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 September 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 (I.R.S. Employer
incorporation 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 45,111,567 shares of its $1 Par Value Common Stock outstanding
as of October 15, 2003.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Consolidated Statements of Financial Position as of September 30,
2003 and December 31, 2002 2
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2003 and 2002 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13
Item 4. Controls and Procedures. 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings. 14
Item 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES 15
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)
September 30, December 31,
2003 2002
-------------------- ------------------
(Unaudited)
ASSETS
Cash and Short-Term Investments $ 55,066 $ 38,315
Marketable Securities 27,000 ---
Trade Receivables, Net of Allowance for
Doubtful Accounts of $4,890 and $5,441,
respectively 52,689 47,740
Materials and Supplies 10,646 10,662
Deferred Income Taxes 21,934 20,035
Other Current Assets 13,035 9,470
-------------------- ------------------
Current Assets 180,370 126,222
Equipment and Property, Net 37,484 38,880
Goodwill 72,498 72,392
Customer Contracts and Other Intangible Assets 31,972 35,507
Deferred Income Taxes 34,760 44,406
-------------------- ------------------
Total Assets $ 357,084 $ 317,407
==================== ==================
LIABILITIES
Accounts Payable $ 13,482 $ 12,138
Accrued Insurance 13,050 11,740
Accrued Payroll 33,218 28,623
Unearned Revenue 49,533 43,049
Accrual for Termite Contracts 19,000 19,000
Other Current Liabilities 18,787 15,312
-------------------- ------------------
Current Liabilities 147,070 129,862
Accrued Insurance, Less Current Portion 27,637 30,222
Accrual for Termite Contracts, Less Current Portion 28,114 27,446
Accrued Pension 5,770 10,769
Long-Term Accrued Liabilities 28,652 28,418
-------------------- ------------------
Total Liabilities 237,243 226,717
-------------------- ------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 45,108,317 and 44,799,368
shares issued and outstanding, respectively 45,108 44,799
Additional Paid-In Capital 4,176 299
Accumulated Other Comprehensive Loss (16,602) (16,947)
Retained Earnings 87,159 62,539
-------------------- ------------------
Total Stockholders' Equity 119,841 90,690
-------------------- ------------------
Total Liabilities and Stockholders' Equity $ 357,084 $ 317,407
==================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ------------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- -----------------
REVENUES
Customer Services $ 178,262 $ 174,063 $ 518,489 $ 511,554
---------------- ---------------- ---------------- -----------------
COSTS AND EXPENSES
Cost of Services Provided 96,085 94,402 275,713 275,609
Depreciation and Amortization 5,065 5,425 15,258 16,298
Sales, General & Administrative 61,426 63,478 177,901 182,055
Net Interest Income (120) (135) (280) (125)
---------------- ---------------- ---------------- -----------------
162,456 163,170 468,592 473,837
---------------- ---------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 15,806 10,893 49,897 37,717
---------------- ---------------- ---------------- -----------------
PROVISION FOR INCOME TAXES
Current 4,728 4,600 15,481 12,346
Deferred 1,278 (461) 3,480 1,986
---------------- ---------------- ---------------- -----------------
6,006 4,139 18,961 14,332
---------------- ---------------- ---------------- -----------------
NET INCOME $ 9,800 $ 6,754 $ 30,936 $ 23,385
================ ================ ================ =================
EARNINGS PER SHARE - BASIC $ 0.22 $ 0.15 $ 0.69 $ 0.52
================ ================ ================ =================
EARNINGS PER SHARE - DILUTED $ 0.21 $ 0.15 $ 0.67 $ 0.52
================ ================ ================ =================
Average Shares Outstanding---Basic 45,115 44,885 45,049 45,101
Average Shares Outstanding---Diluted 45,994 45,118 46,170 45,382
DIVIDENDS PER SHARE $ 0.05 $ 0.0333 $ 0.15 $ 0.10
================ ================ ================ =================
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)
Nine Months Ended
September 30,
----------------------------------------
2003 2002
------------------ -----------------
OPERATING ACTIVITIES
Net Income $ 30,936 $ 23,385
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 15,258 16,298
Deferred Income Taxes 7,748 2,085
Other, Net 278 776
(Increase) Decrease in Assets:
Trade Receivables (4,810) (4,894)
Materials and Supplies 69 831
Other Current Assets (3,565) (577)
Other Non-Current Assets (60) 96
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 11,727 3,720
Unearned Revenue 6,484 15,602
Accrued Insurance (1,275) (449)
Accrual for Termite Contracts 668 822
Long-Term Accrued Liabilities (4,724) (4,359)
------------------ -----------------
Net Cash Provided by Operating Activities 58,734 53,336
------------------ -----------------
INVESTING ACTIVITIES
Purchase of Marketable Securities (27,000) ---
Purchases of Equipment and Property (8,744) (5,900)
Acquisition of Companies (1,543) (1,768)
------------------ -----------------
Net Cash Used in Investing Activities (37,287) (7,668)
------------------ -----------------
FINANCING ACTIVITIES
Dividends Paid (6,754) (4,511)
Common Stock Purchased --- (5,288)
Payments on Capital Leases --- (256)
Other 2,058 231
------------------ -----------------
Net Cash Used in Financing Activities (4,696) (9,824)
------------------ -----------------
Net Increase in Cash and Short-Term Investments 16,751 35,844
Cash and Short-Term Investments At Beginning of Period 38,315 8,650
------------------ -----------------
Cash and Short-Term Investments At End of Period $ 55,066 $ 44,494
================== =================
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 AND OTHER
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").
