Rollins, Inc. 2018 Q3 Form 10-Q Summary
Business context and reporting period
Rollins, Inc. operates a single reportable segment focused on residential and commercial pest and termite control. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. The filing was signed October 26, 2018.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $487.7 million | $450.4 million | $1.377 billion | $1.259 billion |
| Net income | $66.6 million | $51.4 million | $180.7 million | $145.4 million |
| Diluted EPS | $0.31 | $0.24 | $0.83 | $0.67 |
| Operating cash flow | Not separately provided | Not separately provided | $213.3 million | $189.4 million |
| Gross margin | 51.6% | 51.4% | 51.1% | 51.4% |
| Net margin | Approximately 13.7% | Approximately 11.4% | Approximately 13.1% | Approximately 11.5% |
- Q3 revenue increased 8.3%; management attributed approximately 3.2 percentage points to acquisitions and 5.1 points to customer growth and pricing.
- Q3 net income increased 29.6%, while nine-month net income increased 24.3%. Lower tax rates materially supported earnings growth.
- Q3 cost of services increased 8.0%, and gross margin improved 0.2 percentage points. Nine-month gross margin declined 0.3 percentage points because of higher labor, benefits, fuel, vehicle, materials, maintenance and repair costs.
- Q3 SG&A increased 7.5% but declined to 29.7% of revenue from 30.0%. Nine-month SG&A increased 9.3% and represented 30.1% of revenue versus 30.2%.
- The effective tax rate declined to 25.9% in Q3 from 37.7% and to 24.5% for nine months from 35.7%, primarily reflecting the Tax Cuts and Jobs Act. Management expected a 2018 corporate tax rate in the mid-20% range.
- Cash and cash equivalents were $118.7 million at September 30, 2018, compared with $107.1 million at December 31, 2017. Total assets were $1.130 billion and total liabilities were $394.8 million.
- The company had no outstanding borrowings under its $175.0 million unsecured revolving credit facility and reported compliance with debt covenants.
- Capital expenditures were $19.6 million year to date, with approximately $8.0 million expected for the remainder of 2018. Acquisition spending was $71.8 million, versus $127.9 million in the prior-year period.
Material changes versus the prior comparable period
- Revenue growth was broad-based. For Q3, commercial pest control revenue increased 5.7%, residential pest control 9.2%, and termite and ancillary services 11.0%. For nine months, the increases were 5.8%, 9.8%, and 14.4%, respectively.
- Acquisition activity included 32 acquisitions during the first nine months, including Aardwolf Pestkare in Singapore on July 2, 2018, Rollins’ first company-owned operation in Singapore. The transaction’s cash purchase price was $71.8 million.
- Goodwill increased to $365.5 million from $346.5 million at year-end 2017, and customer contracts increased to $185.5 million from $152.9 million, primarily reflecting acquisitions. No goodwill or intangible-asset impairment was indicated by the September 30 annual analysis.
- Operating cash flow increased $23.9 million, or approximately 12.6%, year over year. Cash used for acquisitions declined, while dividends paid increased to $91.7 million from $75.2 million.
- Unearned revenue increased to $134.8 million at September 30, 2018 from $117.6 million at December 31, 2017; short-term unearned revenue was $123.9 million.
- The company adopted ASC 606 using the modified retrospective method. Management reported no material impact on the financial statements.
Guidance, outlook, risks and unusual items
- Management stated that cash, expected operating cash flow and available credit were sufficient to fund operations, obligations and expansion for the foreseeable future.
- The company expected approximately $8.0 million of additional 2018 capital expenditures and no further defined-benefit pension contributions in 2018. The pension plan was more than 100% funded, and a transition to an insurance provider was expected to take approximately 12–15 months.
- On October 23, 2018, the board approved a three-for-two stock split, effective December 10, 2018, and declared a regular $0.14-per-share dividend plus a special $0.14-per-share year-end dividend.
- The company faces ordinary-course litigation, employment claims and environmental matters. Management did not believe these matters would have a material adverse effect, but an unfavorable outcome could materially affect an individual quarter or year.
- Key operating risks include weather and climate conditions, competition and pricing, labor availability and costs, acquisition integration, regulatory changes, data security, brand and reputation damage, termite-treatment effectiveness, foreign exchange movements and potential litigation.
- ASU 2016-02, Leases, was expected to materially increase reported assets and liabilities upon adoption beginning in 2019. The filing did not provide a quantified estimate.
- Foreign currency translation reduced other comprehensive income by $8.7 million for the first nine months, compared with a $10.5 million gain in the prior-year period.
Most important facts for investors to verify
- Verify the apparent revenue transcription inconsistency in the revenue-disaggregation table, which reports Q3 2018 total revenue as $488.739 million versus $487.739 million in the primary statements and MD&A.
- Assess how much earnings growth is attributable to the lower effective tax rate versus underlying operating performance.
- Monitor acquisition integration, goodwill and customer-contract balances, particularly following 32 acquisitions and the Singapore entry.
- Evaluate the effect of higher labor, benefits, fuel, vehicle and maintenance costs on future gross margins.
- Confirm the timing and balance-sheet impact of the 2019 lease-accounting adoption.
- Review the terms and funding implications of the announced stock split, regular dividend and special dividend.
- Review the 2017 Form 10-K for detailed risk factors, litigation disclosures and contingencies referenced but not repeated in this filing.