Rollins, Inc. 2017 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. provides pest and termite control services through one reportable segment. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the same periods in 2016. The company reported 217,975,154 common shares outstanding as of October 16, 2017.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | First Nine Months 2017 | First Nine Months 2016 |
|---|---|---|---|---|
| Revenue | $450.4 million | $424.0 million | $1.259 billion | $1.188 billion |
| Net income | $51.4 million | $49.7 million | $145.4 million | $129.4 million |
| Basic and diluted EPS | $0.24 | $0.23 | $0.67 | $0.59 |
| Gross margin | 51.4% | 51.5% | 51.4% | 51.2% |
| Net margin | Approximately 11.4% | Approximately 11.7% | Approximately 11.5% | Approximately 10.9% |
| Operating cash flow | Not separately provided | Not separately provided | $189.4 million | $158.2 million |
- Q3 revenue increased 6.2%, while net income increased 3.6% and EPS increased 4.3%.
- Nine-month revenue increased 6.0%, net income increased 12.4%, and EPS increased 13.6%.
- Q3 cost of services was $218.8 million, and SG&A was $134.9 million, or 30.0% of revenue versus 29.6% in the prior-year quarter.
- Nine-month SG&A was $379.8 million, or 30.2% of revenue versus 30.7% in the prior-year period.
- Cash and cash equivalents were $113.4 million at September 30, 2017, compared with $142.8 million at December 31, 2016.
- Total assets were $1.047 billion and total liabilities were $396.1 million at September 30, 2017. Stockholders’ equity was $650.4 million.
- The company had no outstanding borrowings under its unsecured $175.0 million revolving credit facility. The facility includes a $75.0 million letter-of-credit subfacility and a $25.0 million swingline subfacility.
- Capital expenditures were $17.2 million during the first nine months, and management expected approximately $8.0 million of additional capital expenditures during the remainder of 2017.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected acquisitions, customer additions, and pricing. Acquisitions contributed approximately 2.3 percentage points of Q3 growth and 1.4 percentage points of nine-month growth.
- Q3 revenue growth occurred across commercial, residential, and termite and ancillary services. Termite and ancillary revenue grew 10.1%, residential revenue grew 6.1%, and commercial revenue grew 4.9%.
- Nine-month gross margin improved by 0.2 percentage points, primarily from lower service and administrative salaries as a percentage of revenue and lower insurance expense.
- Q3 gross margin declined slightly because of storm-related disruption, higher personnel costs, fleet expenses, and materials costs.
- Depreciation and amortization increased 9.4% in Q3 and 12.3% for the first nine months, reflecting the BOSS customer relationship management system, acquisitions, equipment purchases, and amortization of acquired customer contracts.
- The effective tax rate declined to 35.7% for the first nine months from 37.8%, partly because of $5.0 million of excess tax benefits from share-based compensation under ASU 2016-09.
- Acquisition spending increased to $127.9 million from $40.8 million. The company completed 19 acquisitions during the first nine months, including the August 1 acquisition of Northwest Exterminating’s pest control business for a cash purchase price of $127.9 million.
- Dividends paid increased to $75.2 million, or $0.345 per share, from $65.5 million, or $0.30 per share. No open-market share repurchases occurred during the first nine months of 2017, although $8.2 million of employee-related share repurchases were made.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash balances, operating cash flow, and available credit are expected to fund operations, obligations, and expansion for the foreseeable future.
- Management expected no further defined-benefit pension contributions in 2017 and stated that the plans were adequately funded.
- On October 24, 2017, the board declared a regular quarterly dividend of $0.115 per share and a special year-end dividend of $0.10 per share, payable December 11, 2017.
- Hurricanes Harvey and Irma negatively affected revenue and profitability through preparation activities, flooding, branch closures, and service interruptions in affected regions.
- Foreign currency movements reduced Q3 revenue by approximately $8.4 million and pre-tax earnings by approximately $1.6 million. The company uses foreign-exchange forwards and recorded a nine-month derivative loss of $0.3 million.
- Pending lawsuits, employment claims, environmental matters, and other claims are being contested. Management does not expect a material adverse effect on financial position, results, or liquidity, but an unfavorable outcome could materially affect an individual quarter or year.
- The company expects revenue recognition standard Topic 606 to have no material impact, although variable consideration provisions may affect revenue accounting. Adoption was planned for the first quarter of 2018 using the modified retrospective method.
- The company expects lease accounting guidance to materially increase reported assets and liabilities when adopted. Other recently issued accounting standards were not expected to materially affect reported results or financial position.
- Key disclosed risks include weather and climate conditions, labor availability and costs, competition and pricing, acquisition integration, technology and industry changes, termite-treatment effectiveness, foreign exchange, economic conditions, and regulatory or environmental changes.
Most Important Facts for Investors to Verify
- Verify whether acquisition-driven growth and the Northwest Exterminating integration support the company’s revenue and margin trajectory.
- Assess the effect of hurricanes and other weather events on service capacity, costs, customer retention, and future quarterly comparisons.
- Monitor cash conversion, acquisition spending, capital expenditures, dividend commitments, and the decline in cash balances.
- Review goodwill and acquired customer-contract balances, which increased materially following acquisitions, and confirm the results of future impairment testing.
- Confirm the implementation effects of Topic 606 and lease accounting on retained earnings, revenue timing, assets, and liabilities.
- Review litigation, environmental claims, insurance accruals, termite-related estimates, and other contingencies because adverse outcomes could be material to a quarter or year.