Rollins, Inc. 2018 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. Its single reportable segment includes operations in North America, Australia, Europe and other international markets. This filing covers the fiscal year ended December 31, 2018; fourth-quarter data are presented as unaudited quarterly information.
Approximately 80% of pest control revenue was recurring. The business is seasonal, with revenue generally highest in the spring and summer. The company employed approximately 14,000 people as of January 31, 2019.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1.822 billion | $1.674 billion | +8.8% |
| Income before taxes | $310.7 million | $294.5 million | +5.5% |
| Net income | $231.7 million | $179.1 million | +29.3% |
| Diluted EPS | $0.71 | $0.55 | +29.1% |
| Gross margin | 50.9% | 51.0% | Down 0.1 point |
| Net profit margin | 12.7% | 10.7% | Up 2.0 points |
| Operating cash flow | $286.3 million | $235.4 million | +21.6% |
| Capital expenditures | $27.2 million | $24.7 million | +10.1% |
| Cash and cash equivalents | $115.5 million | $107.1 million | +7.9% |
| Total debt | None outstanding | None outstanding | No change |
Revenue growth was broad-based: residential revenue increased 9.1% to $773.9 million, commercial revenue increased 6.0% to $707.4 million, and termite, bait monitoring and renewal revenue increased 12.8% to $332.6 million. Foreign operations represented approximately 8% of revenue and were negatively affected by foreign currency movements.
Cost of services increased 9.1%, while depreciation and amortization increased 18.0% to $66.8 million and sales, general and administrative expense increased 9.4% to $550.7 million. Personnel costs, higher insurance premiums, payroll taxes, fuel, leased vehicles, acquisitions and technology-related professional services pressured margins.
Investing cash outflows were $101.4 million, including $76.8 million for acquisitions. Financing cash outflows were $162.3 million, including $152.7 million of dividends. The 2018 dividend was $0.47 per share, including a $0.09 special dividend. No open-market share repurchases occurred.
Current assets were $286.0 million, total assets were $1.094 billion, total liabilities were $382.2 million and stockholders’ equity was $711.9 million at December 31, 2018. The company had an undrawn $175.0 million unsecured revolving credit facility, with approximately $32.9 million of letters of credit outstanding.
Fourth-quarter information
| Metric | Fourth quarter 2018 | Fourth quarter 2017 |
|---|---|---|
| Revenue | $444.6 million | $414.7 million |
| Gross profit | $223.4 million | $207.2 million |
| Net income | $51.0 million | $33.7 million |
| Diluted EPS | $0.16 | $0.10 |
Material changes versus the prior comparable period
- Revenue growth accelerated to 8.8% from 6.4% in 2017, supported by pricing, organic growth and acquisitions.
- Net income benefited from the Tax Cuts and Jobs Act; the estimated 2018 benefit was approximately $38.4 million, while 2017 included approximately $11.6 million of unfavorable tax effects.
- Gross margin declined modestly because of higher employee benefit, insurance, payroll, fleet and vehicle costs.
- Operating cash generation improved by $50.9 million, while acquisition spending declined from $130.2 million to $76.8 million.
- Backlog increased to $5.8 million from $4.9 million. Orkin franchises increased to 133 from 128, including 86 international franchises versus 81.
- Goodwill increased to $368.5 million from $346.5 million, primarily because of acquisitions, and customer contracts increased to $178.1 million from $152.9 million.
- Accumulated other comprehensive loss increased to $71.1 million, primarily reflecting pension and foreign-currency losses.
Guidance, outlook, risks and unusual items
- Management expected 2019 capital expenditures of approximately $25 million to $30 million.
- Rollins expected to fund the planned acquisition of Clark Pest Control, announced in January 2019, with cash, its revolving facility and a new term loan. The expected purchase price was approximately $400 million, including real estate, subject to closing conditions and regulatory clearance.
- The company expected the Clark transaction to close in the first or second quarter of 2019, but timing and completion were not assured.
- Management expected no 2019 pension contribution because the plans were more than fully funded and planned to transition the pension plan to an insurance provider over approximately six to nine months.
- Adoption of ASC 606 had no material effect on the consolidated financial statements. Adoption of the new lease standard in 2019 was expected to add approximately $175 million to $195 million of operating lease right-of-use assets and liabilities.
- Key risks include seasonality and adverse weather, economic pressure on discretionary residential and commercial spending, labor shortages and wage inflation, competition, foreign-currency exposure, acquisition integration, cybersecurity and data breaches, environmental and pesticide regulation, litigation, franchisee conduct, termite claims and concentrated voting control.
- Routine litigation, employment claims and environmental matters were being contested. Management did not expect a material adverse effect, but acknowledged that an unfavorable outcome could materially affect an individual quarter or year.
- The company was a controlled company, with executive officers, directors and affiliates holding approximately 56% of outstanding common stock, limiting minority stockholder influence.
Important facts for investors to verify
- Confirm the extent to which 2018 earnings growth was operational versus the one-time or nonrecurring tax benefit from the TCJA.
- Assess whether personnel, insurance, fleet and acquisition-related costs continue to pressure gross and operating margins.
- Review the financing, leverage and integration implications of the proposed approximately $400 million Clark Pest Control acquisition.
- Evaluate the effect of the 2019 lease accounting adoption on reported assets, liabilities and leverage metrics.
- Monitor recurring revenue, customer retention, pricing, backlog and service-line growth, particularly residential and termite operations.
- Review litigation, termite-contract accruals, self-insured claims, environmental obligations and cybersecurity disclosures for changes in exposure.
- Consider foreign-currency volatility and the company’s policy of retaining and reinvesting cash held by foreign subsidiaries.
- Verify dividend sustainability given the $152.7 million of dividends paid in 2018 and management’s stated intention to continue dividends.