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, 2001.
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
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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 [ ]
Rollins, Inc. had 30,063,747 shares of its $1 Par Value Common Stock
outstanding as of October 31, 2001.
ROLLINS, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page No.
--------------
Item 1. Financial Statements.
Condensed Consolidated Statements of Financial Position as of
September 30, 2001 and December 31, 2000 2
Condensed Consolidated Statements of Income and Earnings Retained
for the Three and Nine Months Ended September 30, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2001 and 2000 4
Notes to Condensed 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 1. Legal Proceedings. 10
Item 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands except share data)
(Unaudited)
September 30, December 31,
2001 2000
------------------ ------------------
ASSETS
Cash and Short-Term Investments $ 10,462 $ 399
Trade Receivables, Net 53,709 50,099
Materials and Supplies 11,548 12,980
Deferred Income Taxes 15,997 18,472
Other Current Assets 13,886 7,019
------------------ ------------------
Current Assets 105,602 88,969
Equipment and Property, Net 45,559 49,349
Goodwill and Other Intangible Assets, Net 112,672 115,966
Deferred Income Taxes 40,492 42,645
Other Assets 9 1,890
------------------ ------------------
Total Assets $ 304,334 $ 298,819
================== ==================
LIABILITIES
Capital Lease Obligations $ 638 $ 1,829
Accounts Payable 14,661 15,302
Accrued Insurance 11,758 10,126
Accrued Payroll 23,042 21,195
Unearned Revenue 33,145 28,381
Other Current Liabilities 31,646 33,973
------------------ ------------------
Current Liabilities 114,890 110,806
Capital Lease Obligations - 256
Accrued Insurance 33,523 39,400
Accrual for Termite Contracts 41,270 42,651
Long-Term Accrued Liabilities 24,461 27,107
------------------ ------------------
Total Liabilities 214,144 220,220
------------------ ------------------
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share; 99,500,000 shares
authorized; 30,166,747 and 30,036,241 shares issued at
September 30, 2001 and December
31, 2000, respectively 30,167 30,036
Earnings Retained 60,023 48,563
------------------ ------------------
Total Stockholders' Equity 90,190 78,599
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 304,334 $ 298,819
================== ==================
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
2
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS RETAINED
(In thousands except share and per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ---------------------------------
2001 2000 2001 2000
------------- ------------- ------------- --------------
REVENUES
Customer Services $ 169,806 $ 172,373 $ 502,128 $ 502,451
------------- ------------- ------------- --------------
COSTS AND EXPENSES
Cost of Services Provided 95,118 98,294 280,111 283,817
Depreciation and Amortization 5,140 4,677 15,033 13,548
Sales, General and Administrative 62,664 65,591 182,263 186,927
------------- ------------- ------------- --------------
162,922 168,562 477,407 484,292
------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAXES 6,884 3,811 24,721 18,159
------------- ------------- ------------- --------------
PROVISION FOR INCOME TAXES
Current 1,370 898 5,499 5,250
Deferred 1,246 550 3,895 1,650
------------- ------------- ------------- --------------
2,616 1,448 9,394 6,900
------------- ------------- ------------- --------------
NET INCOME $ 4,268 $ 2,363 $ 15,327 $ 11,259
============= ============= ============= ==============
EARNINGS RETAINED
Balance at Beginning of Period 57,538 50,345 48,563 41,909
Cash Dividends (1,509) (1,504) (4,527) (4,528)
Common Stock Purchased (56) - (56) (144)
Other (218) 48 716 2,756
------------- ------------- ------------- --------------
BALANCE AT END OF PERIOD $ 60,023 $ 51,252 $ 60,023 $ 51,252
============= ============= ============= ==============
EARNINGS PER SHARE - BASIC AND
DILUTED $ 0.14 $ 0.08 $ 0.51 $ 0.38
============= ============= ============= ==============
WEIGHTED SHARES OUTSTANDING - BASIC 30,176,364 30,036,184 30,155,118 30,000,334
