Rollins, Inc. 2011 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. reported results for the three and nine months ended September 30, 2011. The company operates one reportable segment: pest and termite control, including commercial, residential, termite, fumigation, and foreign operations. The filing was signed October 28, 2011, and the company had 146.3 million common shares outstanding as of October 15, 2011.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $323.9 million; up 6.2% | $916.0 million; up 6.9% |
| Income before taxes | $47.0 million; up 14.8% | $126.4 million; up 11.5% |
| Net income | $29.4 million; up 15.3% | $79.1 million; up 11.8% |
| Diluted EPS | $0.20; versus $0.17 | $0.54; versus $0.48 |
| Gross margin | 49.0%; versus 48.9% | 49.2%; approximately flat |
| Effective tax rate | 37.4%; versus 37.7% | 37.4%; versus 37.6% |
Net margin was approximately 9.1% for the quarter and 8.6% for the nine-month period. Sales, general and administrative expense declined as a percentage of revenue to 31.6% in the quarter from 32.4%, and to 32.3% year to date from 32.8%.
Net cash provided by operating activities was $115.1 million for the first nine months, compared with $92.4 million in the prior-year period. Investing cash outflows were $22.4 million, including $13.4 million of capital expenditures and $9.3 million for acquisitions. Financing cash outflows were $82.5 million, including $30.9 million of dividends, $28.8 million for share repurchases, and $26.0 million of net debt repayment.
Cash and cash equivalents increased to $30.2 million at September 30, 2011, from $20.9 million at December 31, 2010. The company had no borrowings outstanding under its $175.0 million unsecured revolving credit facility. Total liabilities were $305.9 million and stockholders’ equity was $326.5 million. Unearned revenue increased to $95.0 million from $85.5 million, representing customer payments received before services are provided.
Material Changes Versus the Prior Comparable Period
- Third-quarter residential pest control revenue increased 8.2%, commercial pest control revenue increased 5.8%, and termite revenue increased 3.2%.
- Commercial revenue benefited from price increases, although commodity fumigation volume through East Coast ports was weaker. Overall commercial fumigation revenue increased 8.5%.
- Year-to-date residential revenue increased 8.6%, commercial revenue increased 7.4%, and termite revenue increased 2.8%.
- Higher fuel costs, described as approximately 50 basis points, were offset by favorable administrative salary, medical, risk, casualty, termite, health-care, and materials costs.
- Interest expense was $449 thousand year to date versus $265 thousand, while third-quarter interest expense declined to $79 thousand. Debt associated with the 2008 HomeTeam acquisition was paid in full during the quarter.
- Capital expenditures increased to $13.4 million from $6.8 million, while acquisition spending declined to $9.3 million from $20.9 million.
- The company paid $0.21 per share in dividends year to date versus $0.18 and repurchased 1.4 million shares at an average price of $18.63. Approximately 1.1 million shares remained available under the repurchase authorization.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash on hand, expected operating cash flow, and available credit capacity should be sufficient to fund operations, obligations, and business expansion for the foreseeable future. The company expected approximately $5.0 million of additional capital expenditures during the remainder of 2011 and was considering approximately $0.4 million of additional defined-benefit plan contributions.
Management expected to remain in compliance with debt covenants through 2011 and believed interest-rate and foreign-exchange risks would not materially affect results. Foreign operations represented approximately 8% of revenue. The company noted that results are seasonal and that quarterly results are not necessarily indicative of the full year.
Pending litigation includes wage-and-hour, payroll-deduction, termite, bed-bug, and fumigation-related matters, several involving potential class certification. The Khan class action was dismissed in early October 2011; other matters had not been scheduled for class certification hearings. Management believed the claims were without merit and did not expect pending litigation to have a material adverse effect, while acknowledging that an unfavorable outcome could materially affect an individual quarter or year. Environmental matters were also described as not material based on management’s assessment.
The company completed its annual goodwill and intangible-asset impairment analyses as of September 30, 2011 and identified no impairment. Financing receivables totaled $22.8 million net, with no non-accrual accounts or balances more than 180 days past due. The filing identifies risks from litigation, economic conditions, competition and pricing, weather and climate, labor availability and costs, acquisitions, technology, and regulatory changes.
Important Facts for Investors to Verify
- Verify whether revenue growth and margin performance continued after the seasonal third quarter, particularly in residential and commercial services.
- Monitor the effect of fuel, labor, health-care, insurance, and termite-related costs on gross margins.
- Confirm the pace of capital expenditures, acquisitions, dividends, and share repurchases relative to operating cash flow.
- Review subsequent developments in the pending litigation and any related accruals or settlements.
- Assess the conversion of the $95.0 million of unearned revenue into future service revenue and the associated service costs.
- Follow the company’s use of its $175.0 million credit facility and continued compliance with debt covenants.
- Review the impact of new accounting guidance on comprehensive income presentation and goodwill impairment assessments.