In accordance with SFAS 94, our policy is to consolidate all
subsidiaries or investees where we have voting control. We do not
have any subsidiaries or investees where we have less than a 100%
equity interest or less than 100% voting control, nor do we have
any interest in other investees, joint ventures, or other
entities that would require consolidation.
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.
The Company uses its Orkin franchise program for strategic growth
in mostly secondary markets. Since the inception of the franchise
program in 1994, the Company's policy has been to defer
recognition of any initial franchise fee income because the
franchise agreement provides the Company an option but not the
obligation, to acquire the franchises' customer base at a future
date. Since the beginning of the program, the Company has
repurchased two franchises and the deferred revenues were used to
reduce the purchase price allocated to the acquired assets.
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 September 30, 2003 and December 31, 2002, and
the results of its operations for the three and nine months ended
September 30, 2003 and 2002 and cash flows for the nine months
ended September 30, 2003 and 2002. Operating results for the
three and nine months ended September 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 nine months ended
September 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. The Company adopted EITF 00-21 in
the third quarter of 2003. This EITF addresses how to account for
arrangements that involve the delivery or performance of multiple
products, services, and/or rights to use assets. The Company's
termite baiting service involves multiple deliverables,
consisting of an initial directed liquid termiticide treatment,
installation of termite monitoring stations, and subsequent
periodic monitoring inspections. The portion of the termite
baiting service sales price applicable to subsequent periodic
monitoring inspections, which is determined based on fair value,
is deferred and recognized over the first year of each contract.
The portion of the sales price applicable to the termiticide
treatment and installation of the monitoring services is
determined under the residual method (the total sales price less
the fair value of the monitoring inspections). Revenues from the
termiticide treatment and installation of the termite monitoring
stations are
5
recognized upon performance of the service and installation. The
adoption of this EITF did not have a significant effect on the
Company's financial position, results of operations or liquidity.
In December 2002, the FASB issued 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 are effective for all variable interest entities created or
acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual period
ending after December 15, 2003. 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 the 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.
Total Net Revenues
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
First Quarter $ 155,122 $ 153,302 $ 150,280
Second Quarter 185,105 184,189 180,731
Third Quarter 178,262 174,063 169,223
Fourth Quarter N/A 153,871 149,691
Cash and short-term investments include cash on hand and in banks
with original maturities of three months or less.
In 2003, the Company has invested $27,000,000 in marketable
securities and classified them as available for sale securities.
The securities are carried at their fair value, which
approximates cost as of September 30, 2003. Any unrealized
holding gains and losses, net of income taxes, will be reflected
as a separate component of stockholders' equity until realized.
For the purposes of computing realized and unrealized gains and
losses, cost is determined on a specific identification basis.
