Rollins, Inc. 2015 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates a single reportable segment focused on pest and termite control. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $399.7 million | $384.9 million | $1.123 billion | $1.068 billion |
| Income before taxes | $72.4 million | $65.9 million | $191.4 million | $172.9 million |
| Net income | $45.0 million | $41.1 million | $120.4 million | $107.7 million |
| Basic and diluted EPS | $0.21 | $0.19 | $0.55 | $0.49 |
| Dividends per share | $0.08 | $0.07 | $0.24 | $0.21 |
- Q3 gross margin was 51.1%, compared with 50.9% in the prior-year quarter. Nine-month gross margin was 50.7%, compared with 50.1%.
- Q3 net margin was approximately 11.3%; nine-month net margin was approximately 10.7%.
- Cash provided by operating activities was $143.8 million for the first nine months, versus $157.4 million in 2014.
- Cash and cash equivalents were $134.3 million at September 30, 2015, compared with $108.4 million at December 31, 2014.
- Total assets were $862.3 million and stockholders’ equity was $519.4 million at September 30, 2015.
- The company had no outstanding borrowings under its unsecured $175.0 million revolving credit facility. The facility includes $75.0 million of letter-of-credit capacity and $25.0 million of swingline capacity.
- Capital expenditures were $28.6 million year to date, and acquisition cash spending was $31.4 million. Management expected approximately $5.0 million of additional capital expenditures for the remainder of 2015.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 3.9%, and nine-month revenue increased 5.2%. Management attributed Q3 growth to approximately 4.8% organic growth and pricing and 0.7% acquisition contribution.
- Q3 net income increased 9.5%, while nine-month net income increased 11.7%. EPS increased from $0.19 to $0.21 in Q3 and from $0.49 to $0.55 year to date.
- Q3 commercial pest control revenue grew 1.5%, residential pest control grew 7.2%, and termite and ancillary revenue grew 1.1%. For the first nine months, the respective growth rates were 3.4%, 7.4%, and 4.1%.
- Sales, general and administrative expense increased 2.7% in Q3 but declined to 30.5% of revenue from 30.9%. Year-to-date expense increased 4.8% while declining slightly to 30.8% of revenue from 30.9%.
- Foreign currency movements reduced Q3 revenue by approximately $9.0 million and earnings by approximately $2.0 million. Foreign operations represented approximately 7% of Q3 revenue, down from 9% in the prior-year quarter.
- Acquisition spending declined to $31.4 million from $59.7 million year to date. Rollins completed 12 acquisitions, including Critter Control, during the first nine months of 2015, compared with nine acquisitions in the 2014 period.
- Open-market repurchases were approximately 19,000 shares year to date, compared with approximately 1.5 million shares in the prior-year period. No open-market shares were repurchased during Q3 2015.
- Dividends paid increased to $52.4 million from $45.9 million year to date.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash, expected operating cash flow, and available credit capacity should be sufficient to fund operations, obligations, and expansion for the foreseeable future.
- The company announced a $0.08 regular quarterly dividend plus a $0.10 special year-end dividend, both payable December 10, 2015.
- Management expected no further defined-benefit pension contributions during 2015 after contributing $5.0 million during the first nine months.
- Management reported no goodwill or other intangible-asset impairment from its September 30, 2015 annual impairment analyses.
- Pending litigation includes an appealed fumigation-related matter and two California antitrust-related lawsuits involving HomeTeam’s “tubes in the walls” system. The company cannot estimate potential losses for the antitrust matters. Management does not believe the proceedings will have a material adverse effect, although an unfavorable outcome could materially affect an individual quarter or year.
- Key operating risks include weather and climate conditions, competitive pricing, labor availability and costs, integration of acquisitions, industry and technology changes, environmental regulation, termite-treatment effectiveness, foreign exchange, and litigation.
- The company stated that recently issued accounting standards, including the revenue-recognition standard, are not expected to have a material effect, although implementation impacts were still being evaluated.
- Seasonality affects revenue because pest activity and termite activity generally increase during spring and summer.
- Disclosure controls were deemed effective as of September 30, 2015, with no material weaknesses identified.
Important Facts for Investors to Verify
- Reconcile reported revenue and earnings growth with the disclosed foreign-exchange headwinds, organic growth, pricing, and acquisition contributions.
- Assess whether improved gross margin and SG&A leverage are sustainable given higher healthcare, insurance, sales compensation, and personnel costs.
- Review operating cash flow conversion, working-capital movements, capital expenditures, acquisition spending, and the planned dividend and special dividend.
- Monitor the company’s cash held by foreign subsidiaries and its stated plan not to repatriate those funds.
- Track the pending antitrust and other litigation, including potential exposure that management cannot currently estimate.
- Evaluate the effect and timing of the adoption of new accounting standards, particularly revenue recognition.