Rollins, Inc. 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. reported results for the three months ended March 31, 2013. The company operates primarily in pest and termite control through one reportable segment. Results are seasonal, with increased pest and termite activity typically occurring in the spring and summer. The filing was signed April 26, 2013.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $299.7 million | $289.5 million | Up 3.5% |
| Income before taxes | $35.1 million | $36.7 million | Down 4.4% |
| Net income | $23.2 million | $23.1 million | Up 0.4% |
| Diluted earnings per share | $0.16 | $0.16 | Unchanged |
| Operating cash flow | $38.8 million | $37.1 million | Up $1.7 million |
| Dividends paid | $13.1 million | $11.7 million | Up $1.4 million |
- Gross margin declined to 48.1% from 48.8%. Based on reported revenue and net income, net margin was approximately 7.7% versus 8.0%.
- Cost of services increased 5.1% to $155.6 million, while sales, general and administrative expense increased 4.5% to $99.1 million.
- The effective income tax rate declined to 34.0% from 37.2%, primarily because of differences in state tax rates and a write-down of certain deferred tax liabilities.
- Cash and cash equivalents totaled $82.5 million at March 31, 2013, compared with $65.1 million at December 31, 2012.
- Total liabilities were $342.5 million and stockholders’ equity was $365.0 million at March 31, 2013.
- The company had no outstanding borrowings under its $175.0 million unsecured revolving credit facility and reported compliance with debt covenants.
- Cash used in investing activities was $5.6 million, including $4.7 million of capital expenditures and $0.9 million for acquisitions. Cash used in financing activities was $14.9 million.
Material Changes Versus the Prior Comparable Period
- Commercial pest control revenue increased 3.7%, residential pest control revenue increased 5.4%, and termite revenue decreased 0.1%.
- Cold weather and a delayed termite swarm reduced demand and new prospect leads across service lines, particularly termite services.
- Operating cost pressure reflected lower productivity during the delayed spring season, higher material and supply costs associated with TAEXX installations and ancillary product sales.
- SG&A increased as a percentage of revenue to 33.1% from 32.8%, driven by professional services for a commercial pricing initiative, costs related to a new branch operating system and higher advertising expense.
- Acquisition spending decreased to $0.9 million from $6.8 million in the prior-year quarter.
- The company did not repurchase shares in the open market during the quarter, compared with 68,000 shares repurchased in Q1 2012. It did repurchase $4.5 million of shares from employees to fund taxes on restricted-share vesting.
- Cash dividends increased to $0.09 per share from $0.08 per share. A further $0.09 per-share quarterly dividend was declared on April 23, 2013.
- Foreign currency translation produced a $0.8 million comprehensive loss in Q1 2013, compared with a $0.6 million gain in Q1 2012.
Guidance, Outlook, Risks and Unusual Items
- Management expects current cash, operating cash flow and available credit to fund operations, obligations and planned expansion for the foreseeable future.
- Management expects approximately $11.0 million of additional capital expenditures during the remainder of 2013.
- The company is considering approximately $5.0 million of additional defined-benefit pension contributions during 2013.
- Management stated that litigation and environmental matters are not expected to have a material adverse effect on financial position, results or liquidity, but an unfavorable outcome could be material to an individual quarter or year.
- Pending matters include proposed class actions involving wage-and-hour and termite services, as well as fumigation-related lawsuits alleging breach of contract and negligence.
- Key identified risks include weather and climate conditions, economic and market conditions, competition and pricing, labor availability and costs, acquisitions and integration, government and environmental regulation, foreign exchange and interest-rate exposure.
- The company stated that recent accounting standards are not expected to have a material effect on reported results or financial position.
- Disclosure controls were assessed as effective, with no material weaknesses identified and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Verify whether revenue growth and margins improved as delayed spring and termite activity shifted into the second quarter.
- Monitor the impact of pricing initiatives, advertising, branch-system implementation and TAEXX-related costs on operating margins.
- Confirm cash generation, capital expenditures, pension contributions, dividends and any resumption of share repurchases.
- Track the status and potential exposure from the pending class-action and fumigation-related litigation.
- Reconcile the credit-facility disclosure: one section identifies a $10.0 million swingline subfacility, while the MD&A identifies a $25.0 million swingline subfacility.
- Assess the effect of foreign currency movements and the concentration of approximately $42.5 million of cash in international bank accounts.