Rollins, Inc. — Form 10-Q Summary
Business context and reporting period
Rollins, Inc. operates a single reportable segment focused on pest and termite control services. This unaudited quarterly report covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The filing was signed July 29, 2015.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $392.2 million | $369.4 million | $723.1 million | $682.7 million |
| Income before taxes | $72.3 million | $65.7 million | $118.9 million | $107.0 million |
| Net income | $45.1 million | $40.9 million | $75.4 million | $66.6 million |
| Basic and diluted EPS | $0.21 | $0.19 | $0.34 | $0.30 |
| Dividends per share | $0.08 | $0.07 | $0.16 | $0.14 |
| Operating cash flow | Not separately provided | Not separately provided | $89.3 million | $90.0 million |
- Second-quarter revenue increased 6.2% and net income increased 10.3%. Six-month revenue increased 5.9% and net income increased 13.1%.
- Second-quarter gross margin improved to 51.5% from 50.6%; six-month gross margin increased to 50.5% from 49.6%.
- Second-quarter SG&A was 30.2% of revenue versus 30.0% in the prior-year quarter. Six-month SG&A remained 31.0% of revenue.
- The second-quarter effective tax rate was 37.7%, compared with 37.8%; the six-month rate was 36.6%, compared with 37.9%.
- Cash and cash equivalents were $109.7 million at June 30, 2015, compared with $108.4 million at December 31, 2014.
- Total assets were $848.8 million and total liabilities were $351.5 million at June 30, 2015. Stockholders’ equity was $497.2 million.
- The company had no 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.
- Unearned revenues increased to $107.3 million from $94.1 million at year-end 2014, reflecting customer payments received in advance of service delivery.
Material changes versus the prior comparable period
- Growth occurred across all service lines, with organic growth, acquisitions, and pricing contributing roughly equally to second-quarter revenue growth.
- Second-quarter commercial pest control revenue increased 4.6%, residential pest control increased 7.8%, and termite and ancillary services increased 3.9%.
- For the six-month period, commercial pest control revenue increased 4.4%, residential pest control increased 7.1%, and termite and ancillary services increased 5.7%.
- Cost of services increased more slowly than revenue, supported by improved service salaries, routing and scheduling, lower fuel costs, and cost controls.
- SG&A increased due to higher sales and payroll costs related to acquisitions and call centers, currency effects, CRM implementation costs, and professional fees.
- Operating cash flow was broadly stable year over year, while cash used for acquisitions declined to $30.8 million from $59.7 million. Capital expenditures increased to $17.7 million from $11.5 million.
- The company completed 11 acquisitions during the first six months, including Critter Control. Cash consideration for acquisitions was $30.8 million, including $17.9 million of acquired goodwill.
- The company paid $35.0 million in dividends during the first six months, compared with $30.6 million in the prior-year period. Open-market repurchases declined to approximately 19,000 shares from approximately 289,000 shares.
- A three-for-two stock split was completed in March 2015, and all share and per-share data were retrospectively adjusted.
Outlook, risks, contingencies, and unusual items
- Management expects cash balances, operating cash flow, and available credit to fund operations, obligations, and expansion for the foreseeable future.
- Management expects approximately $12 million of additional capital expenditures during the remainder of 2015. The filing does not provide formal revenue or earnings guidance.
- The board declared a regular quarterly dividend of $0.08 per share payable September 10, 2015.
- Management stated that no further defined-benefit pension contributions were planned for 2015 after $3.5 million contributed during the first six months, although actual requirements may vary.
- Pending matters include an appeal in the Severn Peanut litigation and two early-stage antitrust-related lawsuits involving HomeTeam’s “tubes in the walls” system. The company cannot currently estimate reasonably possible losses for the antitrust matters.
- Management does not believe pending litigation will materially affect financial position, results, or liquidity, but an unfavorable outcome could materially affect an individual quarter or year.
- Key risks include litigation, economic and market conditions, weather and climate, competition and pricing, acquisition integration, labor availability and costs, environmental regulation, technology and industry changes, and foreign-exchange movements.
- The company is evaluating recently issued accounting standards, including revenue recognition and discontinued-operations guidance, but does not expect them to have a material effect based on the filing’s assessment.
- Disclosure controls were deemed effective as of June 30, 2015, with no identified material weaknesses or material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and margin improvement continue after the seasonally stronger spring and summer periods.
- The integration, performance, and valuation of the 11 acquisitions completed in the first half of 2015, including the resulting goodwill and intangible assets.
- Cash conversion and working-capital trends, particularly the increase in trade receivables and unearned revenues.
- Progress and potential exposure in the Severn Peanut appeal and the two HomeTeam antitrust lawsuits.
- Actual 2015 capital expenditures, pension contributions, dividends, and share repurchases compared with management’s stated expectations.
- Foreign-currency effects, labor costs, fuel prices, weather conditions, and regulatory developments affecting operating margins.