Rollins, Inc. 2011 Form 10-K Summary
Business context and reporting period
Rollins, Inc. provides residential and commercial pest and termite control services through Orkin and other subsidiaries in North America, with international franchises across multiple regions. The filing covers the fiscal year ended December 31, 2011. Rollins reports one operating segment: pest and termite control. Fourth-quarter 2011 information is included in the filing’s unaudited quarterly data.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $1,205.1 million | $1,136.9 million | 6.0% increase |
| Income before taxes | $161.1 million | $143.5 million | 12.2% increase |
| Net income | $100.7 million | $90.0 million | 11.9% increase |
| Diluted EPS | $0.69 | $0.61 | Increase |
| Gross margin | 48.8% | 48.7% | 10 basis-point increase |
| Net profit margin | 8.4% | 7.9% | 50 basis-point increase |
| Operating cash flow | $154.6 million | $124.1 million | 24.7% increase |
| Capital expenditures | $18.7 million | $13.0 million | Increase |
| Cash and cash equivalents | $46.3 million | $20.9 million | Increase |
| Line of credit balance | None | $26.0 million | Debt repaid |
Commercial pest control represented approximately 42% of revenue and grew 6.0%; residential pest control represented approximately 40% and grew 7.7%; and termite services represented approximately 18% and grew 2.8%. Foreign operations accounted for approximately 8% of revenue.
Fourth-quarter 2011 revenue was $289.1 million, gross profit was $137.9 million, net income was $21.6 million, and diluted EPS was $0.15, compared with fourth-quarter 2010 revenue of $279.9 million, gross profit of $132.3 million, net income of $19.2 million, and diluted EPS of $0.13.
Material changes versus the prior comparable period
- 2011 was the Company’s 14th consecutive year of improved results, with record revenue and profit.
- Revenue growth occurred across all service lines, supported by pricing, sales execution, increased leads and acquisitions.
- SG&A increased 4.1% in dollars but declined to 32.3% of revenue from 32.8%, reflecting lower professional-services costs and workforce efficiencies.
- Depreciation and amortization increased 3.0%, primarily from amortization of intangible assets acquired in 2010.
- The Company recorded a $0.5 million software impairment related to terminated projects, contributing to a $0.4 million net loss on asset sales and impairments.
- Operating cash flow increased by $30.6 million, while investing cash use declined because acquisitions totaled $11.4 million versus $34.8 million in 2010.
- The Company repurchased 1.5 million shares for $30.2 million, compared with 1.9 million shares for $29.7 million in 2010. Dividends paid increased to $41.1 million from $35.5 million.
- The defined benefit pension deficit increased to $31.9 million from $12.5 million, substantially affecting other comprehensive income.
Liquidity, debt and commitments
Rollins had no borrowings under its $175.0 million unsecured revolving credit facility at December 31, 2011 and remained in compliance with its debt covenants. The facility matures March 27, 2013 and includes approximately $31.3 million of outstanding letters of credit. Management believes cash, expected operating cash flow and available borrowings are sufficient for operations, obligations and expansion for the foreseeable future.
Total contractual obligations were $91.2 million, including $83.2 million of non-cancelable operating leases, $6.7 million of business-combination-related liabilities and $1.3 million of unrecognized tax positions. The Company was considering approximately $5.0 million of pension contributions in 2012.
Guidance, outlook, commentary and risks
- Management expected 2012 capital expenditures of approximately $15 million to $20 million and anticipated maintaining compliance with credit-facility covenants.
- The Board approved an increase in the quarterly dividend to $0.08 per share, payable March 9, 2012. The Company stated that future dividends remain subject to earnings, financial condition and other relevant factors.
- Management continued to seek acquisitions and expanded Orkin’s franchise network to 76 total franchises, including 18 international franchises, at year-end.
- Key risks include intense competition and pricing pressure, economic weakness affecting discretionary residential and commercial spending, adverse weather and seasonality, labor shortages and wage inflation, acquisition execution and integration, environmental and pesticide regulation, and litigation.
- Pending lawsuits include wage-and-hour, payroll-deduction, termite-service, bed-bug-service and fumigation-related matters. Management did not expect the matters to have a material adverse effect, but acknowledged that an unfavorable outcome could materially affect an individual quarter or year.
- Critical estimates include termite-contract claims, self-insurance reserves, revenue recognition, litigation accruals, pension obligations and allowance for doubtful accounts.
- The defined benefit plans were underfunded, and pension assets included $34.1 million of Rollins common stock, creating concentration and market-related exposure.
Investor verification checklist
- Verify the sustainability of revenue growth, particularly residential growth of 7.7% and termite growth of 2.8%.
- Review recurring-service retention, pricing, customer acquisition costs and the effect of seasonality and weather on quarterly results.
- Assess acquisition spending, integration results and the carrying values of goodwill and customer-contract intangibles.
- Monitor the pension deficit, required contributions, discount-rate assumptions and exposure to Rollins stock in plan assets.
- Review the status and potential exposure of pending class-action and other litigation matters.
- Confirm continued covenant compliance, the March 2013 credit-facility maturity and the availability of liquidity after dividends, repurchases and acquisitions.
- Evaluate whether the stated 2012 capital-expenditure outlook and dividend policy remain consistent with operating cash generation.