Rollins, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing also provides unaudited fourth-quarter results. Rollins provides residential and commercial pest and termite control services through wholly owned subsidiaries and franchises across North America, Australia, Europe, and other international markets. The company reports one operating segment.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1.674 billion | $1.573 billion | +6.4% |
| Income before taxes | $294.5 million | $260.6 million | +13.0% |
| Net income | $179.1 million | $167.4 million | +7.0% |
| Diluted EPS | $0.82 | $0.77 | +6.5% |
| Gross margin | 51.0% | 50.9% | +0.1 percentage points |
| Net profit margin | 10.7% | 10.6% | +0.1 percentage points |
| Operating cash flow | $235.4 million | $226.5 million | +3.9% |
| Capital expenditures | $24.7 million | $33.1 million | Down $8.4 million |
| Acquisition spending | $130.2 million | $46.3 million | Significantly higher |
| Cash and equivalents | $107.1 million | $142.8 million | Down $35.7 million |
| Third-party debt | None outstanding | None outstanding | $175 million facility available |
Fourth quarter: Revenue was $414.7 million versus $385.6 million in the prior-year quarter. Net income was $33.7 million versus $38.0 million, and diluted EPS was $0.15 versus $0.17.
Cash flow and liquidity: Cash used in investing activities was $154.2 million, primarily reflecting acquisitions. Cash used in financing activities was $130.3 million, including $122.0 million of dividends. The company had approximately $29.4 million of letters of credit but no borrowings under its $175.0 million unsecured revolving credit facility. Management stated that cash, expected operating cash flow, and available borrowings should fund operations, obligations, and expansion for the foreseeable future.
Balance sheet: Total assets increased to $1.034 billion from $916.5 million, primarily reflecting acquisitions and related goodwill and intangible assets. Stockholders’ equity increased to $653.9 million from $568.5 million. Current liabilities were $294.6 million, including $109.0 million of unearned revenue.
Material Changes Versus 2016
- All major service lines grew: residential pest control revenue increased 6.4%, commercial pest control increased 5.1%, and termite and ancillary services increased 9.7%.
- Approximately 4.5% of revenue growth came from organic growth and pricing; acquisitions contributed the remainder. Less than 2% of the revenue increase was attributable to pricing.
- Approximately 80% of pest control revenue remained recurring. Foreign operations increased to approximately 8% of revenue from 7%.
- The company acquired Northwest Exterminating effective August 1, 2017, and completed 23 acquisitions during the year. Acquisition cash spending increased to $130.2 million from $46.3 million.
- Gross margin improved modestly due to service salary and routing efficiencies from the BOSS operating system and Virtual Route Management. Higher fuel, leased-vehicle, materials, and termite-treatment costs partially offset the improvement.
- SG&A declined to 30.1% of revenue from 31.2%, while depreciation and amortization increased to 3.4% of revenue from 3.2%.
- The Tax Cuts and Jobs Act increased 2017 tax expense by an estimated $11.6 million, reducing net income by approximately $0.05 per diluted share. Excluding this effect, management reported non-GAAP net income of $190.7 million, or $0.87 per share.
- The company paid $0.56 per share in dividends, including a $0.10 special year-end dividend, compared with $0.50 per share in 2016. No open-market share repurchases were made in 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management expected the 2018 corporate tax rate to be in the mid-20% range, with the rate adjusted throughout the year.
- Expected 2018 capital expenditures were $25 million to $28 million. Management did not expect a defined-benefit pension contribution in 2018.
- Strategic acquisitions and international and franchise expansion remain priorities. The company had 81 Orkin international franchises and operated in 53 countries at year-end.
- Management identified seasonality and adverse weather as important operating factors, with higher pest activity generally increasing spring and summer revenue.
- Key risks include discretionary spending sensitivity, labor availability and wage inflation, competition, acquisition integration, franchisee and vendor conduct, data-security incidents, environmental and pesticide regulation, litigation, foreign exchange, and weather conditions.
- Pending litigation, employment claims, and environmental matters are considered not material in the aggregate by management, although an unfavorable outcome could produce a material charge in an individual period.
- Operating lease commitments totaled $143.5 million; total disclosed contractual obligations, including business-combination liabilities and unrecognized tax positions, were $177.0 million.
- The company expected adoption of the new lease standard to materially increase reported assets and liabilities, although the filing did not provide a quantified estimate. Other accounting standards adopted or scheduled for adoption were not expected to have a material impact, except that the credit-loss standard remained under evaluation.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important Facts for Investors to Verify
- Confirm the recurring revenue retention and organic-growth contribution underlying the 6.4% reported revenue increase.
- Assess whether acquisition-driven growth, particularly Northwest Exterminating, is generating expected revenue, margins, and cash returns.
- Reconcile reported 2017 net income with the company’s non-GAAP figure excluding the $11.6 million TCJA impact.
- Monitor cash usage, dividend policy, acquisition spending, and the decline in year-end cash despite positive operating cash flow.
- Evaluate the effect of labor costs, fuel and vehicle expenses, insurance claims, weather, and foreign exchange on future margins.
- Review termite-contract accruals, self-insured claims reserves, litigation contingencies, and the $143.5 million operating-lease commitment.
- Consider governance implications of concentrated ownership: executive officers, directors, and affiliates controlled approximately 56% of outstanding shares and the company used the NYSE controlled-company exemption.