UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-4422
ROLLINS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0068479
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2170 Piedmont Road, N.E., Atlanta, Georgia
(Address of principal executive offices)
30324
(Zip Code)
(404) 888-2000
(Registrant's telephone number, including area code)
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Rollins, Inc. had 45,116,771 shares of its $1 Par Value Common Stock outstanding
as of July 15, 2003.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Consolidated Statements of Financial Position as of June 30, 2003
and December 31, 2002 2
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 11
Item 4. Controls and Procedures. 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 6. Exhibits and Reports on Form 8-K. 12
SIGNATURES 14
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share and per share data)
(Unaudited)
June 30, December 31,
2003 2002
-------------------- ------------------
ASSETS
Cash and Short-Term Investments $ 64,865 $ 38,315
Trade Receivables, Net of Allowance for
Doubtful Accounts of $4,724 and $5,441,
respectively 54,392 47,740
Materials and Supplies 11,073 10,662
Deferred Income Taxes 19,800 20,035
Other Current Assets 11,037 9,470
-------------------- ------------------
Current Assets 161,167 126,222
Equipment and Property, Net 34,391 38,880
Goodwill 72,498 72,392
Customer Contracts and Other Intangible Assets 33,700 35,507
Deferred Income Taxes 42,278 44,406
-------------------- ------------------
Total Assets $ 344,034 $ 317,407
==================== ==================
LIABILITIES
Accounts Payable $ 15,912 $ 12,138
Accrued Insurance 12,668 11,740
Accrued Payroll 30,354 28,623
Unearned Revenue 44,848 43,049
Accrual for Termite Contracts 19,000 19,000
Other Current Liabilities 19,360 15,312
-------------------- ------------------
Current Liabilities 142,142 129,862
Accrued Insurance, Less Current Portion 29,471 30,222
Accrual for Termite Contracts, Less Current Portion 26,980 27,446
Accrued Pension 5,770 10,769
Long-Term Accrued Liabilities 27,512 28,418
-------------------- ------------------
Total Liabilities 231,875 226,717
-------------------- ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 45,101,771 and 44,799,368
shares issued and outstanding, respectively 45,102 44,799
Additional Paid-In Capital 4,178 299
Accumulated Other Comprehensive Loss (16,613) (16,947)
Retained Earnings 79,492 62,539
-------------------- ------------------
Total Stockholders' Equity 112,159 90,690
-------------------- ------------------
Total Liabilities and Stockholders' $ 344,034 $ 317,407
Equity
==================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- -----------------
REVENUES
Customer Services $ 185,105 $ 184,189 $ 340,227 $ 337,491
---------------- ---------------- ---------------- -----------------
COSTS AND EXPENSES
Cost of Services Provided 95,550 97,205 179,628 181,227
Depreciation and Amortization 5,037 5,446 10,193 10,873
Sales, General & Administrative 62,253 62,720 116,475 118,557
Interest (Income) Expense (94) (39) (160) 10
---------------- ---------------- ---------------- -----------------
162,746 165,332 306,136 310,667
---------------- ---------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 22,359 18,857 34,091 26,824
---------------- ---------------- ---------------- -----------------
PROVISION FOR INCOME TAXES
Current 7,290 5,942 10,753 7,746
Deferred 1,207 1,224 2,202 2,447
---------------- ---------------- ---------------- -----------------
8,497 7,166 12,955 10,193
---------------- ---------------- ---------------- -----------------
NET INCOME $ 13,862 $ 11,691 $ 21,136 $ 16,631
================ ================ ================ =================
EARNINGS PER SHARE - BASIC
Net Income $ 0.31 $ 0.26 $ 0.47 $ 0.37
================ ================ ================ =================
EARNINGS PER SHARE - DILUTED
Net Income $ 0.30 $ 0.26 $ 0.46 $ 0.37
================ ================ ================ =================
Average Shares Outstanding---Basic 45,117 45,227 45,015 45,211
Average Shares Outstanding---Diluted 46,404 45,543 46,258 45,516
DIVIDENDS PAID PER SHARE $ 0.05 $ 0.0333 $ 0.10 $ 0.0666
================ ================ ================ =================
The accompanying notes are an integral part of these
consolidated financial statements.
