2015, 2014, and 2013 are summarized as follows:

 

(in thousands)   2015   2014   2013
Pretax (income)/loss   $ (11,035 )   $ 44,159     $ (41,767 )
Amortization of net loss     (3,761 )     (2,439 )     (3,910 )
Total recognized in other comprehensive income     (14,796 )     41,720       (45,677 )
Total recognized in net periodic benefit (income)/cost and other comprehensive income   $ (14,822 )   $ 41,229     $ (44,693 )

 

The Company expects to amortize a net loss of $3.0 million in 2016. At December 31, 2015 and 2014, the Plan’s assets were comprised of listed common stocks and U.S. government and corporate securities, real estate and other. Included in the assets of the Plan were shares of Rollins, Inc. Common Stock with a market value of $40.5 million and $37.3 million at December 31, 2015 and 2014, respectively.

 

The Plans’ weighted average asset allocation at December 31, 2015 and 2014 by asset category, along with the target allocation for 2016, are as follows:

 

  Target Percentage of plan assets as of
  allocations for December 31,
Asset category 2016 2015 2014
Cash and cash equivalents 0% -5% 1.9% 0.5%
Equity securities - Rollins stock 0% -40% 21.2% 19.4%
Domestic equity - all other 0% - 40% 20.5% 20.3%
International equity 0% - 30% 22.2% 23.2%
Debt securities - core fixed income 15% - 50% 24.0% 23.8%
Real estate 0% - 20% 6.6% 8.9%
Real return 0.0% 0.0% 1.6%
Alternative/Opportunistic/Special 0% -20% 3.6% 2.3%
Total 100.0% 100.0% 100.0%

 

For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits.  The investment policy establishes a target allocation for each asset class which is rebalanced as required. The plans utilize a number of investment approaches, including individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation. The Company and management are considering making contributions to the pension plans of approximately $3.3 million during fiscal 2016.

 

Some of our assets, primarily our private equity, real estate, and hedge funds, do not have readily determinable market values given the specific investment structures involved and the nature of the underlying investments.  For the December 31, 2015 plan asset reporting, publicly traded asset pricing was used where possible.  For assets without readily determinable values, estimates were derived from investment manager statements combined with discussions focusing on underlying fundamentals and significant events.   Additionally, these investments are categorized as level 3 investments and are valued using significant non-observable inputs which do not have a readily determinable fair value.  In accordance with ASU No. 2011-12 “Investments In Certain Entities That Calculate Net Asset Value per Share (Or Its Equivalent),” these investments are valued based on the net asset value per share calculated by the funds in which the plan has invested. These valuations are subject to judgments and assumptions of the funds which may prove to be incorrect, resulting in risks of incorrect valuation of these investments. The Company seeks to mitigate against these risks by evaluating the appropriateness of the funds’ judgments and assumptions by reviewing the financial data included in the funds’ financial statements for reasonableness.

 

 

Fair Value Measurements

 

The Company’s overall investment strategy is to achieve a mix of approximately 70 percent of investments for long-term growth and 30 percent for near-term benefit payments, with a wide diversification of asset types, fund strategies and fund managers.  Equity securities primarily include investments in large-cap and small-cap companies domiciled domestically and internationally.  Fixed-income securities include corporate bonds, mortgage-backed securities, sovereign bonds, and U.S. Treasuries.  Other types of investments include real estate funds and private equity funds that follow several different investment strategies. For each of the asset categories in the pension plan, the investment strategy is identical – maximize the long-term rate of return on plan assets with an acceptable level of risk in order to minimize the cost of providing pension benefits.  The investment policy establishes a target allocation for each asset class which is rebalanced as required.  The plans utilize a number of investment approaches, including but not limited to individual market securities, equity and fixed income funds in which the underlying securities are marketable, and debt funds to achieve this target allocation.

 

The following table presents our plan assets using the fair value hierarchy as of December 31, 2015. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. See note 7 for a brief description of the three levels under the fair value hierarchy.

