Rollins, Inc. 2010 Form 10-K Summary
Business Context and Reporting Period
Rollins, Inc. provides residential and commercial pest and termite control services through Orkin and other wholly owned subsidiaries, with domestic operations and international franchises. The filing covers the fiscal year ended December 31, 2010; fourth-quarter information is included but the filing is an annual report.
- One reportable segment: pest and termite control.
- Approximately 10,330 employees at December 31, 2010.
- Orkin franchises increased to 72 from 65, including 56 U.S. and 16 international franchises.
- Waltham Services was acquired on July 31, 2010; several smaller acquisitions were also completed.
Financial Performance and Position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $1,136.9 million | $1,074.0 million | 5.9% increase |
| Income before taxes | $143.5 million | $126.3 million | 13.7% increase |
| Net income | $90.0 million | $84.0 million | 7.2% increase |
| Diluted EPS | $0.61 | $0.56 | Increase |
| Gross margin | 48.7% | 48.7% | Flat |
| Net profit margin | 7.9% | 7.8% | Improved |
| Operating cash flow | $124.1 million | $110.8 million | Increase |
| Capital expenditures | $13.0 million | $15.7 million | Decrease |
Fourth-quarter 2010 revenue was $279.9 million versus $259.6 million in the fourth quarter of 2009. Fourth-quarter net income was $19.2 million versus $20.0 million, and diluted EPS was $0.13 in both periods.
- Commercial pest control represented approximately 42% of revenue and grew 6.9%; residential pest control represented approximately 39% and grew 5.5%; termite services represented approximately 19% and grew 3.5%.
- Cash and cash equivalents increased to $20.9 million from $9.5 million.
- Total assets were $619.0 million and stockholders’ equity was $298.0 million at year-end.
- Total debt under the credit facility was $26.0 million, consisting of $25.0 million of revolver borrowings and $1.0 million of swingline borrowings.
- The company had a $175.0 million unsecured revolving credit facility and approximately $29.3 million of letters of credit.
- Debt covenants were satisfied at year-end, and management expected continued compliance during 2011.
Material Changes Versus the Prior Comparable Period
- Revenue increased $62.9 million, with growth across all service lines and foreign operations rising to approximately 8% of revenue from 7%.
- Sales, general and administrative expense increased 5.0% in dollars but declined to 32.8% of revenue from 33.1%.
- Depreciation and amortization declined 2.0%, primarily because older acquisition-related intangible assets became fully amortized.
- Interest expense declined to $0.4 million from $1.0 million because of lower average debt and higher cash balances.
- The 2009 $2.9 million impairment charge related to the routing and scheduling initiative did not recur; 2010 included only a $0.1 million loss on asset sales or impairments.
- The effective tax rate increased to 37.3% from 33.5%, as 2009 benefited from valuation allowance releases related to entity conversions.
- Operating cash flow increased $13.2 million, while acquisition spending increased to $34.8 million from $11.0 million.
- Dividends paid increased to $35.5 million, and the company repurchased 1.9 million shares for $29.7 million, compared with 2.5 million shares for $29.1 million in 2009.
Guidance, Outlook, Risks and Unusual Items
- Management described 2010 as the thirteenth consecutive year of improved results and reported record revenue and profit, but provided no formal revenue or earnings guidance.
- 2011 capital expenditures were expected to range from $13.0 million to $20.0 million.
- Management expected cash, operating cash flow and available credit to fund operations, obligations and expansion for the foreseeable future.
- The company was considering approximately $6.0 million of pension contributions in 2011. The defined benefit plans were underfunded by $12.5 million at year-end.
- Key risks include economic pressure on discretionary residential services and commercial customers, competition and pricing, adverse weather, labor availability and wage inflation, acquisition integration, environmental and pesticide regulation, and litigation.
- Several wage-and-hour, payroll deduction, termite-service and bed-bug matters sought class certification. Management considered the claims without merit and did not expect a material adverse effect, but acknowledged that an unfavorable outcome could materially affect an individual quarter or year.
- The company self-insures certain workers’ compensation, general liability and vehicle risks; reserves depend on actuarial estimates and could change materially.
- Executive officers, directors and affiliates controlled approximately 57% of outstanding shares, and the company used the NYSE controlled-company exemption.
- Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that internal controls and disclosure controls were effective.
Important Facts for Investors to Verify
- Reconcile annual and fourth-quarter results, particularly the year-over-year decline in fourth-quarter net income despite higher revenue.
- Review the credit facility’s maturity terms, including borrowings maturing in the first quarter of 2011, covenant requirements and available borrowing capacity.
- Assess the effect of acquisitions, goodwill of $210.8 million and other intangible assets on future amortization and impairment risk.
- Evaluate the sustainability of revenue growth and margins amid labor, fuel, health-care and regulatory cost pressures.
- Review the status and potential exposure from pending litigation, environmental matters, self-insurance reserves and the $8.9 million termite-contract accrual.
- Consider pension funding needs, the $12.5 million underfunded position and concentration of pension assets in Rollins common stock.
- Confirm the planned increase in the quarterly dividend to $0.07 per share and the remaining 2.5 million share repurchase authorization.