WEIGHTED SHARES OUTSTANDING - DILUTED 30,313,600 30,039,628 30,300,810 30,002,770
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
3
ROLLINS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------------
2001 2000
------------------ -----------------
OPERATING ACTIVITIES
Net Income $ 15,327 $ 11,259
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 15,033 13,548
Provision for Deferred Income Taxes 3,894 1,651
Other, Net 136 (562)
(Increase) Decrease in Assets:
Trade Receivables (3,610) (9,538)
Materials and Supplies 1,432 558
Other Current Assets (6,731) (5,096)
Other Non-Current Assets (273) 666
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 2,534 (6,009)
Unearned Revenue 4,764 9,959
Accrued Insurance (4,244) (4,581)
Accrual for Termite Contracts (1,380) (6,648)
Long-Term Accrued Liabilities (865) (2,311)
------------------ -----------------
Net Cash Provided by Operating Activities 26,017 2,896
------------------ -----------------
INVESTING ACTIVITIES
Purchases of Equipment and Property (6,184) (11,781)
Net Cash Used for Acquisition of Companies (704) (7,080)
Marketable Securities, Net - 13,084
------------------ -----------------
Net Cash Used in Investing Activities (6,888) (5,777)
------------------ -----------------
FINANCING ACTIVITIES
Dividends Paid (4,527) (4,528)
Common Stock Purchased and Retired - (154)
Payments on Capital Leases (1,447) (2,542)
Payments, Net of Borrowings,
under Line of Credit Agreement (1,400) 4,475
Other (1,692) 204
------------------ -----------------
Net Cash Used in Financing Activities (9,066) (2,545)
------------------ -----------------
Net Increase in Cash and Short-Term
Investments 10,063 (5,426)
Cash and Short-Term Investments
at Beginning of Period 399 5,689
------------------ -----------------
Cash and Short-Term Investments
at End of Period $ 10,462 $ 263
================== =================
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
4
ROLLINS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The condensed 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
accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and
regulations.
These condensed 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, 2000.
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 condensed consolidated
financial statements included herein contain all normal
recurring adjustments necessary to present fairly the
financial position of the Company as of September 30, 2001 and
December 31, 2000, and the results of operations for the three
and nine months ended September 30, 2001 and 2000 and cash
flows for the nine months ended September 30, 2001 and 2000.
Operating results for the three months and nine months ended
September 30, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31,
2001.
For the three and nine months ended September 30, 2001 and
2000, comprehensive income is not materially different from
net income and, as a result, the impact of SFAS 130,
"Reporting Comprehensive Income," is not reflected in the
Company's consolidated financial statements included herein.
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended.
The adoption of this standard, effective for the Company as of
January 1, 2001, did not impact the results of operations or
financial condition of the Company as the Company is not a
party to any derivative transactions that fall under the
provisions of this statement.
In June 2001 the Financial Accounting Standards Board approved
Statement of Financial Accounting Standards No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 prospectively prohibits the
pooling of interest method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 142
requires companies to cease amortizing goodwill that existed
at June 30, 2001. The amortization of existing goodwill will
cease on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be
amortized. SFAS No. 142 also establishes a new method of
testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its
carrying value. The adoption of SFAS No. 142 will result in
the Company's discontinuation of amortization of its goodwill;
however, the Company will be required to test its goodwill for
impairment under the new standard beginning in the first
quarter of 2002. The Company is currently in the process of
determining the financial statement impact of SFAS 142.