 

(in thousands)   Total   Level 1   Level 2   Level 3
  (1)     Cash and Cash Equivalents   $ 3,543     $ 3,543     $ —       $ —    
  (2)     Fixed Income Securities     45,712       —         45,712       —    
        Domestic Equity Securities                                
        Rollins, Inc. Stock     40,510       40,510       —         —    
        Other Securities     39,070       12,008       27,062       —    
  (3)     International Equity Securities     42,373               42,373       —    
  (4)     Real Estate     12,565       —         —         12,565  
  (6)     Alternative/Opportunistic/Special     6,867       —         —         6,867  
        Total   $ 190,640     $ 56,061     $ 115,147     $ 19,432  

 

The following table presents our plan assets using the fair value hierarchy as of December 31, 2014. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

 

(in thousands)   Total   Level 1   Level 2   Level 3
  (1)     Cash and Cash Equivalents   $ 1,016     $ 1,016     $ —       $ —    
  (2)     Fixed Income Securities     45,768       18,322       27,446       —    
        Domestic Equity Securities                                
        Rollins, Inc. Stock     37,271       37,271       —         —    
        Other Securities     38,982       12,066       26,916       —    
  (3)     International Equity Securities     44,559       —         44,559       —    
  (4)     Real Estate     17,067       —         —         17,067  
  (5)     Real Return     3,119       —         3,119       —    
  (6)     Alternative/Opportunistic/Special     4,381       —         —         4,381  
        Total   $ 192,163     $ 68,675     $ 102,040     $ 21,448  

 

  (1) Cash and cash equivalents, which are used to pay benefits and plan administrative expenses, are held in Rule 2a-7 money market funds.
  (2) Fixed income securities are primarily valued using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.
  (3) Some International equity securities are valued using a market approach based on the quoted market prices of identical instruments in their respective markets.
  (4) Real estate fund values are primarily reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based comparable data.
  (5) Real Return funds invest in global equities, commodities and inflation protected core bonds that are valued primarily using a market approach based on the quoted market prices of identical instruments in their respective markets.
  (6) Alternative/Opportunistic/Special funds can invest across the capital structure in both liquid and illiquid securities that are valued using a market approach based on the quoted market prices of identical instruments, or if no market price is available, instruments will be held at their fair market value (which may be cost) as reasonably determined by the investment manager, independent dealers, or pricing services.

 

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2015.

 

            Net   Net    
    Balance at   Net Realized   Purchases,   Transfers   Balance at
    December 31,   and Unrealized   Issuances and   In to/(Out of)   December 31,
(in thousands)   2014   Gains/(Losses)   Settlements   Level 3   2015
Real Estate                                        
UBS Trumbull Property Income   $ 12,991     $ 799     $ (5,000 )   $ —       $ 8,790  
Garrison Real Estate Fund     4,076       859       (1,160 )     —         3,775  
Alternative/Opportunistic/Special                                        
Marathon European Credit Opp Fund     4,381       347       2,139       —         6,867  
Total   $ 21,448     $ 2,005     $ (4,021 )   $ —       $ 19,432  

 

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2014.

 

            Net   Net    
    Balance at   Net Realized   Purchases,   Transfers   Balance at
    December 31,   and Unrealized   Issuances and   In to/(Out of)   December 31,
(in thousands)   2013   Gains/(Losses)   Settlements   Level 3   2014
Real Estate                                        
UBS Trumbull Property Income   $ 12,831     $ 1,360     $ (1,200 )   $ —       $ 12,991  
Garrison Real Estate Fund     —         —         4,076       —         4,076  
Alternative/Opportunistic/Special                                        
Marathon European Credit Opp Fund     —         101       4,280       —         4,381  
Total   $ 12,831     $ 1,461     $ 7,156     $ —       $ 21,448  

 

The estimated future benefit payments over the next ten years are as follows:

 

(in thousands)    
  2016     $ 10,588  
  2017       10,973  
  2018       11,467  
  2019       11,785  
  2020       12,143  
  Thereafter       64,521  
  Total     $ 121,477  