3
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------------------------
2003 2002
------------------ -----------------
OPERATING ACTIVITIES
Net Income $ 21,136 $ 16,631
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 10,193 10,873
Provision for Deferred Income Taxes 2,364 2,463
Other, Net 163 173
(Increase) Decrease in Assets:
Trade Receivables (6,517) (6,238)
Materials and Supplies (358) 309
Other Current Assets (1,566) 2,284
Other Non-Current Assets (60) 94
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 11,874 7,186
Unearned Revenue 1,799 12,235
Accrued Insurance 177 526
Accrual for Termite Contracts (466) 841
Long-Term Accrued Liabilities (5,864) 224
------------------ -----------------
Net Cash Provided by Operating Activities 32,875 47,601
------------------ -----------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (2,332) (4,611)
Net Cash Used for Acquisition of Companies (1,508) (1,358)
------------------ -----------------
Net Cash Used in Investing Activities (3,840) (5,969)
------------------ -----------------
FINANCING ACTIVITIES
Dividends Paid (4,500) (3,016)
Common Stock Purchased --- (1,292)
Payments on Capital Leases --- (256)
Other 2,015 292
------------------ -----------------
Net Cash Used in Financing Activities (2,485) (4,272)
------------------ -----------------
Net Increase in Cash and Short-Term Investments 26,550 37,360
Cash and Short-Term Investments At Beginning of Period 38,315 8,650
------------------ -----------------
Cash and Short-Term Investments At End of Period $ 64,865 $ 46,010
================== =================
The accompanying notes are an integral part of these
consolidated financial statements.
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. 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. Footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States have been
condensed or omitted pursuant to 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, 2002.
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.
In the opinion of management, the consolidated financial
statements included herein contain all normal recurring
adjustments necessary to present fairly the financial position of
the Company as of June 30, 2003 and December 31, 2002, and the
results of operations for the three and six months ended June 30,
2003 and 2002 and cash flows for the six months ended June 30,
2003 and 2002. Operating results for the three and six months
ended June 30, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2003.
Comprehensive income includes foreign currency translation
adjustments (See Note 5). For the three and six months ended June
30, 2003 and 2002, comprehensive income is not materially
different from net income.
The Board of Directors, at its quarterly meeting on January 28,
2003, authorized a three-for-two stock split by the issuance on
March 10, 2003 of one additional common share for each two common
shares held of record on February 10, 2003. Accordingly, the par
value for additional shares issued was adjusted to common stock,
and fractional shares resulting from the stock split were settled
in cash. All share and per share data appearing throughout this
Form 10-Q have been retroactively adjusted for this stock split.
In November 2002, the Emerging Issues Task Force issued EITF
00-21, Revenue Arrangements with Multiple Deliverables, which is
effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. This EITF addresses how to account
for arrangements that may involve the delivery or performance of
multiple products, services, and/or rights to use assets. The
Company's termite baiting business involves multiple
deliverables, consisting of an initial installation and
subsequent monitoring inspections. Since the inception of its
termite baiting program in 1999, the Company has consistently
deferred a portion of the selling price to be recognized over the
first year of the contracts based on a fair value assessment of
the service provided. The Company will adopt EITF 00-21 in the
third quarter of 2003. Management believes that the adoption of
this statement will not have a material effect on the Company's
financial position, results of operations or liquidity.
In December 2002, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). The
Interpretation requires that a variable interest entity be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply
in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
The Company believes the adoption of the Interpretation will not
have a material impact on the financial position, results of
operations or liquidity of the Company.
Certain amounts for prior periods have been reclassified to
conform with current period consolidated financial statement
presentation. Such reclassifications had no effect on previously
reported net income.
