Rollins, Inc. 2015 Form 10-K Summary
Business context and reporting period
Rollins, Inc. is an international pest and termite control services company serving residential and commercial customers through wholly owned subsidiaries and franchises. Its principal brands include Orkin, Orkin Canada, Western Pest Services, HomeTeam Pest Defense, IFC, Rollins Australia and Critter Control. The filing covers the fiscal year ended December 31, 2015; fourth-quarter data is presented but the filing is an annual report.
The Company operates as one reportable segment. Approximately 80% of pest control revenue was recurring. Foreign operations represented approximately 7% of revenue, down from 8% in 2014 primarily because of currency translation.
Financial performance and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1.485 billion | $1.412 billion | 5.2% |
| Income before taxes | $243.2 million | $219.5 million | 10.8% |
| Net income | $152.1 million | $137.7 million | 10.5% |
| Diluted EPS | $0.70 | $0.63 | 11.1% |
| Gross margin | 50.4% | 49.9% | +0.5 percentage points |
| Net profit margin | 10.2% | 9.8% | +0.4 percentage points |
| Cash from operations | $196.4 million | $194.1 million | 1.1% |
| Capital expenditures | $39.5 million | $28.7 million | 37.4% |
| Cash and equivalents | $134.6 million | $108.4 million | 24.2% |
| Total assets | $852.4 million | $808.2 million | 5.5% |
| Stockholders’ equity | $524.0 million | $462.7 million | 13.3% |
Residential pest control revenue increased 6.6%, commercial pest control increased 3.3%, and termite revenue increased 4.6%. Organic growth and pricing contributed approximately 4.2% of revenue growth, with acquisitions contributing the balance. Less than 2% of the increase was attributable to pricing actions.
Cost of services increased 4.0%, while SG&A increased 5.0% but declined to 31.2% of revenue from 31.3%. Management cited lower gasoline and fleet costs, improved routing and scheduling, cost controls and lower bad debt expense as margin drivers. The effective tax rate was 37.4%, compared with 37.3% in 2014.
Cash flow, debt and liquidity
- Operating cash flow was $196.4 million. Investing cash use was $69.9 million, including $33.5 million for acquisitions and $39.5 million for capital expenditures.
- Financing cash use was $97.2 million, including $91.8 million of dividends and $7.4 million of common stock purchases and employee stock repurchases.
- The Company had no third-party debt or borrowings outstanding at year-end.
- Rollins maintained a $175.0 million unsecured revolving credit facility, extended to October 31, 2019, with approximately $31.4 million of letters of credit outstanding.
- Management stated that cash, expected operating cash flow and available credit were sufficient for operations, obligations and planned expansion.
- Contractual obligations totaled $92.0 million, primarily $85.2 million of non-cancelable operating leases.
Material changes versus the prior comparable period
- Revenue growth accelerated across all major service lines, while net income grew roughly twice as fast as revenue.
- Gross margin improved by 50 basis points, and net margin improved by 40 basis points.
- Cash increased by $26.2 million in 2015, compared with a $9.8 million decrease in 2014.
- Capital expenditures increased by $10.8 million, while cash acquisition spending declined from $63.3 million to $33.5 million.
- Dividends paid increased from $75.8 million to $91.8 million, including a $0.10-per-share special year-end dividend.
- Rollins acquired Critter Control on February 27, 2015. Critter Control was fully franchised, with 108 franchises at year-end.
- Orkin international franchises increased from 37 to 48, and total Orkin franchises increased from 92 to 99.
- The Company rolled out its BOSS customer relationship management system to 50% of Orkin branches and expected completion by the end of the third quarter of 2016.
- The defined benefit pension deficit declined from $29.6 million to $9.7 million, although the plans remained underfunded.
Outlook, risks and unusual items
- Management planned continued expansion through acquisitions, domestic and international franchises, and reinvestment of foreign earnings. It expected 2016 capital expenditures of $20 million to $25 million and was considering approximately $3.3 million of pension contributions.
- The Board approved a 25% increase in the regular quarterly dividend to $0.10 per share beginning in March 2016.
- Key risks include intense competition and pricing pressure, economic weakness affecting discretionary residential spending and commercial customers, adverse weather and seasonality, labor availability and wage inflation, acquisition integration, foreign exchange, environmental regulation and litigation.
- Two HomeTeam-related antitrust lawsuits remained pending. The Company could not estimate potential losses because the matters were at an early stage, although management did not believe pending litigation would materially affect the Company overall.
- The Company self-insures certain liability and workers’ compensation risks, and reserves for insurance claims and termite contract obligations depend on actuarial and management estimates.
- Severn Peanut litigation was dismissed and the dismissal was affirmed on appeal in December 2015.
- Management reported effective disclosure controls and internal control over financial reporting. Grant Thornton issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm that revenue growth and margin expansion remain primarily supported by recurring customer relationships and operating efficiencies rather than acquisitions or pricing.
- Monitor BOSS implementation, expected efficiency benefits and related depreciation and technology spending.
- Assess acquisition performance, particularly Critter Control, and the Company’s ability to integrate future acquisitions.
- Review self-insurance, termite claim and pension assumptions, including the effect of adverse claims development or investment performance.
- Track the HomeTeam antitrust litigation and any related changes in loss estimates or disclosures.
- Evaluate foreign exchange effects, international cash reinvestment plans and the tax implications of unrecognized tax positions and foreign earnings.
- Consider shareholder concentration: directors, executives and affiliates controlled approximately 56% of outstanding shares, and the Company elected the NYSE controlled-company exemption.