 

Defined Contribution 401(k) Savings Plan

 

The Company sponsors a defined contribution 401(k) Savings Plan that is available to a majority of the Company’s full-time employees the first day of the calendar quarter following completion of three months of service. The Plan is available to non full-time employees the first day of the calendar quarter following one year of service upon completion of 1,000 hours in that year.  The Plan provides for a matching contribution of fifty cents ($.50) for each one dollar ($1.00) of a participant’s contributions to the Plan that do not exceed 6 percent of his or her eligible compensation (which includes commissions, overtime and bonuses). The charge to expense for the Company match was approximately $10.2 million for the year ended December 31, 2015 and $8.5 million and $8.2 million for the years ended December 31, 2014 and 2013, respectively. At December 31, 2015, 2014, and 2013 approximately, 33.5%, 29.3%, and 34.9%, respectively of the plan assets consisted of Rollins, Inc. Common Stock. Total administrative fees paid by the Company for the Plan were less than $0.1 million each of the years ending December 31, 2015, 2014 and 2013, respectively.

 

Nonqualified Deferred Compensation Plan

 

The Deferred Compensation Plan provides that participants may defer up to 50% of their base salary and up to 85% of their annual bonus with respect to any given plan year, subject to a $2 thousand per plan year minimum. The Company may make discretionary contributions to participant accounts. The Company credited accounts of participants of long service to the Company with certain discretionary amounts (“Pension Plan Benefit Restoration Contributions”) in lieu of benefits that previously accrued under the Company’s Retirement Income Plan up to a maximum of $245 thousand.

 

Accounts will be credited with hypothetical earnings, and/or debited with hypothetical losses, based on the performance of certain “Measurement Funds.” Account values are calculated as if the funds from deferrals and Company credits had been converted into shares or other ownership units of selected Measurement Funds by purchasing (or selling, where relevant) such shares or units at the current purchase price of the relevant Measurement Fund at the time of the participant’s selection. Deferred Compensation Plan benefits are unsecured general obligations of the Company to the participants, and these obligations rank in parity with the Company’s other unsecured and unsubordinated indebtedness. The Company has established a “rabbi trust,” which it uses to voluntarily set aside amounts to indirectly fund any obligations under the Deferred Compensation Plan. To the extent that the Company’s obligations under the Deferred Compensation Plan exceed assets available under the trust, the Company would be required to seek additional funding sources to fund its liability under the Deferred Compensation Plan.

 

Generally, the Deferred Compensation Plan provides for distributions of any deferred amounts upon the earliest to occur of a participant’s death, disability, retirement or other termination of employment (a “Termination Event”). However, for any deferrals of salary and bonus (but not Company contributions), participants would be entitled to designate a distribution date which is prior to a Termination Event. Generally, the Deferred Compensation Plan allows a participant to elect to receive distributions under the Deferred Compensation Plan in installments or lump-sum payments.

 

At December 31, 2015 the Deferred Compensation Plan had 70 life insurance policies with a net face value of $42.2 million. The cash surrender value of these life insurance policies were worth $12.9 million and $12.7 million at December 31, 2015 and 2014, respectively.

 

The estimated life insurance premium payments over the next five years are as follows:

 

(in thousands)    
  2016     $ 504  
  2017       1,097  
  2018       1,057  
  2019       952  
  2020       1,055  
  Total     $ 4,665  

 

Total expense/ (income) related to deferred compensation was $231 thousand, $207 thousand and $159 thousand in 2015, 2014, and 2013, respectively. The Company had $14.0 million and $13.7 million in deferred compensation assets as of December 31, 2015 and 2014, respectively, included within other assets on the Company’s consolidated statements of financial position and $14.1 million and $13.7 million in deferred compensation liability as of December 31, 2015 and 2014, respectively, located within long-term accrued liabilities on the Company’s consolidated statements of financial position. The amounts of assets were marked to fair value.