The business of the Company is affected by the seasonal nature of
the Company's pest and termite control services as evidenced by
the following chart.
5
Total Net Revenues
---------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
First Quarter $ 155,122 $ 153,302 $ 150,280
Second Quarter 185,105 184,189 180,731
Third Quarter N/A 174,063 169,223
Fourth Quarter N/A 153,871 149,691
NOTE 2. EARNINGS PER SHARE
In accordance with SFAS No. 128, Earnings Per Share, the Company
computes basic Earnings Per Share ("EPS") 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 during the period, which, if exercised,
would have a dilutive effect on EPS. Basic and diluted EPS have
been restated for the three-for-two stock split for all
applicable 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 amounts) 2003 2002 2003 2002
------------------------------------------------------------------------------------------------- ------------------------
Basic and diluted earnings available to stockholders
(numerator): $13,862 $11,691 $21,136 $16,631
Shares (denominator):
Weighted-average shares outstanding 45,117 45,227 45,015 45,211
Effect of Dilutive securities:
Employee Stock Options 1,287 316 1,243 305
--------------------------- ------------------------
Adjusted Weighted-Average Shares and
Assumed Exercises 46,404 45,543 46,258 45,516
Per share amounts:
Basic earnings per common share $0.31 $0.26 $0.47 $0.37
Diluted earnings per common share $0.30 $0.26 $0.46 $0.37
------------------------------------------------------------------------------------------------- ------------------------
NOTE 3. LEGAL PROCEEDINGS
Orkin, one of the Company's subsidiaries, is a named defendant in
Helen Cutler and Mary Lewin v. Orkin Exterminating Company, Inc.
et al. pending in the District Court of Houston County, Alabama.
The plaintiffs in the above mentioned case filed suit in March of
1996 and are seeking monetary damages and injunctive relief for
alleged breach of contract arising out of alleged missed or
inadequate reinspections. The attorneys for the plaintiffs
contend that the case is suitable for a class action and the
court has ruled that the plaintiffs would be permitted to pursue
a class action lawsuit against Orkin. Orkin believes this case to
be without merit and intends to defend itself vigorously at
trial. At this time, the final outcome of the litigation cannot
be determined. However, in the opinion of Management, the
ultimate resolution of this action will not have a material
adverse effect on the Company's financial position, results of
operations or liquidity.
Orkin is also a named defendant in 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 in excess of
$15,000 for each named plaintiff and injunctive relief for
alleged breach of contract, fraud and various violations of
Florida state law. The Court ruled in early April 2002,
certifying the class action lawsuit against Orkin. Orkin has
appealed this ruling to the Florida Second District Court of
Appeals. Moreover, Orkin believes this case to be without merit
and intends to defend itself vigorously through trial, if
necessary. At this time, the final outcome of the litigation
cannot be determined. However, in the opinion of Management, the
ultimate resolution of this action will not have a material
adverse effect on the Company's financial position, results of
operations or liquidity.
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.
6
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 personnel and equipment. Orkin is actively contesting these
actions. In the opinion of Management, however, the outcome of
these actions will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
NOTE 4. STOCKHOLDERS' EQUITY
For the second quarter and six months ended June 30, 2003,
approximately 85,500 and 218,000 shares of common stock were
issued upon exercise of stock options by employees respectively.
