Rollins, Inc. 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates as a single reportable segment focused on pest and termite control services. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|
| Revenue | $411.1 million | $392.2 million | 4.8% increase |
| Income before taxes | $77.0 million | $72.3 million | 6.4% increase |
| Net income | $47.8 million | $45.1 million | 6.0% increase |
| Basic and diluted EPS | $0.22 | $0.21 | Increase |
| Gross margin | 52.3% | 51.5% | 80 basis-point increase |
| Net margin | 11.6% | 11.5% | Slight increase |
| Dividends per share | $0.10 | $0.08 | 25.0% increase |
| Metric | Six Months 2016 | Six Months 2015 | Change |
|---|
| Revenue | $763.9 million | $723.1 million | 5.6% increase |
| Income before taxes | $128.1 million | $118.9 million | 7.7% increase |
| Net income | $79.7 million | $75.4 million | 5.8% increase |
| Basic and diluted EPS | $0.36 | $0.34 | Increase |
| Net margin | 10.4% | 10.4% | Broadly unchanged |
- Operating cash flow was $96.5 million for the first six months, compared with $89.3 million in 2015.
- Cash and cash equivalents were $126.5 million at June 30, 2016, versus $134.6 million at December 31, 2015.
- Total assets were $905.6 million and stockholders’ equity was $558.3 million at June 30, 2016.
- The company had no outstanding borrowings under its $175.0 million unsecured revolving credit facility and remained in compliance with debt covenants.
- Capital expenditures were $20.0 million year to date, and acquisition spending was $35.0 million for 21 acquisitions.
- Cash dividends paid year to date totaled $43.7 million, and open-market share repurchases totaled approximately $11.2 million, including employee-tax-related repurchases.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected increased customers and pricing, with acquisitions contributing less than 1% of revenue growth in both the quarter and first six months.
- Q2 commercial, residential, and termite and ancillary revenue increased 2.6%, 6.7%, and 5.2%, respectively. For the first six months, the corresponding increases were 3.6%, 7.1%, and 6.2%.
- Cost of services increased 3.0% in Q2, below revenue growth, benefiting from lower group insurance, workers’ compensation, auto liability, and fuel costs.
- Sales, general and administrative expense increased 6.7% in Q2 and rose to 30.8% of revenue from 30.2%, primarily due to higher sales salaries and advertising.
- Depreciation and amortization increased 9.8% in Q2 and 8.9% year to date, driven largely by expenditures related to the BOSS customer relationship management and operating system rollout.
- The company completed the BOSS conversion at more than 95% of Orkin branches. Rollout acceleration negatively affected expenses during the quarter and six-month period.
- Foreign-exchange movements reduced Q2 revenue by approximately $9.0 million and earnings by approximately $1.6 million. Q2 2016 also did not include a favorable nonrecurring tax adjustment reflected in 2015.
- Unearned revenue increased to $109.7 million from $96.2 million at year-end 2015, representing customer payments received in advance of service delivery.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects available cash, operating cash flow, and unused credit capacity to fund operations, obligations, and expansion for the foreseeable future.
- Management expected approximately $10.0 million of additional capital expenditures during the remainder of 2016 and was considering approximately $3.3 million of defined-benefit plan contributions during 2016.
- The board declared a $0.10 per-share quarterly dividend payable September 9, 2016. Management indicated that future dividends remain subject to earnings, financial condition, and other relevant factors.
- Rollins acquired Safeguard Pest Control and Environmental Services Limited in the United Kingdom, expanding its international presence.
- Pending litigation includes antitrust claims involving HomeTeam Pest Defense’s “tubes in the walls” system. The company cannot estimate a potential loss because the matters remain at an early stage, although management does not believe pending matters will have a material adverse effect on overall financial position, results, or liquidity.
- Foreign-exchange forwards generated a $0.6 million loss for the first six months and had a net liability fair value of approximately $0.4 million at June 30, 2016.
- The company identified no material changes in internal control over financial reporting and no material weaknesses as of June 30, 2016.
- Key risks include litigation outcomes, economic and market conditions, weather and climate, competition and pricing, labor availability and costs, acquisition integration, technology and industry changes, termite-treatment performance, and environmental or other regulatory changes.
- Rollins early adopted the deferred-tax balance-sheet classification standard retrospectively, with no impact on reported operating results. The company was evaluating the future revenue recognition, lease, and share-based compensation standards and did not expect material impacts.
Important Facts for Investors to Verify
- Confirm that revenue growth continues to be driven primarily by customer additions and pricing rather than acquisitions.
- Monitor the effect of the BOSS rollout on depreciation, implementation costs, operating efficiency, and margins.
- Assess sustainability of the improved gross margin given labor, insurance, fuel, and other service-delivery costs.
- Track foreign-currency effects on international revenue, earnings, cash, and derivative positions.
- Review acquisition activity, customer-contract intangible additions, goodwill, and integration performance.
- Evaluate cash deployment among dividends, share repurchases, acquisitions, capital expenditures, and potential pension contributions.
- Follow developments in the HomeTeam antitrust litigation and other environmental, employment, and service-related claims.
- Verify the company’s expected 2016 capital expenditures, dividend policy, credit-facility availability, and covenant compliance.
