Rollins, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
Rollins, Inc. reported unaudited results for the three and six months ended June 30, 2019. The company operates one reportable segment focused on pest and termite control, including residential, commercial, termite, ancillary, and franchise services.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Revenue | $524.0 million | $480.5 million | 9.1% increase |
| Net income | $64.3 million | $65.5 million | 1.9% decrease |
| Diluted EPS | $0.20 | $0.20 | Flat |
| Gross margin | 51.7% | 52.0% | Down 0.3 points |
| SG&A as a percentage of revenue | 30.9% | 29.8% | Up 1.1 points |
| Effective tax rate | 26.1% | 27.3% | Down 1.2 points |
| Metric | Six months ended June 30, 2019 | Six months ended June 30, 2018 | Change |
|---|---|---|---|
| Revenue | $953.0 million | $889.2 million | 7.2% increase |
| Net income | $108.5 million | $114.1 million | 4.9% decrease |
| Diluted EPS | $0.33 | $0.35 | Decrease |
| Gross margin | 50.6% | 50.9% | Down 0.3 points |
| SG&A as a percentage of revenue | 31.6% | 30.3% | Up 1.3 points |
| Effective tax rate | 24.1% | 23.6% | Up 0.5 points |
Q2 net margin was approximately 12.3%, compared with approximately 13.6% in the prior-year quarter. Six-month net margin was approximately 11.4%, compared with approximately 12.8% in the prior-year period.
- Cash flow from operating activities was $136.9 million for the first six months, compared with $130.5 million in 2018.
- Cash and cash equivalents were $98.5 million at June 30, 2019, versus $115.5 million at December 31, 2018.
- Cash used for acquisitions was $410.1 million, compared with $54.6 million in the prior-year period. Capital expenditures were $13.4 million, compared with $14.2 million.
- Total debt was approximately $348.0 million at June 30, 2019, consisting of $101.0 million under the revolving facility and $246.9 million under the term loan, before considering the separately presented current debt amount. The filing’s balance sheet reports $347.9 million of current and long-term debt.
- The company had a $175.0 million unsecured revolving commitment and a $250.0 million unsecured variable-rate term loan, both with five-year terms commencing April 29, 2019. Management stated that debt covenants were satisfied.
- Dividends paid during the first six months were $68.7 million, or $0.21 per share, compared with $61.1 million, or $0.19 per share, in 2018.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions, customer growth, and pricing. Management attributed approximately 5.5 percentage points of Q2 growth to acquisitions and 3.6 points to customers and pricing; for the six-month period, the contributions were approximately 3.5 and 3.7 points, respectively.
- Residential revenue grew 11.1% in Q2, commercial revenue grew 7.7%, and termite and ancillary revenue grew 9.2%. For the first six months, the respective growth rates were 8.4%, 6.2%, and 7.2%.
- Cost of services, depreciation and amortization, and SG&A increased faster than revenue in Q2. Management cited acquisition-related costs, higher salaries, fleet and materials costs, increased amortization of acquired customer contracts, restricted-share compensation, 401(k) costs, and maintenance expenses.
- Rollins completed the acquisition of Clark Pest Control on April 30, 2019 for approximately $400 million. Clark had approximately 145,000 customers, 26 service locations, and 2018 revenue of approximately $139.2 million. The preliminary purchase-price allocation included $191.9 million of goodwill and $112.7 million of customer contracts.
- Total assets increased to $1.73 billion from $1.09 billion at December 31, 2018, primarily reflecting acquisitions and acquired goodwill and intangible assets.
- The company adopted ASC 842 leases on January 1, 2019, recognizing approximately $195.7 million of operating lease right-of-use assets and $195.5 million of lease liabilities, with a $0.2 million increase to beginning retained earnings.
Guidance, outlook, risks, contingencies, and unusual items
- Management believes cash, operating cash flow, and available borrowing capacity will be sufficient to fund operations, obligations, and expansion for the foreseeable future.
- Management expects to repay the Clark acquisition-related loans within two years of closing and expects to remain in compliance with the maximum 3.00:1.00 leverage covenant through 2019.
- The company expected approximately $10.0 million of additional capital expenditures for the remainder of 2019 in the liquidity discussion; the forward-looking statement section references $22.0 million. The filing text does not clearly reconcile this difference.
- Management expected no further defined-benefit pension contributions in 2019 and planned to transition the pension plan to an insurance provider by September 30, 2019. The plan was described as more than 100% funded.
- The board declared a quarterly dividend of $0.105 per share payable September 10, 2019.
- Pending litigation, employment claims, environmental matters, weather and climate conditions, labor availability and costs, competition, acquisition integration, data security, regulatory changes, foreign exchange, and interest-rate exposure are identified risks. Management does not expect current claims to have a material adverse effect, but an unfavorable outcome could materially affect an individual quarter or year.
- The company used interest-rate and foreign-exchange derivatives. It estimated that approximately $0.4 million of derivative-related accumulated other comprehensive income would be reclassified into interest expense over the following 12 months.
- Disclosure controls and internal control over financial reporting were reported effective as of June 30, 2019, with no material weaknesses identified.
Important facts for investors to verify
- Verify the final purchase-price allocation, goodwill, intangible values, and integration performance for Clark Pest Control and the other 2019 acquisitions.
- Assess whether acquisition-driven revenue growth converts into improved earnings after higher amortization, compensation, operating costs, and interest expense.
- Reconcile the reported debt balances, borrowing availability, interest-rate exposure, leverage covenant, and management’s stated plan to repay acquisition-related borrowings.
- Clarify the inconsistency between the $10.0 million and $22.0 million capital-expenditure expectations for the remainder of 2019.
- Monitor gross-margin and SG&A trends, which deteriorated despite strong revenue growth, and assess the effect on full-year profitability.
- Review litigation, environmental contingencies, acquisition earnouts of $26.9 million, pension-plan insurance transition, and the effects of ASC 842 on future reported liabilities and expenses.