The Company accounts for its employee stock options under the
recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related
Interpretations. The following table illustrates the effect on
net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended Six Months Ended
------------------------------------------------
June 30, June 30,
------------------------------------------------
(In thousands, except per share data) 2003 2002 2003 2002
---------------------- -----------------------
Net income, as reported $13,862 $11,691 $21,136 $16,631
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related
tax effects (483) (463) (966) (926)
---------------------- -----------------------
Pro forma net income $13,379 $11,228 $20,170 $15,705
---------------------- -----------------------
Earnings per share:
Basic-as reported $0.31 $0.26 $0.47 $0.37
Basic-pro forma $0.30 $0.25 $0.45 $0.35
Diluted-as reported $0.30 $0.26 $0.46 $0.37
Diluted-pro forma $0.29 $0.25 $0.44 $0.35
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consists of the following
(in thousands):
Minimum Foreign
Pension Currency
Liability Translation Total
--------------- -------------- ---------------
Balance at December 31, 2001 $ (4,047) $ (775) $ (4,822)
Change during first six months of 2002:
Before-tax amount --- 149 149
Tax benefit --- (57) (57)
--------------- -------------- ---------------
--- 92 92
--------------- -------------- ---------------
Balance at June 30, 2002 $ (4,047) $ (683) $ (4,730)
=============== ============== ===============
Balance at December 31, 2002 $ (16,182) $ (765) $ (16,947)
Change during first six months of 2003:
Before-tax amount --- 538 538
Tax benefit --- (204) (204)
--------------- -------------- ---------------
--- 334 334
--------------- -------------- ---------------
Balance at June 30, 2003 $ (16,182) $ (431) $ (16,613)
=============== ============== ===============
NOTE 6. ACCRUAL FOR TERMITE CONTRACTS
During the first quarter of 2003, the Company adopted the
accounting provisions of FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of
Others, which requires that the fair value of guarantees issued
after December 31, 2002 be recorded as a liability, with the
offsetting entry being recorded based on the circumstances in
7
which the guarantee was issued. FIN 45 further states that the
liability is typically reduced over the term of the guarantee.
The adoption had no impact on the Company's financial position,
results of operations or liquidity.
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 as discussed in further detail under Critical Accounting
Policies in Item 2. A reconciliation of the beginning and ending
balances of the accrual for termite contracts is as follows:
(In thousands)
- -----------------------------------------------------------------
Beginning Balance as of December 31, 2002 $46,446
Current Year Provision 12,592
Settlements, Claims and Expenditures Made
During the Period (13,058)
------------
Ending Balance as of June 30, 2003 $45,980
- -----------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's continued emphasis on customer retention, along with building
recurring revenues, resulted in revenue growth of 0.5% in the second quarter and
0.8% for the first six months of 2003 despite a sluggish economy and
unseasonably wet and cold weather conditions in parts of the U.S. The financial
results for the second quarter and the first six months of 2003 were positively
impacted by the continued benefit of our recent service initiatives, which
included every-other-month residential pest control service, AcuridSM premium
commercial pest control services, and termite directed liquid and baiting
treatment.
For the second quarter of 2003, the Company had net income of $13.9 million
compared to net income of $11.7 million in the second quarter of 2002, which
represents a 18.6% increase. For the first six months of 2003, the Company had
net income of $21.1 million compared to net income of $16.6 million in the first
six months of 2002, which represents a 27.1% increase. The overall improvement
in profit margins is largely a result of decreased Cost of Services Provided and
Sales, General & Administrative as a percentage of revenues.
For the first six months of 2003, the Company generated cash of $26.6 million
compared to $37.4 million for the first six months of 2002. The Company had Cash
and Short-Term Investments of $64.9 million at June 30, 2003, compared to $38.3
million at December 31, 2002 and $46.0 million at June 30, 2002.
Results of Operations
Revenues for the quarter ended June 30, 2003 increased to $185.1 million, an
increase of $916,000 or 0.5% from last year's second quarter revenues of $184.2
million. Revenues for the six month period ended June 30, 2003 increased to
$340.2 million, an increase of $2.7 million or 0.8% from last year's first six
month revenues of $337.5 million. The revenue increase was attributable to a
modest increase in revenues from residential and commercial pest control
service. The growth in pest control revenues reflects a successful 2002 and 2003
price increase campaign, as well as higher average selling prices for new
customers. Every-other-month service, our primary residential pest control
service offering, continues to grow in importance, comprising over 50% of our
residential pest control customer base at June 30, 2003. Our commercial revenues
improved slightly in the second quarter and six months, as a result of new
service offerings and a successful price increase campaign implemented in April
2003. Termite revenues decreased in the second quarter and six months of 2003
reflecting continuing wet and cold weather in parts of the U.S. Per the National
Climatic Data Center's 109 years of tracking weather data, temperatures in the
Northeast Region of the country were the 10th coldest on record. Also, the
Southeast experienced the second wettest six month period on record. The Company
experienced an improvement in recurring termite revenues mainly from higher bait
monitoring services. Despite the decrease in termite sales dollars, the Company
managed to achieve a slight improvement in average selling prices. The Company's
foreign operations made up less than 6.2% of the Company's total revenues in the
second quarter and six months of 2003 and 2002.
