Rollins, Inc. — 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. reported results for the three months ended March 31, 2019. The company operates in one reportable segment: pest and termite control, including residential, commercial, termite, ancillary and franchise services. The filing was signed April 26, 2019.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $429.1 million | $408.7 million | +5.0% |
| Income before income taxes | $56.1 million | $59.2 million | -5.3% |
| Net income | $44.2 million | $48.5 million | -8.9% |
| Basic and diluted EPS | $0.14 | $0.15 | Down $0.01 |
| Gross margin | 49.4% | 49.6% | Down 0.2 percentage points |
| SG&A as a percentage of revenue | 32.4% | 30.9% | Up 1.6 percentage points |
| Effective tax rate | 21.1% | 18.0% | Up 3.1 percentage points |
| Operating cash flow | $58.6 million | $72.7 million | Down $14.1 million |
Revenue growth was broad-based. Residential revenue was $172.5 million, commercial revenue was $169.7 million, termite completions, bait monitoring and renewals were $80.3 million, franchise revenue was $3.3 million, and other revenue was $3.4 million. Approximately 1.1 percentage points of revenue growth came from acquisitions, with customer growth and pricing contributing the remaining 3.9 percentage points.
At March 31, 2019, cash and cash equivalents were $116.6 million, compared with $115.5 million at December 31, 2018. Total assets were $1.272 billion and total liabilities were $552.9 million. The company had no borrowings under its unsecured $175.0 million revolving credit facility and stated that it remained in compliance with its debt covenants.
Net cash used in investing activities was $12.6 million, including $7.0 million for acquisitions and $6.5 million for capital expenditures. Net cash used in financing activities was $43.5 million, including $34.3 million of dividends and $9.1 million of employee-related share repurchases. Cash increased by $1.1 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5.0%, but net income declined 8.9% and EPS declined from $0.15 to $0.14.
- Cost of services increased 5.4%, reducing gross margin modestly. Management cited higher administrative salaries, insurance reserves and fleet expenses.
- SG&A increased 10.3%, driven by restricted-share grant amortization, higher sales salaries and headcount, employee benefit costs, professional services, IT projects and lease-accounting-related costs.
- The effective tax rate increased to 21.1%, primarily because of higher nondeductible expenses, fewer favorable tax adjustments and new Tax Cuts and Jobs Act provisions.
- Operating cash flow declined from $72.7 million to $58.6 million, while acquisition spending decreased from $43.2 million to $7.0 million.
- The company adopted ASC 842 lease accounting on January 1, 2019. It recognized operating lease right-of-use assets of approximately $195.7 million and lease liabilities of approximately $195.5 million, together with a $0.2 million increase to beginning retained earnings. The March 31 balance sheet included $182.2 million of operating lease right-of-use assets and $182.2 million of lease liabilities.
- Dividends paid increased to $34.3 million, or $0.105 per share, from $30.6 million, or $0.093 per share.
Outlook, Commentary, Risks and Unusual Items
Management characterized the quarter as successful despite Arctic weather and torrential rains that kept termites and other pests dormant. Management cited improved customer and employee retention and expected warmer weather and the spring pest season to support activity.
Rollins expected to close its planned acquisition of Clark Pest Control of Stockton, Inc. during the second quarter of 2019, subject to regulatory clearance and customary closing conditions. Management expected to fund the acquisition with cash on hand, approximately $100 million drawn under the revolving credit facility and an approximately $250 million LIBOR-linked term loan, with an expectation of repayment within two years.
Management expected approximately $22.0 million of additional capital expenditures for the remainder of 2019. It also expected no further contributions to its defined benefit pension plans during 2019 because the plans were more than 100% funded, and had begun a process to transfer the pension plan to an insurance provider over an estimated three-to-nine-month period.
The company stated that cash, expected operating cash flows and available credit capacity should fund operations, obligations and expansion for the foreseeable future. Short-term unearned revenue was $123.9 million at March 31, 2019, representing customer payments received in advance of services.
Key risks include weather and seasonality, competition and pricing, labor availability and costs, acquisition integration and financing, litigation and environmental matters, regulatory changes, data security, foreign-exchange exposure, lease obligations and the potential for unfavorable outcomes in pending claims. Management did not believe existing litigation would materially affect the company overall, but noted that an unfavorable outcome could be material to an individual quarter or year.
On April 23, 2019, the board declared a $0.105 per-share quarterly dividend payable June 10, 2019. Shareholders also approved an increase in authorized common shares from 375 million to 550 million.
Important Facts for Investors to Verify
- Whether Clark Pest Control closed on the expected terms and how the planned approximately $350 million of financing affected leverage and interest expense.
- The sustainability of revenue growth and whether warmer seasonal conditions translated into stronger termite and pest activity.
- Whether SG&A growth, insurance costs, fleet expenses and lease-related costs moderated in subsequent quarters.
- The effect of the higher effective tax rate on full-year earnings and cash flow.
- Operating cash-flow conversion, acquisition spending, capital expenditures and dividend coverage.
- Compliance with debt covenants after any acquisition-related borrowing and the expected repayment schedule.
- Progress and financial consequences of the pension-plan transfer to an insurance provider.
- Potential material developments in litigation, environmental claims, regulatory approvals and foreign-exchange exposure.