Rollins, Inc. 2019 Form 10-K Summary
Business context and reporting period
Rollins, Inc. is an international pest and termite control services company serving residential and commercial customers through wholly owned subsidiaries and franchises. The filing covers the fiscal year ended December 31, 2019, with quarterly data provided for the fourth quarter. The company reports one segment: pest and termite control.
- Operations span the United States, Canada, Australia, Europe, Asia, and other international markets.
- Approximately 15,000 employees were reported as of January 31, 2020.
- Approximately 80% of pest control revenue was recurring in 2019.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $2.015 billion | $1.822 billion | +10.6% |
| Income before taxes | $261.2 million | $310.7 million | -16.0% |
| Net income | $203.3 million | $231.7 million | -12.2% |
| Diluted EPS | $0.62 | $0.71 | -12.7% |
| Net profit margin | 10.1% | 12.7% | -2.6 percentage points |
| Gross margin | 50.7% | 50.9% | -0.2 percentage points |
| Cash from operating activities | $309.2 million | $286.3 million | +8.0% |
| Capital expenditures | $27.1 million | $27.2 million | Approximately flat |
| Cash and cash equivalents | $94.3 million | $115.5 million | -$21.2 million |
Revenue growth occurred across all major service lines: residential revenue increased 11.3%, commercial revenue increased 8.9%, and termite and ancillary revenue increased 11.6%. Residential, commercial, and termite services represented approximately 43%, 38%, and 18% of revenue, respectively.
- Sales, general and administrative expense increased 13.2% to $623.4 million, or 30.9% of revenue versus 30.2% in 2018.
- Depreciation and amortization increased 21.4% to $81.1 million, primarily because of acquisitions and technology investments.
- The effective tax rate declined to 22.1% from 25.4%, partly because of favorable pension-settlement-related tax adjustments.
- Dividends paid totaled $153.8 million, or $0.47 per share, including a $0.05 per-share special dividend.
Liquidity, debt, and capital allocation
- Operating cash flow was $309.2 million, while investing cash flow was negative $455.1 million, including $430.6 million for acquisitions.
- At year-end, debt included $101.5 million outstanding under a $175.0 million revolving facility and $190.0 million under a $250.0 million term loan, for total borrowings of $291.5 million.
- The effective interest rate on outstanding debt was 2.66%, based primarily on one-month LIBOR plus an applicable margin.
- The company was in compliance with its maximum 3.00:1.00 leverage-ratio covenant and expected to remain compliant throughout 2020.
- Contractual obligations totaled $561.2 million, including debt, acquisition payments, operating leases, and unrecognized tax positions.
- Management expected 2020 capital expenditures of approximately $28 million to $30 million.
- The company stated that cash, expected operating cash flow, and available borrowing capacity should fund operations, obligations, and expansion for the foreseeable future.
Material changes versus the prior comparable period
- Revenue increased for the 22nd consecutive year, but profitability declined because of a $49.9 million pension settlement loss, higher acquisition-related and integration costs, increased employee benefit costs, higher insurance expense, and greater depreciation and amortization.
- Rollins acquired Clark Pest Control on April 30, 2019, its largest acquisition since HomeTeam Pest Defense in 2008. Clark contributed results from the acquisition date through year-end and represented 21.8% of consolidated assets and 4.7% of revenue.
- Total acquisition cash spending increased substantially from $76.8 million in 2018 to $430.6 million in 2019.
- Goodwill increased from $368.5 million to $572.8 million, and customer contracts, net, increased from $178.1 million to $273.7 million, primarily because of acquisitions.
- The company adopted ASC 842 for leases on January 1, 2019, recognizing approximately $200.7 million of operating lease right-of-use assets and $201.8 million of lease liabilities, net of interest.
- The primary Rollins defined benefit pension plan was settled in 2019. The settlement generated a $49.9 million non-cash expense and left approximately $21.6 million of benefit plan assets at year-end.
- Fourth-quarter 2019 revenue was $506.0 million and net income was $50.8 million, compared with $444.6 million and $51.0 million, respectively, in the fourth quarter of 2018.
Guidance, outlook, commentary, and risks
- Management planned to continue pursuing acquisitions, international expansion, franchise growth, and reinvestment of foreign earnings. No formal revenue or earnings guidance was provided.
- The company expected to continue paying cash dividends, subject to earnings, financial condition, and other relevant factors. The board subsequently approved a 14.3% increase in the quarterly dividend to $0.12 per share, payable March 10, 2020.
- Key operating risks include economic weakness affecting discretionary residential services and commercial customers, labor shortages and wage inflation, adverse weather and seasonality, competitive pricing, foreign currency fluctuations, and challenges integrating acquisitions.
- Additional risks include cybersecurity and data privacy incidents, environmental and pesticide regulation, litigation and employment claims, termite-related service claims, and actions by franchisees, subcontractors, or vendors.
- Management considered pending litigation and environmental matters not material to financial condition, results of operations, or liquidity, but acknowledged that an unfavorable outcome could materially affect an individual quarter or year.
- The company retained approximately $32.9 million in letters of credit supporting self-insured workers’ compensation and casualty obligations.
- The company is a controlled company under NYSE rules; executive officers, directors, and affiliates held approximately 57% of outstanding common shares, limiting minority-stockholder influence.
- Management assessed internal control over financial reporting as effective, although Clark Pest Control was excluded from the 2019 assessment and represented 21.8% of total assets and 4.7% of revenue.
Most important facts for investors to verify
- Whether revenue growth can continue to offset acquisition-related costs, higher labor and benefit expenses, and rising amortization.
- The pace and returns of acquisitions, particularly the integration and performance of Clark Pest Control.
- Debt repayment, leverage-covenant compliance, and exposure to variable interest rates.
- The sustainability of dividends and the company’s ability to fund acquisitions while maintaining liquidity.
- The adequacy of reserves for termite claims, self-insured liabilities, litigation, and environmental matters.
- The effectiveness of cybersecurity controls and the completion of Clark Pest Control’s inclusion in the company’s internal-control assessment for 2020.
- The impact of recurring seasonality, weather, foreign exchange, labor availability, and economic conditions on future operating margins.