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 March 31, 1999
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 [ ]
Rollins, Inc. had 30,542,389 shares of its $1 Par Value
Common Stock outstanding as of April 30, 1999.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I .....FINANCIAL INFORMATION Page No.
Item 1. Financial Statements.
Consolidated Statements of Financial Position
as of March 31, 1999 and December 31, 1998 2
Consolidated Statements of Income (Loss) and
Earnings Retained for the Quarters Ended
March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
Quarters Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. 10
Item 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share data)
(Unaudited)
March 31, December 31,
1999 1998
----------- -----------
ASSETS
Cash and Short-Term Investments ...................... $ 646 $ 1,244
Marketable Securities ................................ 109,296 110,229
Trade Receivables, Net ............................... 38,523 42,353
Materials and Supplies ............................... 14,193 13,335
Deferred Income Taxes ................................ 19,452 20,083
Other Current Assets ................................. 14,026 11,864
----------- -----------
Current Assets ................................... 196,136 199,108
Equipment and Property, Net .......................... 36,431 35,466
Intangible Assets .................................... 40,566 40,602
Deferred Income Taxes ................................ 43,344 44,369
Other Assets ......................................... 7,885 7,720
----------- -----------
Total Assets ..................................... $ 324,362 $ 327,265
=========== ===========
LIABILITIES
Capital Lease Obligations ............................ $ 3,473 $ 3,419
Accounts Payable ..................................... 16,243 10,890
Accrued Insurance ................................... 16,971 18,348
Accrued Payroll ...................................... 17,661 18,400
Unearned Revenue ..................................... 17,827 15,210
Other Expenses ....................................... 46,280 48,826
----------- -----------
Current Liabilities .............................. 118,455 115,093
Capital Lease Obligations ............................ 5,201 6,090
Accrued Insurance .................................... 37,945 38,975
Accrual for Termite Contracts ........................ 61,144 66,350
Long-Term Accrued Liabilities ........................ 22,716 20,522
----------- -----------
Total Liabilities ................................ 245,461 247,030
----------- -----------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000
shares authorized; 30,475,841 and 30,488,741
shares issued at March 31, 1999 and
December 31, 1998, respectively .................. 30,476 30,489
Earnings Retained .................................... 48,425 49,746
----------- -----------
Total Stockholders' Equity ........................... 78,901 80,235
----------- -----------
Total Liabilities and Stockholders' Equity ........... $ 324,362 $ 327,265
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
ROLLINS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND EARNINGS RETAINED
(In thousands except share data)
(Unaudited)
Quarters Ended
March 31,
----------------------------
1999 1998
------------ ------------
REVENUES
Customer Services ................................... $ 129,886 $ 122,965
------------ ------------
COSTS AND EXPENSES
Cost of Services Provided ........................... 76,857 76,909
Depreciation and Amortization ....................... 2,405 2,092
Sales, General and Administrative ................... 50,998 49,431
Interest Income ..................................... (1,125) (2,622)
------------ ------------
129,135 125,810
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ............................... 751 (2,845)
------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES
Current ............................................. (1,395) (3,311)
Deferred ............................................ 1,679 2,230
------------ ------------
284 (1,081)
------------ ------------
NET INCOME (LOSS) ............................................... $ 467 $ (1,764)
============ ============
EARNINGS RETAINED
Balance at Beginning of Period ...................... 49,746 112,365
Cash Dividends ...................................... (1,524) (4,988)
Common Stock Purchased and Retired .................. (134) (1,596)
Other ............................................... (130) 13
------------ ------------
BALANCE AT END OF PERIOD ........................................ $ 48,425 $ 104,030
============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED ................... $ 0.02 $ (0.05)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC ..................... 30,486,038 33,269,785
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED ................... 30,493,701 33,284,705
The accompanying notes are an integral part of these
consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarters Ended
March 31,
----------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net Income (Loss) ............................... $ 467 $ (1,764)
Adjustments to Reconcile Net Income (Loss) to Net
Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization ............... 2,405 2,092
Provision for Deferred Income Taxes ......... 1,679 2,230
Other, Net .................................. (133) 106
(Increase) Decrease in Assets:
Trade Receivables ........................... 3,839 5,014
Materials and Supplies ...................... (856) (1,437)
Other Current Assets ........................ (2,162) (2,826)
Other Non-Current Assets .................... 64 192
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses ....... 2,068 (5,749)
Unearned Revenue ............................ 2,617 1,521
Accrued Insurance ........................... (2,407) (966)
Accrual for Termite Contracts ............... (5,206) (3,660)
Long-Term Accrued Liabilities ............... 2,194 1,472
--------- ---------
Net Cash Provided by (Used in) Operating
Activities .................................... 4,569 (3,775)
--------- ---------
INVESTING ACTIVITIES
Purchases of Equipment and Property ............. (3,208) (3,516)
Net Cash Used for Acquisition of Companies ...... (169) (210)
Marketable Securities, Net ...................... 684 85
--------- ---------
Net Cash Used in Investing Activities ........... (2,693) (3,641)
--------- ---------
FINANCING ACTIVITIES
Dividends Paid .................................. (1,524) (4,988)
Common Stock Purchased and Retired .............. (143) (1,678)
Payments on Capital Leases ...................... (835) (766)
Other ........................................... 28 41
--------- ---------
Net Cash Used in Financing Activities ........... (2,474) (7,391)
--------- ---------
Net Decrease in Cash and Short-Term
Investments ................................... (598) (14,807)
Cash and Short-Term Investments
at Beginning of Period ........................ 1,244 125,842
--------- ---------
Cash and Short-Term Investments
at End of Period .............................. $ 646 $ 111,035
========= =========
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 the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange
Commission. Footnote disclosures normally included in the
financial statements prepared in accordance with generally
accepted accounting principles 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, 1998.
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 March 31, 1999 and December 31,
1998, and the results of operations and cash flows for the
quarters ended March 31, 1999 and 1998. Operating results for
the quarter ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year
ended December 31, 1999.
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income," effective for fiscal
years beginning after December 15, 1997. For the quarters
ended March 31, 1999 and 1998, comprehensive income is not
materially different from net income and, as a result, the
impact of SFAS 130 is not reflected in the Company's
consolidated financial statements included herein.
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.
NOTE 2. PROVISION FOR INCOME TAXES
The book provision for income taxes includes the liability
for state income taxes, net of the federal income tax
benefit. The deferred provision for income taxes arises from
the changes during the year in the Company's net deferred tax
asset or liability.
5
NOTE 3. EARNINGS PER SHARE
Pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," the
number of weighted average shares used in computing basic and
diluted earnings per share (EPS) are as follows (in
thousands):
Quarters Ended March 31
1999 1998
-------- --------
Basic EPS .......................... 30,486 33,270
Effect of Dilutive Stock Options ... 8 15
-------- --------
Diluted EPS ........................ 30,494 33,285
======== ========
NOTE 4. SUBSEQUENT EVENT
On April 30, 1999, the Company's wholly-owned subsidiary,
Orkin Exterminating Company, Inc. (Orkin), acquired the pest
elimination business operations of PRISM, a subsidiary of SC
Johnson Professional. The acquisition will be accounted for
as a purchase.
In addition, on April 30, 1999, the Company and SC Johnson
Professional entered into a joint venture, Acurid Retail
Services, L.L.C. (Acurid Retail), created to provide pest
elimination services to customers in the retail market and
will jointly contribute existing customers to the joint
venture. The Company owns 50% of the joint venture.
PRISM's commercial pest control operations recorded revenues
of approximately $25.0 million during the company's most
recent fiscal year. The Company does not expect the
above-mentioned transactions to have a material impact on the
Company's financial statements.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The Company reported net income of $467,000 or $0.02 per share for the quarter
compared to a net loss of $1.8 million or $0.05 per share for the comparable
quarter in 1998. Revenues for the first quarter ended March 31, 1999 increased
5.6% to $129.9 million.
The improvement in earnings for the quarter resulted primarily from
quarter-over-quarter increases in both pest and termite control revenue and a
decrease in Cost of Services Provided on both a dollar and percentage of
revenues basis. The improvements in revenue and Cost of Services Provided were
partially offset by a decrease in Interest Income and a $1.4 million increase in
Provision (Benefit) for Income Taxes.