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:
6
Three Months Ended Nine Months Ended
--------------------------- --------------------------
September 30, September 30,
--------------------------- --------------------------
(In thousands except per share data amounts) 2003 2002 2003 2002
------------------------------------------------------------------- ------------- ------------- ------------- ------------
Basic and diluted earnings available to stockholders (numerator):
$9,800 $6,754 $30,936 $23,385
Shares (denominator):
Weighted-average shares outstanding 45,115 44,855 45,049 45,101
Effect of Dilutive securities:
Employee Stock Options 879 263 1,121 281
------------- ------------- ------------- ------------
Adjusted Weighted-Average Shares and
Assumed Exercises 45,994 45,118 46,170 45,382
Per share amounts:
Basic earnings per common share $0.22 $0.15 $0.69 $0.52
Diluted earnings per common share $0.21 $0.15 $0.67 $0.52
------------------------------------------------------------------- ------------- ------------- ------------- ------------
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 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. 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.
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. Some lawsuits have been filed (Ernest W. Warren and
Dolores G. Warren et al. v. Orkin Exterminating Company, Inc., et
al.; Elizabeth Allen and William Allen et al. v. Rollins, Inc.
and Orkin Exterminating Company, Inc.; Francis D. Petsch, et al.
v. Orkin Exterminating Company, Inc. et al.; and Bob J. Stevens
v. Orkin Exterminating Company, Inc. and Rollins, Inc.) in which
the Plaintiffs are seeking certification of a class. The cases
originate in Georgia, Florida, and Texas. The Company believes
them to be without merit and intends to vigorously contest
certification and defend itself through trial, if necessary. 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.
7
NOTE 4. STOCKHOLDERS' EQUITY
For the third quarter and nine months ended September 30, 2003,
approximately 26,000 and 244,000 shares of common stock were
issued upon exercise of stock options by employees. 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 Nine Months Ended
------------------------- -----------------------
September 30, September 30,
------------------------- -----------------------
(In thousands, except per share data) 2003 2002 2003 2002
---------- ----------- ----------- -----------
Net income, as reported $9,800 $6,754 $30,936 $23,385
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (483) (463) (1,449) (1,389)
---------- ----------- ----------- -----------
Pro forma net income $9,317 $6,291 $29,487 $21,996
---------- ----------- ----------- -----------
Earnings per share:
Basic-as reported $0.22 $0.15 $0.69 $0.52
Basic-pro forma $0.21 $0.14 $0.65 $0.49
Diluted-as reported $0.21 $0.15 $0.67 $0.52
Diluted-pro forma $0.20 $0.14 $0.64 $0.48
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 nine months of 2002:
Before-tax amount --- 14 14
Tax benefit --- ( 5) ( 5)
--------------- -------------- ---------------
--- 9 9
--------------- -------------- ---------------
Balance at September 30, 2002 $ (4,047) $ (766) $ (4,813)
=============== ============== ===============
Balance at December 31, 2002 $ (16,182) $ (765) $ (16,947)
Change during first nine months of 2003:
Before-tax amount --- 557 557
Tax benefit --- (212) (212)
--------------- -------------- ---------------
--- 345 345
--------------- -------------- ---------------
Balance at September 30, 2003 $ (16,182) $ (420) $ (16,602)
=============== ============== ===============
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
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
8
prior to the balance sheet date. 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 17,596
Settlements, Claims and Expenditures Made
During the Period (16,928)
------------
Ending Balance as of September 30, 2003 $47,114
-----------------------------------------------------------------
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 2.4% in the third quarter and
1.4% for the first nine months of 2003 despite a sluggish economy and
unseasonably wet and cold weather conditions in parts of the U.S. in the first
half of the year. Revenues were up 1.2% in the first quarter and 0.5% in the
second quarter.
The financial results for the third quarter and the first nine 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 third quarter of 2003, the Company had net income of $9.8 million
compared to net income of $6.8 million in the third quarter of 2002, which
represents a 45.1% increase. In addition to the revenue increase of 2.4%, the
Company achieved margin improvement in Cost of Services Provided of 0.3
percentage points, expressed as a percentage of revenues, and Sales, General and
Administrative expenses improved by 2.0 margin points or $2.1 million.
For the first nine months of 2003, the Company had net income of $30.9 million
compared to net income of $23.4 million in the first nine months of 2002, which
represents a 32.3% increase. In addition to the revenue increase of 1.4%, the
Company achieved margin improvements, expressed as a percentage of revenues, in
Cost of Services Provided of 0.7 points and in Sales, General and Administrative
of 1.3 points.
For the first nine months of 2003, the Company generated cash of $43.8 million
compared to $35.8 million for the first nine months of 2002. The Company had
Cash, Short-Term Investments and Marketable Securities of $82.1 million at
September 30, 2003, compared to $38.3 million at December 31, 2002 and $44.5
million at September 30, 2002.
