Rollins, Inc. 2013 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 Orkin and other wholly owned subsidiaries. The filing covers the fiscal year ended December 31, 2013, with quarterly information for the fourth quarter and comparative full-year periods.
- One reportable segment: pest and termite control.
- Approximately 10,649 employees at December 31, 2013.
- Approximately 80 Orkin franchises at year-end, including 26 international franchises.
- Approximately 80% of revenue was recurring. Foreign operations represented approximately 8% of revenue.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|
| Revenue | $1.337 billion | $1.271 billion | +5.2% |
| Income before taxes | $191.6 million | $176.6 million | +8.5% |
| Net income | $123.3 million | $111.3 million | +10.8% |
| Diluted EPS | $0.84 | $0.76 | +10.5% |
| Operating cash flow | $162.7 million | $141.9 million | +14.6% |
| Capital expenditures | $18.6 million | $19.0 million | -2.1% |
| Cash and equivalents | $118.2 million | $65.1 million | +$53.1 million |
- Gross margin improved to 49.3% from 49.0%; net profit margin improved to 9.2% from 8.8%.
- SG&A increased 5.1% but declined slightly to 32.0% of revenue from 32.1%.
- The effective tax rate declined to 35.6% from 37.0%.
- No borrowings were outstanding under the $175.0 million unsecured revolving credit facility at year-end. Approximately $30.1 million of letters of credit were outstanding.
- Total liabilities were $301.0 million and stockholders’ equity was $438.3 million at December 31, 2013.
- Financing activities used $75.7 million, including $65.7 million of dividends and $13.7 million for common stock purchases.
Fourth-quarter and material period changes
| Fourth-quarter metric | Q4 2013 | Q4 2012 |
|---|
| Revenue | $324.7 million | $306.4 million |
| Gross profit | $157.4 million | $143.4 million |
| Net income | $28.0 million | $22.9 million |
| Diluted EPS | $0.19 | $0.16 |
- Commercial pest control, approximately 41% of revenue, grew 4.9%; residential pest control, also approximately 41%, grew 6.1%; termite revenue, approximately 17%, grew 4.5%.
- Bed bug revenue increased more than 20%, and HomeTeam TAEXX homebuilder installations increased approximately 36%.
- Less than 2% of revenue growth came from pricing; the company implemented its traditional price increase program in June 2013.
- 2013 was the company’s 16th consecutive year of improved revenue and profit.
- Acquisition spending declined to $12.6 million from $25.0 million. In February 2014, after year-end, Rollins acquired Allpest WA in Australia.
- The company repurchased 0.3 million shares in 2013 at an average price of $24.56. No shares were repurchased during the fourth quarter.
- The board approved a 16.7% increase in the regular quarterly dividend to $0.105 per share beginning in March 2014.
Outlook, risks, contingencies and unusual items
- Management expected 2014 capital expenditures of $15 million to $20 million and was considering approximately $3.3 million of pension contributions.
- Management stated that cash balances, operating cash flow and available credit should fund operations, obligations and expansion for the foreseeable future.
- Key risks include competition and pricing pressure, economic weakness affecting discretionary residential and commercial spending, adverse weather and seasonality, labor availability and wage inflation, acquisition integration, environmental regulation, litigation and foreign-exchange exposure.
- Termite claim accruals totaled $7.1 million at year-end and depend on estimates regarding claims, treatment effectiveness and regulatory requirements.
- The company self-insures portions of workers’ compensation, general liability and vehicle liability; reserves are based partly on actuarial estimates.
- Pending litigation and environmental matters were not expected by management to have a material adverse effect, although an unfavorable outcome could materially affect an individual period.
- Operating lease commitments totaled $75.2 million, and business-combination-related liabilities totaled $6.5 million.
- The pension plans were overfunded by $6.4 million at year-end, compared with a $43.3 million accrued pension liability in 2012, primarily reflecting improved plan asset performance and actuarial changes.
- The company is controlled by affiliates of the Rollins family, which held approximately 57% of outstanding shares and enabled the company to use the NYSE controlled-company exemption.
- Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that internal controls and disclosure controls were effective.
Important facts for investors to verify
- Reconcile the reported 2013 current-assets figure: the selected financial data table shows $272.4 million, while the consolidated balance sheet shows $274.4 million.
- Assess the sustainability of margin expansion and double-digit net-income growth relative to revenue growth.
- Review recurring-revenue retention, pricing contribution, customer acquisition trends and the performance of bed bug and TAEXX offerings.
- Evaluate self-insurance, termite-claim and litigation reserves, including the potential for period-specific charges.
- Monitor cash held by foreign subsidiaries, which management did not plan to repatriate, and the associated foreign-exchange exposure.
- Review the terms and covenants of the $175.0 million credit facility and the company’s substantial family ownership and controlled-company governance structure.