The business of the Company is affected by the seasonal nature of the Company's
pest and termite control services as evidenced by the following chart.
Total Net Revenues
---------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
First Quarter $ 155,122 $ 153,302 $ 150,280
Second Quarter 185,105 184,189 180,731
Third Quarter N/A 174,063 169,223
Fourth Quarter N/A 153,871 149,691
8
Cost of Services Provided for the second quarter ended June 30, 2003 decreased
$1,655,000 or 1.7%, while margins improved by 1.2 percentage points,
representing 51.6% of revenues for the second quarter 2003 compared to 52.8% of
revenues in the prior year second quarter. For the first six months of 2003,
Cost of Services Provided decreased $1,599,000 or 0.9%, while margins improved
by 0.9 percentage points, representing 52.8% of revenues for the first six
months of 2003 compared to 53.7% of revenues in the prior year. The decrease for
the quarter and six months ended June 30, 2003 can be mainly attributed to
reductions in service salaries, insurance and claims expense and materials and
supplies partially offset by higher fleet costs, which were affected by higher
gasoline prices and unusually large numbers of vehicles cycling off of leases.
Pest control and termite technician productivity and employee retention
continued to improve. In management's opinion, better employee retention helps
to drive better customer retention.
Sales, General and Administrative for the second quarter ended June 30, 2003
decreased $467,000 or 0.7% and, as a percentage of revenues, improved by 0.5
margin points for the second quarter, averaging 33.6% of total revenues compared
to 34.1% for the prior year quarter. Sales, General and Administrative for the
first six months of 2003 decreased $2.1 million or 1.8% and, as a percentage of
revenues, improved by 0.9 margin points for the first six months, averaging
34.2% of total revenues compared to 35.1% for the prior year. Improvement for
the year was mainly attributed to reduced sales salaries due to reduction of the
sales costs partially offset by higher marketing costs related to a new campaign
in Canada.
Depreciation and Amortization expenses for the quarter ended June 30, 2003 were
approximately $409,000 or 7.5% lower than the prior year quarter. For the first
six months of 2003, Depreciation and Amortization expenses were approximately
$680,000 or 6.3% lower than the prior year. The decrease was due to lower
capital spending and certain technology assets becoming fully depreciated in the
last twelve months.
The Company's tax provision of $8.5 million for the second quarter and $13.0
million for the first six months ended June 30, 2003 reflects increased pre-tax
income over the prior year periods. The effective tax rate was 38% in both
periods.
Critical Accounting Policies
We view critical accounting policies to be those policies that are very
important to the portrayal of our financial condition and results of operations,
and that require Management's most difficult, complex or subjective judgments.
The circumstances that make these judgments difficult or complex relate to the
need for Management to make estimates about the effect of matters that are
inherently uncertain. We believe our critical accounting policies to be as
follows:
Accrual for Termite Contracts - The Company maintains an accrual for
termite 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. The
Company contracts an independent third party actuary on an annual basis to
provide the Company a range of estimated liability based upon historical
claims information. The actuarial study is a major consideration in
determining the accrual balance, along with Management's knowledge of
changes in business practices, contract changes, ongoing claims and termite
remediation trends. The reserve is established based on all these factors.
