Rollins, Inc. Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates one reportable segment: pest and termite control. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the same periods in 2010. Results are seasonal, with higher pest and termite activity typically increasing spring and summer revenue.
Financial Performance and Position
| Metric | Q2 2011 | Q2 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Revenue | $320.4 million | $298.8 million | $592.1 million | $551.8 million |
| Income before taxes | $49.6 million | $44.4 million | $79.4 million | $72.4 million |
| Net income | $31.1 million | $27.7 million | $49.7 million | $45.3 million |
| Diluted EPS | $0.21 | $0.19 | $0.34 | $0.30 |
| Operating cash flow | Not separately provided | Not separately provided | $74.3 million | $59.0 million |
- Q2 revenue increased 7.2%; six-month revenue increased 7.3%.
- Q2 net income increased 12.1%; six-month net income increased 9.8%.
- Q2 gross margin was 50.2%, versus 50.3% in the prior-year quarter. Six-month gross margin was 49.2%, versus 49.4%.
- Approximate Q2 net margin was 9.7%, compared with 9.3% in 2010. Approximate six-month net margin was 8.4%, compared with 8.2%.
- At June 30, 2011, cash and cash equivalents were $25.8 million, compared with $20.9 million at December 31, 2010.
- Total assets were $637.1 million and total liabilities were $323.9 million. Stockholders’ equity was $313.2 million.
- The company had $10.0 million outstanding under its $175.0 million unsecured revolving credit facility, including available letter-of-credit and swingline subfacilities.
- Financing receivables, net, totaled $23.4 million. No financing receivables were on non-accrual status or more than 180 days past due at quarter-end.
Material Changes Versus the Prior Comparable Period
- Commercial pest control revenue increased 8.1% in Q2, supported by pricing and improved customer retention; commercial fumigation declined 0.9%.
- Residential pest control revenue increased 8.9% in Q2. Termite revenue increased 2.6%.
- Cost of services increased 7.6% in both Q2 and the six-month period, with fuel costs pressuring gross margin. Casualty and termite claim development was unfavorable, partly offset by favorable medical claims.
- Sales, general and administrative expense increased 4.9% in Q2 and 6.3% year to date, but declined as a percentage of revenue to 31.8% from 32.5% in Q2 and to 32.6% from 33.0% year to date.
- Interest expense increased to $178,000 in Q2 from $66,000 and to $370,000 year to date from $165,000, primarily reflecting debt associated with the HomeTeam acquisition.
- Operating cash flow increased $15.3 million year to date. Investing cash outflows increased to $15.4 million from $6.6 million, including $8.0 million of acquisitions and $7.6 million of capital expenditures.
- Financing cash outflows were $54.1 million, including $20.6 million of dividends, $18.1 million of share repurchases and $16.0 million of net credit-line repayments.
- The quarterly dividend increased 16.7% to $0.07 per share. The company repurchased 789,296 shares during the first six months at a weighted-average price of $19.22, with approximately 1.7 million shares remaining authorized for repurchase.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash, expected operating cash flow and available borrowings should be sufficient to fund operations, obligations and business expansion for the foreseeable future.
- Management expected approximately $8.0 million of additional capital expenditures during the remainder of 2011 and was considering approximately $1.0 million of additional pension-plan contributions.
- The company reported compliance with debt covenants and expected to remain compliant through 2011.
- Management identified risks from litigation, general economic conditions, fuel and labor costs, weather and climate, competition and pricing, acquisitions and integration, employee retention, termite treatment performance, and changes in environmental and other regulations.
- Several subsidiaries were defending wage-and-hour, payroll-deduction, termite, bed-bug and fumigation lawsuits, including matters seeking class certification. The Urbino matter was voluntarily dismissed on June 13, 2011. Management did not expect pending litigation or environmental matters to have a material effect on financial position, results or liquidity, but acknowledged that an unfavorable outcome could materially affect an individual quarter or year.
- Adoption of ASU 2009-13 on multiple-deliverable revenue arrangements did not materially affect the financial statements. A new comprehensive-income presentation standard was issued in June 2011 and is effective for fiscal years beginning after December 15, 2011.
- Management reported effective disclosure controls, no material weaknesses, and no material changes to internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether revenue growth and customer retention trends continue after the seasonally stronger spring and summer period.
- Monitor fuel costs, casualty and termite claims, and their effect on gross margin.
- Reconcile operating cash flow with acquisitions, capital expenditures, dividends, repurchases and debt repayments.
- Confirm availability under the $175.0 million credit facility and continued compliance with debt covenants.
- Assess the financial exposure and potential timing of pending class-certification and fumigation-related litigation.
- Review the company’s 2011 capital-expenditure and pension-contribution plans and the remaining share-repurchase authorization.