The Company's revenue improvement for the fourth consecutive quarter continued
the positive momentum initiated in 1998. The Company believes the improvements
in revenue and net income resulted from the strategic programs initiated in 1998
and 1997 to build recurring revenue, expand the Company's commercial pest
control business and contain termite claims costs.
On May 3, 1999, the Company announced a major achievement in its strategic plan
to accelerate the growth of its commercial business. The Company closed, on
April 30, 1999, on two strategic business transactions with SC Johnson
Professional - the acquisition of the commercial pest elimination business
operations of PRISM, a subsidiary of SC Johnson Professional, and the creation
of the Acurid Retail joint venture. For further discussion regarding these
transactions, see Note 4 to the accompanying consolidated financial statements.
Results of Operations
Revenues increased to $129.9 million for first quarter 1999 from $123.0 million
for the same period of 1998, primarily as a result of increases in pest control
customer base and in average termite completion and annual renewal prices. The
Company believes the increase in pest control customer base resulted from the
success of its more consumer-friendly selling and treatment programs.
Cost of Services Provided was approximately $52,000 lower than the prior year
quarter and improved to represent 59.2% of revenues compared with 62.5% for the
same quarter of the prior year. The improvement was primarily attributable to
reductions in termite claims experience and operating insurance costs, partially
offset by increased pest and termite service salaries resulting from increased
revenue and headcount.
Selling, General and Administrative increased $1.6 million or 3.2% but decreased
as a percentage of revenues to 39.3% compared with 40.2% for the same quarter of
the prior year. The improvement as a percentage of revenues was primarily due to
reduced administrative staffing, partially offset by increases in average wages
and training costs, and to reductions in telephone and postage resulting from
cost savings initiatives implemented during the quarter.
Interest Income decreased $1.5 million or 57.1% primarily due to lower invested
funds over the same period of the prior year.
The Company's net tax provision of $284,000 for the quarter reflects increased
taxable income, as compared to a benefit of $1.1 million for the same quarter in
1998.
7
- --------------------------------------------------------------------------------
Financial Condition
March 31, December 31,
(In thousands) 1999 1998
-------- --------
Cash and Short-Term Investments .. $ 646 $ 1,244
Marketable Securities ............ 109,296 110,229
-------- --------
109,942 111,473
Working Capital .................. 77,681 84,015
Current Ratio .................... 1.7 1.7
- --------------------------------------------------------------------------------
The Company's financial position remains solid. The Company believes its current
cash balances and future cash flows from operating activities will be sufficient
to finance its current operations and obligations, and fund expansion of the
business for the foreseeable future. The Company's cash flow provided by
operating activities was $4.6 million in first quarter 1999 compared with cash
used in operating activities of $3.8 million in the same period of 1998. This
increase resulted primarily from favorable changes in working capital related
primarily to differences in the timing of accounts payable and higher net income
from operations in 1999, adjusted for non-cash items.
Net trade receivables decreased $3.8 million in first quarter 1999 due primarily
to decreased financed termite sales. Trade receivables include amounts due
subsequent to one year from the balance sheet date, approximating $ 7.3 million
and $11.0 million at March 31, 1999 and 1998, respectively.
The Company invested approximately $3.4 million in capital expenditures and
acquisitions in first quarter 1999, and expects to invest between $40 and $50
million in 1999, inclusive of improvements to its management information
systems. Capital expenditures in first quarter 1999 consisted primarily of
equipment replacements and upgrades. During the quarter, $1.5 million was paid
in cash dividends and $143,000 was paid for repurchases of 9,100 shares of the
Company's Common Stock. These repurchased shares were retired during the
quarter. The capital expenditures, acquisitions, cash dividends and stock
repurchases were primarily funded through existing cash balances and operating
activities. The Company maintains a $40.0 million unused line of credit, which
is available for future acquisitions and growth, if needed.