Management makes judgments utilizing these operational factors but
recognizes that they are inherently subjective due to the difficulty in
predicting settlements and awards. Other factors that may impact future
cost include chemical life expectancy and governmental regulation. It is
significant that the actual number of claims has decreased in recent years
due to changes in the Company's business practices. However, it is not
possible to accurately predict future significant claims. Positive changes
to our business practices include revisions made to our contracts, more
effective treatment methods that include a directed-liquid baiting program,
more effective termiticides, and expanded training methods and techniques.
Accrued Insurance - The Company self-insures, up to specified limits,
certain risks related to general liability, workers' compensation and
vehicle liability. The estimated costs of existing and future claims under
the self-insurance program are accrued based upon historical trends as
incidents occur, whether reported or unreported (although actual settlement
of the claims may not be made until future periods) and may be subsequently
revised based on developments relating to such claims. The Company
contracts an independent third party actuary on an annual basis to provide
the Company a range of estimated liability based upon historical claims
information. The actuarial study is a major consideration, along with
Management's knowledge of changes in business practice and existing claims
compared to current balances. The reserve is established based on all these
factors. Management's judgment is inherently subjective and a number of
factors are outside Management's knowledge and control. Additionally,
historical information is not always an accurate indication of future
events. It should be noted that the number of claims has been decreasing
due to the Company's proactive risk management to develop and maintain
ongoing programs. However, it is not possible to accurately predict future
significant claims. Initiatives that have been implemented include
pre-employment screening and an annual Motor Vehicle report required on all
its drivers, utilization of a Global Positioning System that has been fully
deployed to our Company vehicles, post-offer physicals for new employees,
and pre-hire, random and post-accident drug testing. The Company has
improved the time required to report a claim by utilizing a "Red Alert"
program that provides serious
9
accident assessment twenty four hours a day and seven days a week and has
instituted a modified duty program that enables employees to go back to
work on a limited-duty basis.
Revenue Recognition - The Company's revenue recognition policies are
designed to recognize revenues at the time services are performed. For
certain revenue types, because of the timing of billing and the receipt of
cash versus the timing of performing services, certain accounting estimates
are utilized. Residential and commercial pest control services are
primarily recurring in nature, while certain types of commercial customers
may receive multiple treatments within a given month. In general, pest
control customers sign an initial one year contract, and revenues are
recognized at the time services are performed. For pest control customers,
the Company offers a discount for those customers who prepay for a full
year of services. The Company defers recognition of these advance payments
and recognizes the revenue as the services are rendered. The Company
classifies the discounts related to the advance payments as a reduction in
revenues. Termite baiting revenues are recognized when the initial services
are performed at the inception of a new contract, although a portion of
every termite baiting sale is deferred. The amount deferred is an estimate
of the value of monitoring services to be rendered after the initial
service. The amount deferred is then recognized as income on a
straight-line basis over the remaining contract term, which results in
recognition of revenue in a pattern that approximates the timing of
performing monitoring visits. Baiting renewals are deferred and recognized
over the annual contract period on a straight-line basis that approximates
the timing of performing the required monitoring visits. Traditional
termite treatments are recognized as revenue at the time services are
performed. Traditional termite contract renewals are recognized as revenues
at the renewal date in order to match the revenue with the approximate
timing of the corresponding service provided.
Liquidity and Capital Resources
The Company believes its current cash balances, future cash flows from operating
activities and available borrowings under its $40.0 million credit facility will
be sufficient to finance its current operations and obligations, and fund
expansion of the business for the foreseeable future. The Company's operations
generated cash of $32.9 million for the first six months ended June 30, 2003,
compared with cash provided by operating activities of $47.6 million for the
same period in 2002. The 2003 results were achieved primarily from higher income
from operations. The decrease in net cash provided by operations was due to a
decrease in year over year growth in unearned revenues. Unearned Revenue in 2002
was unusually high due to new computer system capabilities allowing to more
effectively solicit customers. The decrease in Long-Term Accrued Liabilities in
the first six months of 2003 was due to the timing difference in pension
payments between 2003 and 2002.
