Rollins, Inc. 2017 First-Quarter 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates a single reportable segment focused on pest and termite control, including commercial, residential, termite, and ancillary services. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $375.2 million | $352.7 million | +6.4% |
| Income before taxes | $57.3 million | $51.2 million | +11.9% |
| Net income | $40.3 million | $31.9 million | +26.1% |
| Net income per diluted share | $0.18 | $0.15 | +20.0% |
| Gross margin | 49.6% | 49.6% | Flat |
| Net margin | 10.7% | 9.1% | Improved |
| Cash flow from operations | $58.0 million | $41.3 million | +$16.7 million |
Revenue growth occurred across all service lines: commercial pest control increased 5.3%, residential pest control increased 7.0%, and termite and ancillary services increased 7.5%. Approximately 1% of revenue growth came from acquisitions; the remainder was primarily attributable to customer growth and pricing. Foreign operations represented approximately 8% of revenue versus 7% in the prior-year quarter.
Sales, general and administrative expense increased 2.6% but declined to 30.7% of revenue from 31.8%. Depreciation and amortization increased 18.3% to $13.8 million, reflecting BOSS system expenditures, acquisitions, equipment purchases, and amortization of acquired customer contracts.
The effective tax rate declined to 29.7% from 37.6%, primarily because of the adoption of ASU 2016-09. The adoption produced an approximately $4.3 million tax benefit in the quarter. Excluding this benefit, management reported earnings of $36.0 million, or $0.17 per diluted share, representing approximately 12.7% year-over-year growth.
Financial Position, Liquidity, and Capital Allocation
- Cash and cash equivalents were $162.5 million at March 31, 2017, compared with $142.8 million at December 31, 2016.
- Total assets were $924.9 million and total liabilities were $341.3 million at March 31, 2017.
- The company had no borrowings under its unsecured $175.0 million revolving credit facility. The facility includes $75.0 million of letter-of-credit capacity and a $25.0 million swingline subfacility.
- Capital expenditures were $5.5 million, compared with $9.0 million in the prior-year quarter. Management expected approximately $22.0 million of additional capital expenditures during the remainder of 2017.
- Acquisition spending was $3.0 million for five acquisitions, compared with $21.1 million in the prior-year quarter.
- Dividends paid increased to $25.1 million, or $0.115 per share, from $21.9 million, or $0.10 per share. A further $0.115-per-share dividend was declared for payment June 9, 2017.
- No open-market share repurchases occurred during the quarter. The company repurchased $7.5 million of shares from employees to fund taxes on vesting restricted shares; approximately 5.1 million shares remained available under the repurchase authorization.
- Management stated that cash, operating cash flow, and available credit were sufficient to fund operations, obligations, dividends, capital expenditures, and expansion. The company expected approximately $5.5 million of pension-plan contributions during 2017.
Material Changes Versus the Prior Comparable Period
- Revenue increased $22.5 million, while net income increased $8.3 million.
- Operating cash generation improved materially, rising 40.4% year over year.
- Reported earnings growth benefited from the $4.3 million ASU 2016-09 tax benefit; underlying earnings growth was approximately 12.7% according to management.
- Acquisition activity and related cash spending were substantially lower than in the first quarter of 2016.
- Dividends per share increased 15% from $0.10 to $0.115.
- Foreign currency movements reduced 2017 revenue by approximately $1.4 million and reduced pretax earnings by approximately $1.4 million, according to management.
- Accumulated other comprehensive loss improved to $66.1 million from $70.1 million, primarily because of a $4.0 million favorable foreign-currency translation adjustment.
Guidance, Outlook, Risks, and Unusual Items
Management described the quarter as the company’s 44th consecutive quarter of improved revenue and earnings. The company expects to continue investing in technology, acquisitions, international operations, and domestic expansion, but did not provide formal revenue or earnings guidance. Results are seasonal, with pest and termite activity generally increasing in the spring and summer.
Key risks include adverse outcomes in pending litigation, economic and market conditions, weather and climate, competition and pricing, labor availability and costs, technology and industry changes, acquisition integration, and changes in environmental or other regulations. The company cannot currently estimate potential losses from two HomeTeam Pest Defense antitrust matters. Management does not believe pending matters will have a material adverse effect overall, but an unfavorable outcome could materially affect an individual quarter or year.
The company adopted ASU 2016-09 prospectively in the first quarter. It expected the new revenue-recognition standard, scheduled for adoption in the first quarter of 2018 using the modified retrospective method, not to have a material impact, although implementation analysis was ongoing. The company was also evaluating the effect of the new lease standard.
Foreign-exchange derivatives generated a $30,000 gain in the quarter, compared with a $580,000 loss in the prior-year quarter. Management stated that foreign-exchange and interest-rate risks were not expected to have a material effect on future results. Disclosure controls were assessed as effective, with no material weaknesses identified.
Important Facts for Investors to Verify
- Separate the $4.3 million ASU 2016-09 tax benefit from recurring earnings performance.
- Monitor whether revenue growth, pricing, customer additions, and service-line trends continue after the seasonal spring and summer period.
- Verify the timing and cost of planned 2017 capital expenditures, pension contributions, acquisitions, and dividends.
- Review the HomeTeam antitrust litigation, including the potential for renewed or geographically limited class certification.
- Assess the impact of foreign-currency movements, international cash balances, and the company’s decision not to repatriate foreign cash under its current plan.
- Track implementation of the revenue-recognition and lease accounting standards.