In 1997 and 1998, Orkin received letters from the Federal Trade Commission (FTC)
advising of its investigation of the pest control industry - more specifically,
the termite and moisture control practices of the industry - and requesting
certain information voluntarily from the Company. Orkin has voluntarily provided
the information requested and has advised of the Company's intention to continue
to cooperate fully with this investigation. At this point in time, it is too
early to determine the impact, if any, of this investigation.
Year 2000 Issues
Aware that the Year 2000 (Y2K) information technology programming issue could
have a significant potential impact on its future operations and financial
reporting, the Company began its assessment and remediation processes in 1997
regarding its primary financial and operating systems. The Company's assessment
activities have included (1) identifying all software and operating systems -
both information technology (IT) systems and non-IT systems with embedded
technology - which are critical to operations and/or financial reporting, (2)
testing of such software and systems for Y2K compliancy, (3) obtaining
assurances from the Company's vendors and its large commercial customers, and
(4) assigning a manager for Y2K compliance and establishing a monthly readiness
reporting process to ensure that top management will be aware of each area and
step remaining to be done in order for the Company to become fully Y2K
compliant. The Company's remediation activities have included replacing certain
software and operating systems, followed by testing to ensure the Y2K compliancy
of the replacements.
8
Based on its assessment and remediation activities to date, the Company believes
that its critical internal software and operating systems are Y2K compliant with
the exception of its bad debt collection system, its branch personal computers
(PCs), and its commercial division's national accounts system. The Company's bad
debt collection system is currently being updated and is expected to be Y2K
compliant by the end of third quarter 1999, and the branch PCs are expected to
be replaced by the end of third quarter 1999. The Company has formulated an
information technology plan for its national accounts system, and necessary
remediation efforts are expected to be concluded by the end of third quarter
1999. The total cost of Y2K expenditures to date as of March 31, 1999 was
approximately $19.1 million; the remaining Y2K remediation costs are anticipated
to be approximately $1.0 million.
Based on assurances from the majority of its vendors and large commercial
customers to date, the Company does not anticipate any material Y2K impact on
its operations or financial reporting at this time. The Company believes that
the worst case scenario will be some minor nuisances experienced by a small
number of its branches in January 2000.
The Company expects to have contingency plans in place by the end of 1999 that
address potential short-term business disruptions resulting from losses of
electricity and system malfunctions related to the ordering and delivering of
operating supplies and the printing of sales orders.
Impact of Recent Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The adoption of this standard, effective as of January 1, 2000, is
not expected to materially impact the results of operations or financial
condition of the Company.
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The actual results of the
Company could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties, including without
limitation, general economic conditions; market risk; changes in industry
practices or technologies; the degree of success of the Company's termite
process reforms; climate and weather trends; competitive factors and pricing
practices; the Year 2000 programming issue; potential increases in labor costs;
uncertainties of litigation; and changes in various government laws and
regulations, including environmental regulations. 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.
The Company maintains an investment portfolio, comprised of U.S. Government and
corporate debt securities, which is subject to interest rate risk exposure. This
risk is managed through conservative policies to invest in high-quality
obligations. The Company has performed an interest rate sensitivity analysis
using a duration model over the near term with a 10% change in interest rates.
The Company's portfolio is not subject to material interest rate risk exposure
based on this analysis, and no material changes in market risk exposures or how
those risks are managed is expected.
9
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On March 16, 1999, the Company acquired the pest elimination
business of Ramco Exterminating Company, Inc. in exchange for
82,548 shares of the Company's Common Stock. The market value
of the Common Stock issued was approximately $1.4 million,
which the Company believes approximates the fair value of the
net assets acquired. Since the issuance of these shares was
not a public issuance, these shares of Common Stock were
exempt from registration under the Securities Act of 1933, as
amended, Section 4, Paragraph 2.
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) By-laws of Rollins, Inc.
(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.
(27) Financial Data Schedule (For Commission Use Only)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during first
quarter 1999.
10
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: May 10, 1999 By: /s/ Gary W. Rollins
------------------------------------
Gary W. Rollins
President and Chief Operating Officer
(Member of the Board of Directors)
Date: May 10, 1999 By: /s/ Harry J. Cynkus
------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
11