The Company invested approximately $2.3 million in capital expenditures during
the six months ended June 30, 2003, and expects to invest between $7.0 million
and $9.0 million for the remainder of 2003. Capital expenditures for the first
six months consisted primarily of the purchase of equipment replacements and
upgrades and improvements to the Company's management information systems.
During the first six months, the Company made acquisitions totaling $1.5 million
compared to $1.4 million during 2002. The Company currently does not have plans
to aggressively seek new acquisitions but will give consideration to any
unusually attractive acquisition opportunities presented. A total of $4.5
million was paid in cash dividends ($0.10 per share) during the first six months
of 2003. At the January 28, 2003 Board of Directors' Meeting, the Board approved
a 50% increase in the dividend, from $0.033 to $0.05 per share on the split
number of shares, as well as a three-for-two stock split to holders of record on
February 10, 2003 payable March 10, 2003. The capital expenditures, acquisitions
and cash dividends were funded entirely through existing cash balances and
operating activities. The Company maintains a $40.0 million credit facility with
a commercial bank, of which no borrowings were outstanding as of June 30, 2003
or July 15, 2003. However, the Company does maintain approximately $32.0 million
in Letters of Credit.
Orkin, one of the Company's subsidiaries, is aggressively defending a class
action lawsuit filed in Hillsborough County, Tampa, Florida. In early April
2002, the Circuit Court of Hillsborough County certified the class action status
of Butland et al. v. Orkin Exterminating Company, Inc. et al. Orkin is also a
defendant in Helen Cutler and Mary Lewin v. Orkin Exterminating Company, Inc. et
al pending in the District Court of Houston County, Alabama. For further
discussion, see Note 3 to the accompanying financial statements.
The Company made contributions of $20.0 million to the defined benefit
retirement plan (the "Plan") during 2002 as a result of the Plan being
underfunded. The Company made contributions of $5.0 million to the Plan in the
second quarter of 2003 and believes that it may make additional contributions in
the amount of approximately $5.0 million in the remainder of 2003. In the
opinion of Management, additional Plan contributions will not have a material
effect on the Company's financial position, results of operations or liquidity.
Impact of Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force issued EITF 00-21, Revenue
Arrangements with Multiple Deliverables, which is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. This
EITF addresses how to account for arrangements that may involve the delivery or
performance of multiple products, services, and/or rights to
10
use assets. The Company's termite baiting business involves multiple
deliverables, consisting of an initial installation and subsequent monitoring
inspections. Since the inception of its termite baiting program in 1999, the
Company has consistently deferred a portion of the selling price to be
recognized over the first year of the contracts based on a fair value assessment
of the service provided. The Company will adopt EITF 00-21 in the third quarter
of 2003. Management believes that the adoption of this statement will not have a
material effect on the Company's financial position, results of operations or
liquidity.
In December 2002, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"). The Interpretation requires that a
variable interest entity be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company believes the adoption of the
Interpretation will not have a material impact on the financial position,
results of operations or liquidity of the Company.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include statements regarding the expected impact of potential future
pension plan contributions, the outcome of litigation arising in the ordinary
course of business and the outcome of the Helen Cutler and Mary Lewin v. Orkin
Exterminating Company, Inc. et al. ("Cutler") and the Butland et al. v. Orkin
Exterminating Company, Inc. et al. ("Butland") litigation on the Company's
financial condition, results of operations and liquidity; the adequacy of the
Company's resources to fund operations and obligations; the impact of the
corporate restructuring on liquidity and results of operations; and the
Company's projected 2003 capital expenditures. The actual results of the Company
could differ materially from those indicated by the forward-looking statements
because of various risks, timing and uncertainties including, without
limitation, the possibility of an adverse ruling against the Company in the
Cutler, Butland or other litigation; general economic conditions; market risk;
changes in industry practices or technologies; the degree of success of the
Company's termite process reforms and pest control selling and treatment
methods; the Company's ability to identify potential acquisitions; climate and
weather trends particularly unseasonable cold and wet weather; competitive
factors and pricing practices; that the cost reduction benefits of the corporate
restructuring may not be as great as expected or eliminated positions may have
to be reinstated in the future; potential increases in labor costs; and changes
in various government laws and regulations, including environmental regulations
and additional risks discussed in the Company's Form 10-K for 2002. All of the
foregoing risks and uncertainties are beyond the ability of the Company to
control, and in many cases the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of June 30, 2003, the Company maintained an investment portfolio subject to
short-term interest rate risk exposure. The Company has been affected by the
impact of lower interest rates on interest income from its short-term
investments. The Company is also subject to interest rate risk exposure through
borrowings on its $40.0 million credit facility. Due to the absence of such
borrowings as of June 30, 2003 and as currently anticipated for the remainder of
2003, this risk is not expected to have a material effect upon the Company's
results of operations or financial position going forward. The Company is also
exposed to market risks arising from changes in foreign exchange rates. The
Company believes that this foreign exchange rate risk will not have a material
effect upon the Company's results of operations or financial position going
forward.
