Rollins, Inc. 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates one reportable segment focused on pest and termite control. This unaudited filing covers the three months ended March 31, 2016, compared with the same period in 2015. Results are seasonal, with higher pest and termite activity generally occurring in the spring and summer.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $352.7 million | $330.9 million | +6.6% |
| Income before taxes | $51.2 million | $46.6 million | +9.8% |
| Net income | $31.9 million | $30.3 million | +5.4% |
| Basic and diluted EPS | $0.15 | $0.14 | +7.1% |
| Operating cash flow | $41.3 million | $44.1 million | -6.2% |
| Dividends paid | $21.9 million | $17.5 million | +25.0% |
- Gross margin improved to 49.6% from 49.2%. Management attributed the improvement primarily to lower insurance claims, fuel costs and service salary expense as a percentage of revenue, partly offset by higher materials usage and legal expenses.
- Sales, general and administrative expense increased 6.3% but declined to 31.8% of revenue from 31.9%, reflecting lower bad-debt, fuel, advertising and certain personnel costs.
- The effective tax rate increased to 37.6% from 35.0%, primarily because Q1 2015 benefited from a nonrecurring tax adjustment.
- At March 31, 2016, cash and cash equivalents were $131.2 million, total assets were $873.0 million and total liabilities were $331.5 million.
- The company had no borrowings under its $175.0 million unsecured revolving credit facility. The facility includes a $75.0 million letter-of-credit subfacility and a $25.0 million swingline subfacility.
- Unearned revenue was $102.3 million, representing customer cash received in advance of services to be recognized over the following twelve months.
Material Changes Versus the Prior Comparable Period
- Organic growth and pricing contributed approximately 6.2% of revenue growth, while acquisitions contributed less than 1%.
- Commercial pest control revenue increased 4.7%; residential pest control and termite and ancillary services each increased 7.6%.
- Foreign exchange movements involving the Canadian and Australian dollars reduced revenue by approximately $9.0 million and earnings by approximately $1.5 million.
- Eight acquisitions were completed for $21.1 million of cash, compared with $28.2 million spent on acquisitions in Q1 2015. Customer contracts increased to $111.2 million from $92.8 million at December 31, 2015, primarily reflecting acquisitions.
- Capital expenditures were $9.0 million versus $8.3 million. Share repurchases totaled $8.8 million, including employee tax-withholding repurchases, compared with $6.5 million in the prior-year quarter.
- Cash declined by $3.3 million during the quarter, compared with a $15.0 million decline in Q1 2015. A $12.9 million favorable exchange-rate effect on cash partially offset operating, investing and financing uses.
- Comprehensive earnings increased to $41.8 million from $23.1 million, primarily because foreign-currency translation produced a $9.9 million gain versus a $7.1 million loss in Q1 2015.
- The company early adopted ASU 2015-17, presenting deferred tax assets and liabilities as noncurrent. The adoption had no effect on reported operating results.
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 expects approximately $18 million of additional capital expenditures during the remainder of 2016 and is considering approximately $3.3 million of defined-benefit plan contributions during 2016.
- A $0.10-per-share quarterly dividend was declared on April 26, 2016, payable June 10, 2016. Management expects to continue dividends subject to earnings, financial condition and other relevant factors.
- Management expects to remain in compliance with debt covenants through 2016. No debt was outstanding at March 31, 2016.
- The company reported a $0.6 million loss on non-designated foreign-exchange derivatives during the quarter; derivative liabilities were $0.5 million at March 31, 2016.
- Rollins and HomeTeam Pest Defense face two California lawsuits alleging antitrust violations related to HomeTeam’s “tubes in the walls” system. The company cannot estimate potential losses because the matters remain at an early stage and involve unresolved legal and factual issues.
- Management does not believe pending litigation, environmental matters or other claims will materially affect financial position, results or liquidity, although an unfavorable outcome could materially affect an individual quarter or year.
- Key risks include litigation, economic and market conditions, foreign exchange, weather and climate, competition and pricing, labor availability and costs, acquisition integration, technology and regulatory or environmental changes.
Investor Verification Checklist
- Verify whether organic growth and pricing trends remain near the reported 6.2% level and whether acquisitions continue contributing less than 1% of growth.
- Monitor foreign-exchange effects on international revenue, earnings and cash, particularly in Canada and Australia.
- Assess the conversion of operating income into cash, including the decline in operating cash flow despite higher net income.
- Review acquisition spending, customer-contract valuations and potential goodwill or intangible-asset impairment risk.
- Track the two HomeTeam antitrust lawsuits and any developments that could create a material charge.
- Confirm planned capital expenditures, pension contributions, dividends and share repurchases against available cash and operating cash flow.
- Evaluate the effect of the higher effective tax rate and the absence of the prior-year nonrecurring tax benefit.