On October 10, 2003, the Company announced the establishment of an Orkin
franchise in Panama. The Company began its Orkin franchise program in the U. S.
in 1994, and established its first international franchise in Mexico in 2000.
Today, Orkin has 44 franchises in total.
Results of Operations
Revenues for the quarter ended September 30, 2003 increased to $178.3 million,
an increase of $4.2 million or 2.4% from last year's third quarter revenues of
$174.1 million. Revenues for the nine month period ended September 30, 2003
increased to $518.5 million, an increase of $6.9 million or 1.4% from last
year's first nine month revenues of $511.6 million. The Company's revenue growth
was very similar across its primary services, which are residential pest
control, commercial pest control, and termite service. The growth in pest
control revenues in the third quarter reflects the impact of increases in sales
units, better average selling prices, continued improvements in customer
retention, and successful price increase campaigns. Every-other-month service,
our primary residential pest control service offering, continues to grow in
importance, comprising 52.8% of our residential pest control customer base at
September 30, 2003. In commercial pest control, the Company continued to receive
favorable reaction to the rollout of its premium Gold Medal service, which
specifically targets food processing companies, and also achieved improvements
in average prices on new sales and successful price increases from existing
customers. As another sign of strengthening in the commercial market, the
Company achieved its highest ever month of sales to national accounts in
September 2003. Termite revenues increased in the third quarter as a result of
continued growth in recurring revenues from bait monitoring and renewal
revenues, although termite revenues for the first nine months of 2003 decreased
slightly, mainly as a result of the unusually wet and cold weather in parts of
the U.S. in the first half of the year. 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, and the Southeast experienced the
second wettest six month period on record. The Company's foreign operations
accounted for approximately 7% of total third quarter revenues and 6% of total
revenues for the nine months of 2003.
9
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 178,262 174,063 169,223
Fourth Quarter N/A 153,871 149,691
Cost of Services Provided for the third quarter ended September 30, 2003
increased $1.7 million or 1.8%, although the expense margin expressed as a
percentage of revenues improved by 0.3 percentage points, representing 53.9% of
revenues for the third quarter 2003 compared to 54.2% of revenues in the prior
year third quarter. The dollar increase was mainly due to higher expenses for
insurance and claims and fringe benefit costs. The expense margin improvement
was primarily from continued improvement in service payroll. For the first nine
months of 2003, Cost of Services Provided were flat with the prior year,
reflecting an increase of just $104,000, which enabled an improvement in the
expense margin of 0.7 percentage points. Cost of Services Provided represented
53.2% of revenues for the first nine months of 2003 compared to 53.9% of
revenues in the prior year, with most of the margin improvement coming from
lower service payroll and lower materials and supplies. These were partially
offset by higher fleet expenses, as a result of higher fuel costs and a
temporary spike in vehicle counts in the first quarter, fringe benefit
increases, and higher insurance and claims. Service technician productivity and
average pay continued to improve, which leads to better employee retention and,
in management's opinion, improved customer retention.
Sales, General and Administrative for the third quarter ended September 30, 2003
decreased $2.1 million or 3.2% and, as a percentage of revenues, improved by 2.0
margin points or 5.5%, averaging 34.5% of total revenues compared to 36.5% for
the prior year quarter. Sales, General and Administrative for the first nine
months of 2003 decreased $4.2 million or 2.3% and, as a percentage of revenues,
improved by 1.3 margin points or 3.7%, averaging 34.3% of total revenues
compared to 35.6% for the prior year. The improvement for the quarter and the
year was a result of the home office process improvement initiative started in
2002, lower field administrative costs as a result of technology and
organizational investments, lower sales payroll due to lower staffing and partly
from the formation of regional call centers, and lower bad debt expenses due to
better collections and improvement in the receivables aging statistics.
Depreciation and Amortization expenses for the quarter ended September 30, 2003
were $360,000 or 6.6% lower than the prior year quarter. For the first nine
months of 2003, Depreciation and Amortization expenses were $1.0 million or 6.4%
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 $6.0 million for the third quarter and $19.0
million for the first nine months ended September 30, 2003 reflects increased
pre-tax income over the prior year periods. The effective tax rate was 38% in
all 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 government regulation.