Item 4. Controls and Procedures.
Under the supervision and with the participation of our Management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in rules 13a-15(e) and 15d -15(e) under the
Securities Exchange Act of 1934, as of June 30, 2003. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective such that the material
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms relating to Rollins, Inc., including
our consolidated subsidiaries, and was made known to them by others within those
entities, particularly during the period when this report was being prepared.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during the
quarter. We have not identified any significant deficiency or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to Part I, Item 1 for discussion of certain
litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on April
22, 2003. At the meeting, stockholders voted on the following
proposals:
1. To elect two Class II Directors for the three-year term
expiring in 2006. Each nominee for Class II Director was
elected by a vote of the stockholders as follows:
Election of Class II Directors: For Withheld
--------------------------------------- ---------------------- -------------------------
Gary W. Rollins 28,210,903 119,594
Henry B. Tippie 28,223,559 106,938
2. To approve the Performance-Based Incentive Cash
Compensation Plan for Executive Officers. The proposal was
approved by a vote of stockholders as follows:
For 28,116,573
Against 197,091
Abstain 16,833
----------------------
28,330,497
----------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(3) (i) Restated Certificate of Incorporation of
Rollins, Inc. is incorporated herein by
reference to Exhibit (3) (i) as filed with
its Form 10-K for the year ended December 31,
1997.
(ii) Amended and Restated By-laws of Rollins, Inc.
(iii) Amendment to the By-laws of Rollins, Inc. is
incorporated herein by reference to Exhibit
(3) (iii) as filed with its Form 10-Q for the
quarterly period ended March 31, 2001.
(iv) Amendment to the By-laws of Rollins, Inc. is
incorporated herein by reference to Exhibit
(3)(iv) as filed with its Form 10-K for the
year ended December 31, 2002.
(4) Form of Common Stock Certificate of Rollins,
Inc. is incorporated herein by reference to
Exhibit (4) as filed with its Form 10-K for
the year ended December 31, 1998.
(99.1) Certification of Chief Executive Officer
Pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(99.2) Certification of Chief Financial Officer
Pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(99.3) Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
12
(b) Reports on Form 8-K.
On April 3, 2003, the Company furnished a
report on Form 8-K, which reported under Item
9 that the Company will present at Tulane
University's Seventh Annual A.B. Freeman
School of Business Burkenroad Reports
Conference in New Orleans, LA.
On April 24, 2003, the Company furnished a
report on Form 8-K, which reported under Item
9 that on April 22, 2003, the Company
reported earnings for the first quarter ended
March 31, 2003.
On April 24, 2003, the Company furnished a
report on Form 8-K, which reported under Item
9 that on April 22, 2003, the Board of
Directors has declared a regular quarterly
dividend of $0.05 per share.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROLLINS, INC.
(Registrant)
Date: July 23, 2003 By: /s/ Gary W. Rollins
-----------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: July 23, 2003 By: /s/ Harry J. Cynkus
-----------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
14