Rollins, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2010. The filing was signed July 30, 2010. Rollins operates as a single reportable segment focused on pest and termite control services.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Change |
|---|
| Revenue | $298.8 million | $284.6 million | Up 5.0% |
| Income before taxes | $44.4 million | $41.5 million | Up 6.9% |
| Net income | $27.7 million | $25.5 million | Up 8.7% |
| Diluted EPS | $0.28 | $0.26 | Up 7.7% |
| Gross margin | 50.3% | 50.2% | Up 0.1 percentage point |
| Net margin | 9.3% | 9.0% | Improved |
| Metric | Six months 2010 | Six months 2009 | Change |
|---|
|
| Revenue | $551.8 million | $527.5 million | Up 4.6% |
|
| Net income | $45.3 million | $41.3 million | Up 9.7% |
| Diluted EPS | $0.46 | $0.41 | Up 12.2% |
| Gross margin | 49.4% | 49.4% | Unchanged |
| Operating cash flow | $59.0 million | $64.1 million | Down $5.1 million |
- Q2 revenue growth was broad-based: commercial pest control increased 5.4%, residential pest control increased 4.7%, and termite services increased 4.2%.
- Ancillary services were strong, including nearly 20% growth in mosquito control; bed bug services also grew significantly.
- Sales, general and administrative expense increased to 32.4% of revenue from 32.3%, reflecting higher staffing, personnel-related costs, and consulting expenses.
- The effective tax rate declined to 37.6% in Q2 and 37.5% for the six-month period, versus 38.6% in the comparable periods, primarily due to state tax-rate differences.
- Cash and cash equivalents were $19.3 million at June 30, 2010, compared with $9.5 million at December 31, 2009.
- Total assets were $582.4 million and total liabilities were $306.8 million at June 30, 2010. Stockholders’ equity was $275.6 million.
- Unearned revenue was $93.5 million, representing customer cash received before services are performed.
Liquidity, debt, and capital allocation
- Operating activities generated $59.0 million of cash in the first six months. Investing activities used $6.6 million, including $4.5 million of capital expenditures and $2.2 million for acquisitions.
- Financing activities used $42.6 million, including $21.3 million for share repurchases, $17.9 million for dividends, and $5.0 million of net repayment under the credit line.
- Borrowings under the $175 million unsecured revolving credit facility were $25.0 million at June 30, 2010, with an effective interest rate of 0.85%. Approximately $30.3 million of letters of credit reduced borrowing capacity.
- The facility matures March 27, 2013 and includes a debt-to-EBITDA covenant of no more than 2.5 to 1. Management reported compliance with all applicable covenants and expected continued compliance during 2010.
- Rollins repurchased 886,928 shares during the first six months at an average price of $20.92 per share. Approximately 2.1 million shares remained available under the repurchase authorization.
- The quarterly dividend increased 28.6% to $0.09 per share. Dividends paid were $17.9 million, or $0.18 per share, in the first six months.
Material changes and unusual items
- Revenue increased $14.2 million in Q2 and $24.3 million year to date, while net income increased $2.2 million and $4.0 million, respectively.
- Interest expense declined materially to $66,000 in Q2 from $259,000 and to $165,000 year to date from $687,000, primarily due to lower debt associated with the HomeTeam acquisition.
- Depreciation and amortization declined 4.3% in Q2 and 4.4% year to date as certain acquired customer contracts and intangibles became fully amortized.
- Rollins had repaid $65.0 million of the $90.0 million borrowed in April 2008 to finance the HomeTeam Pest Defense acquisition.
- After quarter-end, Rollins announced a definitive agreement to acquire Waltham Services, a New England pest control company with annual revenue exceeding $17 million before the acquisition. Closing was expected effective August 1, 2010.
- The company adopted ASU 2010-06 on fair-value disclosures without a material impact. It planned to adopt amended multiple-element revenue-recognition guidance in fiscal 2011 and was evaluating the effect.
Outlook, risks, and contingencies
- Management stated that existing cash, expected operating cash flow, and available credit were sufficient to fund operations, obligations, and planned expansion for the foreseeable future.
- Capital expenditures were expected to be approximately $8.0 million during the remainder of 2010. Management was also considering an additional $5.0 million pension contribution after a $0.6 million contribution during the first six months.
- The business is seasonal, with greater pest activity and revenue typically occurring in the spring and summer.
- Key risks include adverse outcomes in pending class-action and other litigation, termite claim costs, self-insured workers’ compensation and casualty claims, environmental matters, weather and climate conditions, labor availability and costs, competition, pricing, acquisitions and integration, regulatory changes, and foreign-exchange and interest-rate movements.
- Rollins reported pending lawsuits involving Orkin and Western Pest Services in which plaintiffs 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.
- The company was subject to state tax audits and a proposed adjustment that management considered without merit; a significant unfavorable outcome remained possible.
- Management reported effective disclosure controls, no material weaknesses, and no material changes to internal control over financial reporting.
Investor verification points
- Verify the closing date, purchase price, financing, and subsequent financial contribution of the Waltham Services acquisition.
- Monitor operating cash flow, receivables, unearned revenue, and the ability to fund dividends, repurchases, capital expenditures, acquisitions, and potential pension contributions.
- Review credit-facility availability after letters of credit and confirm continued compliance with the 2.5-to-1 debt-to-EBITDA covenant.
- Assess trends in gross margin and SG&A as staffing, fuel, health-care, employment-tax, and consulting costs change.
- Evaluate the termite-contract accrual, self-insurance reserves, pending litigation, and state tax audit exposure for potential charges.
- Confirm the effect of the 2011 multiple-element revenue-recognition amendments when adopted.