Certain amounts for prior periods have been reclassified to
conform with the current period condensed 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
federal and state income taxes. 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):
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ------------------------------------
2001 2000 2001 2000
---------------- --------------- ---------------- ----------------
Basic EPS 30,176 30,036 30,155 30,000
Effect of Dilutive Stock Options 138 4 146 3
---------------- --------------- ---------------- ----------------
Diluted EPS 30,314 30,040 30,301 30,003
================ =============== ================ ================
NOTE 4. LEGAL PROCEEDINGS
One of the Company's subsidiaries, Orkin Exterminating
Company, Inc., is 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 attorneys for the
plaintiffs contend that the case is suitable for a class
action. The Court may rule in January 2002 on whether the
class should be certified and their case should proceed as a
class action. The Company believes this case to be without
merit and intends to defend itself aggressively through trial,
if necessary. At this time, the final outcome of the
litigation cannot be determined. However, it is the opinion of
Management that the ultimate resolution of this action will
not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
On November 9, 2001, the Alabama Supreme Court further reduced
the $4.4 million judgment rendered in the trial court of The
Estate of Artie Mae Jeter v. Orkin Exterminating Company, Inc.
and Bill Maxwell to $2.3 million plus post-judgment interest.
Of the $2.3 million award, $2 million is for punitive damages
and $300,000 is for compensatory damages. The plaintiffs have
21 days to accept this ruling or it will be remanded for a new
trial. In the opinion of Management, the outcome of this case
as described in the Company's Form 10-K for the year ended
December 31, 2000, will not have a material adverse effect on
the Company's financial position, results of operations or
liquidity.
The Company is not subject to any other material litigation,
except for the case disclosed in the Company's annual
report on Form 10-K for the year ended December 31, 2000.
There has been no material change regarding this case
since the filing of the Form 10-K.
Additionally, in the normal course of business, the Company is
a defendant in a number of lawsuits which allege that
plaintiffs have been damaged as a result of the rendering of
services by Company personnel and equipment. The Company is
actively contesting these actions. It is the opinion of
Management that the outcome of these actions, and the cases
described in the Company's Form 10-K for the year ended
December 31, 2000, will not have a material adverse effect on
the Company's financial position, results of operations or
liquidity.
6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Company reported net income of $4.3 million or $0.14 per share for the third
quarter of 2001 compared to net income of $2.4 million or $0.08 per share for
the comparable quarter in 2000. Net income for the first nine months of 2001
increased 36.1% to $15.3 million or $0.51 per share compared to $11.3 million or
$0.38 per share for the same period in 2000. Revenues for the third quarter and
nine months ended September 30, 2001 decreased 1.5% and 0.1%, respectively.
The improvement in earnings for the quarter and nine months resulted primarily
from pest and termite initiatives that have decreased costs, increased
productivity and improved customer retention. The Cost of Services Provided and
Sales, General and Administrative both reflect margin improvements that were
partially offset by an increase in the Provision for Income Taxes.
Results of Operations
Revenues decreased to $169.8 million for the third quarter of 2001 from $172.4
million for the same quarterly period of 2000. For the nine months of 2001, the
Company generated revenues of $502.1 million, down 0.1% from last year's amount
of $502.4 million. The lack of revenue growth was reflective of the slowing
economy partially offset by an increase in recurring revenues as a result of
company initiatives.
Cost of Services Provided in the third quarter of 2001 was approximately $3.2
million less than the prior year quarter and improved to represent 56.0% of
revenues compared with 57.0% for the same quarter of the prior year. Improvement
can be mainly attributed to programs that have increased productivity while
reducing headcount, service salaries, material and supplies, and fleet expense
which were partially offset by higher insurance and claims experience. For the
nine months of 2001, Cost of Services Provided improved to represent 55.8% of
revenues compared to 56.5% for the prior year period. This $3.7 million
improvement can primarily be attributed to programs that have increased
productivity while reducing headcount, service salaries, personnel related
expenses, and fleet expense which were partially offset by higher insurance and
claims experience.
Sales, General and Administrative decreased $2.9 million and as a percentage of
revenues was 36.9% compared to 38.1% for the same quarter of the prior year.
This improvement can be mainly attributed to reductions in sales and
administrative salaries, personnel related expenses, and bad debt expense. For
the nine months of 2001, Sales, General and Administrative decreased as a
percentage of revenues to 36.3% compared with 37.2% for the prior year period.
The $4.7 million improvement year-to-date resulted primarily from reductions in
sales salaries, personnel related expenses, and bad debt expense.
