Rollins, Inc. 2021 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates a single reportable segment focused on pest and termite control services. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The company remained operational as an essential service during the COVID-19 pandemic.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $638.2 million | $553.3 million | $1,173.8 million | $1,041.2 million |
| Net income | $98.9 million | $75.4 million | $191.5 million | $118.6 million |
| Basic and diluted EPS | $0.20 | $0.15 | $0.39 | $0.24 |
| Operating cash flow | Not separately provided | Not separately provided | $219.2 million | $234.8 million |
| Gross margin | 53.3% | 53.8% | 52.3% | 51.3% |
| Effective tax rate | 26.2% | 27.2% | 24.5% | 25.4% |
Calculated net margin was approximately 15.5% in Q2 2021 versus 13.6% in Q2 2020, and approximately 16.3% for the first six months versus 11.4% in the prior-year period. The six-month results benefited substantially from a $33.2 million gain on asset sales, primarily related to sale-leaseback transactions.
- Q2 revenue increased 15.3%; management attributed approximately 1.7 percentage points to acquisitions and 13.6 percentage points to customer growth and pricing.
- Six-month revenue increased 12.7%, with approximately 1.8 percentage points from acquisitions and 10.9 percentage points from customer growth and pricing.
- Q2 residential revenue increased 13.6%, commercial revenue increased 17.2%, and termite and ancillary revenue increased 16.3%.
- Six-month residential, commercial, and termite and ancillary revenue increased 14.2%, 10.0%, and 14.4%, respectively.
- Q2 cost of services increased 16.5%, exceeding revenue growth and reducing gross margin by 0.5 percentage points. Reported pressures included higher travel, service labor, materials, and fuel costs.
- Six-month sales, general and administrative expense increased 5.0%, but declined to 29.5% of revenue from 31.6% in the prior-year period.
Balance Sheet, Debt, Liquidity, and Capital Allocation
- Cash and cash equivalents were $128.5 million at June 30, 2021, compared with $98.5 million at December 31, 2020.
- Total assets were $1.922 billion and total stockholders’ equity was $1.051 billion at June 30, 2021.
- Total debt was approximately $88.0 million at June 30, 2021, consisting of $18.75 million current debt and $69.25 million long-term debt, versus approximately $203.0 million at December 31, 2020.
- The company had no borrowings under its $175.0 million revolving commitment and $88.0 million outstanding under its $250.0 million term loan. The effective interest rate was 0.854%.
- Management stated that cash, operating cash flow, and available borrowing capacity are sufficient for current operations, obligations, and anticipated expansion. The company remained in compliance with debt covenants and expected to remain compliant throughout 2021.
- Six-month capital expenditures were $13.2 million, compared with $12.4 million in 2020. Acquisition cash spending was $28.4 million, compared with $56.0 million.
- The company paid $79.7 million of dividends, or $0.16 per share, compared with $65.5 million, or $0.13 per share, in the prior-year period. A subsequent quarterly dividend of $0.08 per share was declared on July 27, 2021.
- No open-market share repurchases occurred. Employee tax-related share repurchases totaled $10.3 million during the first six months.
- Short-term unearned revenue increased to $151.4 million from $131.3 million at year-end, reflecting customer payments received before services are performed.
Material Changes, Outlook, Risks, and Unusual Items
- The six-month period included 18 acquisitions, with total consideration of $32.3 million, cash purchase price of $28.4 million, and $11.7 million of acquisition-related goodwill.
- The company completed sale-leaseback transactions involving 17 Clark Pest Control properties, generating gross proceeds of $67.0 million and a $31.5 million gain. The transactions increased operating lease right-of-use assets and future lease obligations.
- Management provided no specific full-year revenue or earnings guidance in the filing. It expects available cash flow and financing capacity to support operations, expansion, and continued dividends.
- COVID-19 variants, changing restrictions, labor availability and costs, fuel prices, inflationary pressures, customer demand, seasonality, and foreign exchange movements could affect future results.
- The SEC is investigating the company’s establishment of accruals and reserves at period-end and the related impact on reported earnings per share for periods beginning January 1, 2015. Rollins is cooperating, but cannot predict the outcome. The Audit Committee’s supplemental internal investigation remains ongoing.
- Management stated that it continues to believe the relevant previously filed financial statements fairly present the company’s financial condition, results of operations, and cash flows. Management also stated that pending litigation, regulatory matters, and investigations are not expected to have a material adverse effect, although an unfavorable outcome could be material to an individual quarter or year.
- Julie Bimmerman was appointed Interim Chief Financial Officer and Treasurer effective July 27, 2021; Paul E. Northern moved to an operational sustainability role.
- The company reported effective disclosure controls as of June 30, 2021 and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess the potential financial, operational, and reporting consequences of the ongoing SEC investigation and supplemental internal investigation.
- Separate recurring operating performance from the $33.2 million six-month gain on asset sales and related sale-leaseback obligations.
- Monitor gross-margin pressure from labor, travel, materials, fuel, and other service costs.
- Verify the sustainability of revenue growth after the unusually disrupted 2020 comparison period and as COVID-19 restrictions and customer behavior normalize.
- Review debt covenant compliance, the variable-rate term loan, interest-rate hedge expiration, and the company’s expected liquidity needs.
- Evaluate acquisition integration, goodwill and customer-contract valuations, contingent consideration, and the company’s ability to continue acquiring businesses.
- Consider litigation, regulatory, employment, environmental, tax, weather, cybersecurity, foreign exchange, and skilled-labor risks disclosed in the filing.