Rollins, Inc. 2014 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 brands including Orkin, Orkin Canada, HomeTeam, Western Pest Services, Industrial Fumigant Company and Rollins Australia. The filing covers the fiscal year ended December 31, 2014. The business is seasonal, with higher activity and revenue generally occurring in the spring and summer. Rollins reports one operating segment.
Approximately 80% of revenue was recurring. Commercial and residential pest control each represented approximately 41% of revenue, while termite services represented approximately 17%. Foreign operations accounted for approximately 8% of revenue.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $1,411.6 million | $1,337.4 million | 5.5% |
| Income before taxes | $219.5 million | $191.6 million | 14.5% |
| Net income | $137.7 million | $123.3 million | 11.6% |
| Basic and diluted EPS | $0.94 | $0.84 | 11.9% |
| Net profit margin | 9.8% | 9.2% | +0.6 points |
| Gross margin | 49.9% | 49.3% | +0.6 points |
| Operating cash flow | $194.1 million | $162.7 million | 19.4% |
| Capital expenditures | $28.7 million | $18.6 million | 54.2% |
| Cash used for acquisitions | $63.3 million | $12.6 million | Material increase |
| Dividends paid | $75.8 million | $65.7 million | 15.4% |
Revenue growth occurred across all service lines. Commercial pest control grew 6.7%, residential pest control grew 4.5%, and termite revenue grew 5.0%. Bed bug revenue increased more than 18%, while HomeTeam TAEXX homebuilder installations increased approximately 5.5%.
Cost of services increased 4.3%, slower than revenue growth. Management attributed the gross-margin improvement to favorable termite and casualty claim development, reduced fleet costs and cost controls. SG&A increased 3.1% in dollars but declined to 31.3% of revenue from 32.0%, reflecting administrative and sales salary leverage and lower advertising expense. The effective tax rate increased to 37.3% from 35.6%.
Fourth-quarter 2014 revenue was $344.0 million, gross profit was $169.0 million and net income was $29.9 million, compared with $324.7 million, $157.4 million and $28.0 million, respectively, in the fourth quarter of 2013.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $108.4 million at December 31, 2014, compared with $118.2 million at December 31, 2013.
- Net cash used in investing activities was $89.5 million, primarily reflecting $63.3 million of acquisitions and $28.7 million of capital expenditures.
- Net cash used in financing activities was $106.5 million, including $75.8 million of dividends and $35.5 million of common-stock purchases.
- Rollins had no borrowings outstanding under its $175.0 million unsecured revolving credit facility. Approximately $35.5 million of letters of credit were outstanding, primarily supporting self-insured workers’ compensation and casualty obligations.
- The credit facility maturity was extended to October 31, 2018, with three optional one-year extensions. Management reported compliance with debt covenants.
- Total assets were $808.2 million and stockholders’ equity was $462.7 million at year-end. No material third-party debt was outstanding.
Material Changes Versus the Prior Comparable Period
- Revenue increased $74.2 million, supported by organic growth, acquisitions, service-line expansion and pricing. Less than 2% of the revenue increase came from pricing and less than 2% came from acquisitions.
- Operating cash generation increased $31.5 million, while cash declined because of substantially higher acquisition spending, capital expenditures, dividends, share repurchases and unfavorable foreign-exchange effects.
- Acquisition spending increased substantially. Rollins acquired several small companies and completed the acquisition of PermaTreat; it also acquired Allpest WA in Australia. Total 2014 consideration included $63.3 million of cash and $16.4 million of company stock.
- Orkin’s total franchise count increased to 92 from 80, including 37 international franchises versus 26 in 2013.
- Goodwill increased to $255.6 million from $211.8 million, primarily from acquisitions and foreign-currency translation.
- The defined-benefit pension plan moved from a $6.4 million funded position to a $29.6 million underfunded position. The after-tax pension adjustment reduced accumulated other comprehensive income by $25.6 million.
- Rollins repurchased 1.0 million shares for approximately $29.3 million at a weighted average price of $29.19, compared with 0.3 million shares for $8.4 million in 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 capital expenditures of approximately $20 million to $25 million and was considering approximately $3.3 million of pension contributions.
- Management stated that cash flows, cash balances and available credit should fund operations, obligations and expansion for the foreseeable future, and that it expected continued dividend payments and further international growth and acquisitions.
- The Board approved a 14.3% increase in the regular quarterly dividend to $0.12 per share, effective March 2015, and authorized a three-for-two stock split effective March 10, 2015. Historical share and per-share data in the filing are presented before the split unless otherwise stated.
- Key risks include intense competition and pricing pressure, economic weakness affecting discretionary residential and commercial demand, adverse weather and seasonality, labor availability and wage inflation, acquisition execution and integration, environmental and pesticide regulation, foreign-exchange exposure, termite claims and self-insured casualty liabilities.
- Rollins is involved in ordinary-course litigation, including matters involving Industrial Fumigant, Orkin and HomeTeam. Management did not expect a material adverse effect, but stated that an unfavorable outcome could produce a material charge in an individual quarter or year. Losses in two HomeTeam antitrust matters could not be estimated because the cases were at an early stage.
- The company’s defined-benefit plans, termite claim accruals, self-insurance reserves and litigation accruals depend on estimates that could change materially as facts develop.
- Management and Grant Thornton reported effective internal control over financial reporting and issued unqualified audit opinions.
Most Important Facts for Investors to Verify
- Whether recurring revenue, pricing, service-line growth and acquisitions continue to support mid-single-digit revenue growth.
- Whether gross-margin and SG&A leverage gains persist while labor, insurance, fleet and treatment costs increase.
- The pace and valuation of acquisitions, including the effect of goodwill and customer-contract amortization.
- Cash deployment among acquisitions, dividends and share repurchases, and the resulting year-end liquidity.
- Changes in the underfunded pension obligation, required contributions and investment performance.
- Developments in the disclosed litigation, termite claims, self-insurance reserves and regulatory matters.
- The effect of the 2015 stock split and dividend increase when comparing subsequent per-share results.