Depreciation and Amortization expenses for the third quarter of 2001 were $463
thousand higher than the prior year quarter. For the nine months of 2001,
Depreciation and Amortization expenses were $1.5 million higher than the prior
year period. The increase was primarily due to the amortization of intangible
assets associated with the Company's July 2000 acquisition of Johnson Wax
Professional's interest in the Acurid Retail Services, L.L.C. joint venture and
to the depreciation associated with FOCUS, the Company's new proprietary branch
computer system. See Impact of Recent Accounting Pronouncements on future impact
of amortization of intangible assets.
The Company's net tax provisions of $2.6 million for the quarter and $9.4
million for nine months reflect increased taxable income over the prior year
periods.
7
Liquidity and Capital Resources
The Company believes its current cash balances, future cash flows from operating
activities and line of credit 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 $26.0 million for
nine months of 2001 compared with cash provided by operating activities of $2.9
million in the same period of 2000. This increase resulted primarily from
favorable changes in working capital related primarily to higher net income from
operations that has been adjusted for non-cash items as well as improvements in
accounts receivable collections and differences in the timing of accounts
payable and other accrued expenses.
The Company invested approximately $6.9 million in capital expenditures and
acquisitions during the nine months of 2001, and expects to invest between $4.0
and $5.0 million for the remainder of 2001, inclusive of improvements to its
management information systems. Capital expenditures in the nine months of 2001
consisted primarily of equipment replacements and upgrades and improvements to
the Company's management information systems. A total of $4.5 million was paid
in cash dividends during the first nine months of 2001. The capital
expenditures, acquisitions and cash dividends were primarily funded through
existing cash balances and operating activities. The Company maintains a $40.0
million line of credit, of which the full amount is available for borrowing as
of October 31, 2001.
The Company is aggressively defending a class action lawsuit filed in Houston
County, Alabama. On November 9, 2001, the Company received a ruling from the
Alabama Supreme Court on The Estate of Artie Mae Jeter v. Orkin Exterminating
Company, Inc. and Bill Maxwell. Additionally, the Company intends to
defend itself aggressively through trial, if necessary, in a potential class
action matter pending in the Circuit Court of Hillsborough County, Florida. For
further discussion, see Note 4 to the accompanying consolidated financial
statements.
8
Impact of Recent Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 142 requires companies to cease
amortizing goodwill that existed at June 30, 2001. The amortization of existing
goodwill will cease on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. The
adoption of SFAS No. 142 will result in the Company's discontinuation of
amortization of its goodwill; however, the Company will be required to test its
goodwill for impairment under the new standard beginning in the first quarter of
2002. The Company is currently in the process of determining the financial
statement impact of SFAS 142.
Forward-Looking Statements
This Form 10-Q 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 the outcome of
outstanding litigation on the Company's financial condition, results of
operations and liquidity; and the Company's projected 2001 capital expenditures,
performance, and borrowings. 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, the possibility
of an adverse ruling against the Company in the Cutler, Butland, Jeter 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; climate and
weather trends; competitive factors and pricing practices; potential increases
in labor costs; 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.
As of October 31, 2001, the Company no longer maintains a material investment
portfolio subject to interest rate risk exposure. The Company is, however,
subject to interest rate risk exposure through borrowings on its $40.0 million
line of credit. Due to the absence of such borrowings at October 31, 2001 and as
currently anticipated at December 31, 2001, this risk is not expected to have a
material effect upon the Company's results of operations or financial position
going forward.
9
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 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.
By-laws of Rollins, Inc. is incorporated herein by reference to Exhibit (3) (ii) as filed
(ii) with its Form 10-Q for the quarterly period ended March 31, 1999.
(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.
(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.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed or were required to be filed during the third quarter of 2001.
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: November 13, 2001 By: /s/ Gary W. Rollins
----------------------------------------------
Gary W. Rollins
Chief Executive Officer, President
and Chief Operating Officer
(Member of the Board of Directors)
Date: November 13, 2001 By: /s/ Harry J. Cynkus
----------------------------------------------
Harry J. Cynkus
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
11