Rollins, Inc. 2016 Third-Quarter Form 10-Q Summary
Business context and reporting period
Rollins, Inc. operates a single reportable segment focused on pest and termite control, including commercial, residential, termite and ancillary services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, with comparisons to the corresponding 2015 periods.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Revenue | $424.0 million | $399.7 million | $1.188 billion | $1.123 billion |
| Income before taxes | $80.0 million | $72.4 million | $208.1 million | $191.4 million |
| Net income | $49.7 million | $45.0 million | $129.4 million | $120.4 million |
| Basic and diluted EPS | $0.23 | $0.21 | $0.59 | $0.55 |
| Operating cash flow | Not separately provided | Not separately provided | $158.2 million | $143.8 million |
- Q3 gross margin was 51.5%, compared with 51.1% in the prior-year quarter. Q3 net margin was approximately 11.7% versus 11.3%.
- For the first nine months, gross margin was approximately 51.2% versus 50.7%, and net margin was approximately 10.9% versus 10.7%.
- At September 30, 2016, cash and cash equivalents were $139.3 million, total assets were $921.5 million, total liabilities were $347.3 million, and stockholders’ equity was $574.2 million.
- The company had no outstanding borrowings under its $175.0 million unsecured revolving credit facility. The facility includes $75.0 million of letter-of-credit capacity and $25.0 million of swingline capacity.
- YTD investing cash outflows were $66.6 million, including $40.8 million for acquisitions and $27.1 million for capital expenditures. YTD financing cash outflows were $93.0 million, including $65.5 million of dividends and $31.0 million of common-stock purchases.
Material changes versus the prior comparable period
- Q3 revenue increased 6.1%, and net income increased 10.2%. YTD revenue increased 5.8%, and net income increased 7.4%.
- Growth occurred across all service lines. Q3 commercial revenue increased 4.9%, residential revenue increased 7.0%, and termite and ancillary revenue increased 7.2%.
- Management attributed substantially all Q3 revenue growth to customer growth and pricing; current-year acquisitions contributed less than 1% of the increase. Acquisitions also contributed less than 1% of YTD revenue growth.
- Cost of services increased 5.2% in Q3 and 4.6% YTD, slower than revenue growth. Routing and scheduling efficiencies, lower gasoline costs and lower insurance expense supported margins, partly offset by higher BOSS system maintenance and software costs.
- Sales, general and administrative expense increased 2.8% in Q3 and 5.2% YTD, while declining modestly as a percentage of revenue.
- Foreign-exchange movements reduced Q3 revenue by approximately $9.0 million and pretax earnings by approximately $1.5 million, according to management.
- The company completed 28 acquisitions during the first nine months, compared with 12 acquisitions during 2015. Customer contracts increased to $116.6 million from $92.8 million at December 31, 2015, while goodwill increased to $260.2 million from $249.9 million.
- Dividends paid increased to $65.5 million from $52.4 million. Open-market repurchases increased to approximately 0.8 million shares from approximately 19,000 shares.
Outlook, risks, contingencies and unusual items
- Management stated that cash balances, expected operating cash flow and available credit are sufficient to fund operations, obligations and expansion for the foreseeable future.
- The company expected approximately $6.0 million of additional capital expenditures during the remainder of 2016 and was considering approximately $0.3 million of additional defined-benefit plan contributions.
- On October 25, 2016, the board declared a regular quarterly dividend of $0.10 per share plus a special year-end dividend of $0.10 per share, payable December 9, 2016.
- Management reported the 42nd consecutive quarter of improved revenue and earnings. No formal full-year revenue or earnings guidance was provided in the filing.
- Two HomeTeam Pest Defense lawsuits in California allege antitrust violations relating to the “tubes in the walls” system. The company cannot estimate any potential loss and intends to defend the matters vigorously. Management does not believe pending claims will have a material adverse effect overall, although an unfavorable outcome could materially affect an individual quarter or year.
- Other risks include economic and competitive conditions, pricing, weather and climate, labor availability and costs, regulatory and environmental changes, acquisition integration, technology changes and foreign-exchange exposure.
- The company early adopted the deferred-tax balance-sheet classification standard retrospectively, with no impact on operating results. Management did not expect the then-pending revenue recognition, lease, share-based payment or cash-flow classification standards to have a material effect, but evaluation was ongoing.
- Foreign-exchange forwards generated a $0.1 million Q3 gain and a $0.5 million YTD loss. The company reported no material changes in market-risk exposure from year-end 2015.
Important facts for investors to verify
- Confirm the sustainability of revenue growth and margin expansion after separating customer growth, pricing, acquisitions and foreign-exchange effects.
- Review the integration, valuation and future amortization implications of the 28 acquisitions and the increase in customer-contract intangibles and goodwill.
- Monitor the two pending HomeTeam antitrust matters, for which the filing provides no estimable loss amount.
- Verify cash deployment among acquisitions, capital expenditures, dividends and share repurchases, including the announced special dividend.
- Assess seasonality, weather, labor costs, regulatory requirements and foreign-currency movements when extrapolating the nine-month results to the full year.