Rollins, Inc. 2020 Q2 SEC Filing Summary
Business context and reporting period
Rollins, Inc. operates a single reportable segment focused on pest and termite control services. This Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The company remained operational globally because pest control was designated an essential industry during the COVID-19 pandemic.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $553.3 million | $524.0 million | $1.041 billion | $953.0 million |
| Net income | $75.4 million | $64.3 million | $118.6 million | $108.5 million |
| Basic and diluted EPS | $0.23 | $0.20 | $0.36 | $0.33 |
| Gross margin | 53.8% | 51.7% | 51.3% | 50.6% |
| Net income margin | 13.6% | 12.3% | 11.4% | 11.4% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $234.8 million | $142.2 million |
Q2 revenue increased 5.6% and net income increased 17.2%. Six-month revenue increased 9.3% and net income increased 9.3%. Q2 cost of services increased only 0.9%, while sales, general and administrative expense increased 5.8%. Interest expense declined to $1.5 million from $1.9 million in Q2, but increased to $3.6 million from $1.6 million for the six-month period.
At June 30, 2020, cash and cash equivalents were $134.8 million, compared with $94.3 million at December 31, 2019. Total debt was approximately $255.0 million, consisting of $72.0 million drawn on the revolving facility and $183.0 million under the term loan, compared with approximately $291.5 million at year-end. The company had a $175.0 million revolving facility and remained in compliance with its 3.00:1.00 leverage covenant.
Total current assets were $363.1 million and total current liabilities were $478.2 million. Unearned revenue increased to $156.5 million from $136.5 million at December 31, 2019. Operating lease liabilities totaled $216.3 million on a net present value basis. Stockholders' equity increased to $862.8 million from $815.8 million.
Material changes versus the prior comparable period
- Residential revenue increased 14.8% in Q2 and 16.5% for the first six months, supported by increased demand from customers spending more time at home; mosquito sales grew more than 30% in Q2.
- Commercial revenue declined 6.0% in Q2 as customer facility closures and economic disruption affected small and medium-sized businesses. Six-month commercial revenue was still up 0.6%.
- Termite and ancillary revenue increased 7.3% in Q2 and 11.7% year to date.
- Acquisitions contributed approximately 3.1 percentage points of Q2 revenue growth and 5.7 percentage points of six-month growth. The company completed 13 acquisitions in the first six months for a total cash purchase price of $56.0 million, versus $410.1 million spent on acquisitions in the 2019 period.
- Gross margin improved because of furloughs and layoffs, lower fuel prices, and routing and scheduling efficiencies.
- Operating cash flow increased $92.6 million year over year, while investing cash usage fell substantially because of lower acquisition spending.
- The company paid $65.5 million in dividends during the first six months, or $0.20 per share, compared with $68.7 million, or $0.21 per share, in 2019. No open-market share repurchases occurred.
- Effective tax rates increased to 27.2% from 26.1% in Q2 and to 25.4% from 24.1% for the first six months, primarily because of reduced beneficial deductions.
Guidance, outlook, risks, contingencies, and unusual items
No formal revenue or earnings guidance is provided. Management expects the adverse impact of COVID-19 on commercial pest control to persist through the remainder of 2020 and possibly longer, depending on the extent and duration of the economic contraction. The company expects to forgo non-essential capital expenditures during 2020 and believes existing cash, operating cash flow, and available credit will fund operations, obligations, dividends, and expansion for the foreseeable future.
Management reported COVID-related operating adjustments, including modified service protocols, health screenings, remote work, furloughs, layoffs, temporary senior-management salary reductions, reduced travel, and other cost controls. Management did not anticipate a significant long-term revenue or cash-flow decline sufficient to impair goodwill or other intangible assets based on Q2 results, but noted that estimates could change materially as the pandemic develops.
The company adopted ASC 326 for credit losses on January 1, 2020, resulting in a $2.5 million increase to beginning retained earnings. The six-month provision for expected credit losses was $9.8 million, with higher bad-debt reserves primarily associated with commercial customers. Goodwill was $602.3 million at June 30, 2020, and management reported no indicated impairment from its latest annual analysis.
Pending litigation, employment claims, environmental matters, and service-related claims are being contested. Management does not expect a material adverse effect in the aggregate, although an unfavorable outcome could materially affect an individual quarter or year. Additional risks include customer closures or payment deferrals, labor availability and costs, supply-chain disruption, acquisitions and integration, weather, foreign exchange, data security, regulatory changes, and brand or reputation damage.
On July 28, 2020, the board declared a regular quarterly dividend of $0.08 per share payable September 10, 2020. The filing states that disclosure controls were effective and that no material weaknesses in internal control were identified.
Important facts for investors to verify
- Whether commercial customer closures and payment risk continued to pressure revenue, receivables, and bad-debt expense after June 30, 2020.
- The durability of residential demand growth and the contribution of acquisitions versus organic customer and pricing growth.
- Compliance with the 3.00:1.00 leverage covenant and the availability of the unused revolving credit capacity.
- Whether COVID-19-related cost reductions, furloughs, and deferred capital expenditures are sustainable without impairing service quality or future growth.
- Potential goodwill, customer-contract, or trademark impairment if the economic downturn persists.
- The resolution and potential financial impact of litigation, environmental matters, insurance accruals, and acquisition earnout liabilities, which totaled $47.1 million at June 30, 2020.
- The effect of credit-loss estimates under ASC 326, particularly for commercial and financed receivables.