It is significant that the actual number of claims has decreased in recent years
due to changes in the Company's business practices. However, it is not possible
to 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.
10
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
practices 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 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 follow the
criteria outlined in the SEC's Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB 101"). Revenue is recognized at the
time services are performed through a contractual arrangement where
collectibility is reasonably assured. 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 fair 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 and marketable securities balances, future
cash flows from operating activities and available borrowings under its $55.0
million credit facility will be sufficient to finance its current operations and
obligations, and fund expansion of the business for the foreseeable future,
including acquisition of select pest control businesses. The Company's
operations generated cash of $58.7 million for the first nine months ended
September 30, 2003, compared with cash provided by operating activities of $53.3
million for the same period in 2002. The 2003 results were achieved primarily
from higher Net Income and strong advance payments received from customers. The
decrease in Long-Term Accrued Liabilities in the first nine months of 2003 was
due to a $5 million contribution to the defined benefit retirement plan in April
2003.
The Company invested approximately $8.7 million in capital expenditures during
the nine months ended September 30, 2003, compared to $5.9 million during the
same period in 2002, and expects to invest between $2.0 million and $4.0 million
for the remainder of 2003. Capital expenditures for the first nine months
consisted primarily of the purchase of equipment replacements and upgrades and
improvements to the Company's management information systems. During the first
nine months, the Company made acquisitions totaling $1.5 million, compared to
$1.8 million during the same period in 2002. A total of $6.8 million was paid in
cash dividends ($0.15 per share) during the first nine months of 2003, compared
to $4.5 million or $0.10 per share during the same period in 2002. At the
January 28, 2003 Board of Directors' Meeting, the Board approved a 50% increase
in the quarterly dividend, from $0.033 to $0.05 per share on the split number of
shares resulting from the three-for-two stock split to holders on March 10,
2003. The capital expenditures, acquisitions and cash dividends were funded
entirely through existing cash balances and operating activities. The Company
maintains a $55.0 million credit facility with a commercial bank, of which no
borrowings were outstanding as of September 30, 2003 or October 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
11
Exterminating Company, Inc. et al pending in the District Court of Houston
County, Alabama. Other lawsuits against Orkin, and in some instances the
Company, are also being vigorously defended, including the Warren, Allen,
Petsch, and Stevens cases. 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. The
Company adopted EITF 00-21 in the third quarter of 2003. This EITF addresses how
to account for arrangements that involve the delivery or performance of multiple
products, services, and/or rights to use assets. The Company's termite baiting
service involves multiple deliverables, consisting of an initial directed liquid
termiticide treatment, installation of termite monitoring stations, and
subsequent periodic monitoring inspections. The portion of the termite baiting
service sales price applicable to subsequent periodic monitoring inspections,
which is determined based on fair value, is deferred and recognized over the
first year of each contract. The portion of the sales price applicable to the
termiticide treatment and installation of the monitoring services is determined
under the residual method (the total sales price less the fair value of the
monitoring inspections). Revenues from the termiticide treatment and
installation of the termite monitoring stations are recognized upon performance
of the service and installation. The adoption of this EITF did not have a
significant effect on the Company's financial position, results of operations or
liquidity.
In December 2002, the FASB issued 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 are effective for all variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period ending after December 15,
2003. 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 the year ended
December 31, 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.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As of September 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 and marketable securities. The Company is also subject to interest
rate risk exposure through borrowings on its $55.0 million credit facility. Due
to the absence of such borrowings as of September 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 September 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 during the quarter that could significantly affect these
controls. We have not identified any significant deficiency or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 3 to Part I, Item 1 for discussion of certain
litigation.
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.
is incorporated by reference to Exhibit (3)
(ii) as filed with its Form 10-Q for the
quarterly period ended June 30, 2003.
(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.
(31.1) Certification of Chief Executive Officer
Pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer
Pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On July 24, 2003, the Company furnished a
report on Form 8-K, which reported under Item
9 that on July 22, 2003, the Company
reported earnings for the second quarter
ended June 30, 2003.
On July 24, 2003, the Company furnished a
report on Form 8-K, which reported under Item
9 that on July 22, 2003, the Board of
Directors has declared a regular quarterly
dividend of $0.05 per share.
14
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: October 29, 2003 By: /s/ Gary W. Rollins
---------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: October 29, 2003 By: /s/ Harry J. Cynkus
---------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
15