Rollins, Inc. 2010 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. reported unaudited consolidated results for the three and nine months ended September 30, 2010. The company operates as a single reportable segment focused on pest and termite control, including Orkin and other brands. The filing was signed October 29, 2010, and reported 98.1 million common shares outstanding as of October 15, 2010.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $305.1 million | $286.9 million | $857.0 million | $814.4 million |
| Income before taxes | $41.0 million | $36.7 million | $113.4 million | $103.9 million |
| Net income | $25.5 million | $22.7 million | $70.8 million | $64.0 million |
| Diluted EPS | $0.26 | $0.23 | $0.71 | $0.64 |
| Operating cash flow | Not provided | Not provided | $92.4 million | $92.2 million |
- Q3 revenue increased 6.4%, net income increased 12.2%, and diluted EPS increased 13.0% year over year.
- Nine-month revenue increased 5.2%, net income increased 10.6%, and diluted EPS increased 10.9%.
- Q3 gross margin was 48.9%, compared with 48.6% in the prior-year quarter. Nine-month gross margin was 49.2%, compared with 49.1%.
- Q3 net margin was approximately 8.4%, compared with 7.9% in Q3 2009. Nine-month net margin was approximately 8.3%, compared with 7.9%.
- Sales, general and administrative expense was 32.4% of revenue in Q3, compared with 32.5% in the prior-year quarter, and 32.8% for both nine-month periods.
- Cash and cash equivalents were $20.3 million at September 30, 2010, versus $9.5 million at December 31, 2009.
- Total assets were $607.6 million and stockholders’ equity was $286.4 million at September 30, 2010. Total liabilities were $321.2 million.
- Unearned revenue was $95.7 million, representing customer payments received in advance of services.
- Borrowings were $24.0 million, consisting of $20.0 million under the revolving credit facility and $4.0 million under its swingline facility. The effective interest rate was 0.78%.
- The $175 million unsecured credit facility matures March 27, 2013 and was subject to a debt-to-EBITDA covenant of no more than 2.5 to 1. The company reported compliance with its covenants.
Cash Flow, Capital Allocation, and Liquidity
| 9M Cash Flow Item | 2010 | 2009 |
|---|---|---|
| Cash provided by operating activities | $92.4 million | $92.2 million |
| Cash used in investing activities | $(27.5) million | $(15.2) million |
| Cash used in financing activities | $(54.3) million | $(65.5) million |
| Capital expenditures | $6.8 million | $9.8 million |
| Acquisition spending | $20.9 million | $5.4 million |
| Dividends paid | $26.7 million | $20.9 million |
| Share repurchases | $29.6 million | $25.0 million |
Management stated that cash, expected operating cash flow, and available credit were sufficient for operations, obligations, and planned expansion. The company expected approximately $3.0 million of additional capital expenditures for the remainder of 2010. It repurchased 1.26 million shares during the first nine months at an average price of $20.92, with approximately 1.7 million shares remaining under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Growth was reported across commercial, residential, and termite services. In Q3, commercial pest control increased 8.0%, residential pest control increased 6.1%, and termite revenue increased 1.7%.
- Commercial pest control represented approximately 42% of Q3 revenue, residential pest control approximately 40%, and termite services approximately 17%. Foreign operations represented approximately 8% of Q3 revenue.
- The acquisition of Waltham Services was completed in July 2010 and contributed approximately $3.5 million of revenue for the partial quarter. The acquisition added approximately $10.8 million of goodwill and $10.0 million of customer contracts, subject to valuation adjustments.
- Acquisition spending increased materially from $5.4 million to $20.9 million year to date.
- Interest expense declined to $0.3 million for the first nine months from $0.8 million, reflecting lower debt balances.
- Cash from operations was essentially flat year over year despite higher earnings, partly reflecting increased trade receivables.
- The company’s board approved a three-for-two stock dividend, payable December 10, 2010 to shareholders of record November 10, 2010. It also declared a regular quarterly cash dividend of $0.09 per pre-split share.
Outlook, Risks, Contingencies, and Unusual Items
- Management stated that leads, pricing, customer service, retention, and other revenue fundamentals remained strong into the fourth quarter, but the filing did not provide formal revenue or earnings guidance.
- Results are seasonal, with pest pressure and termite activity generally increasing during spring and summer.
- Key operating risks include economic conditions, weather and climate, competition and pricing, labor availability and costs, regulatory and environmental changes, industry practices and technologies, termite treatment performance, and the ability to integrate acquisitions.
- The company is self-insured for certain workers’ compensation, general liability, and vehicle liability risks. Insurance reserves depend on actuarial estimates and may change materially as claims develop.
- The termite contract accrual was $9.0 million at September 30, 2010, compared with $10.0 million at December 31, 2009. Future costs may be affected by claim trends, termiticide performance, and regulation.
- Several subsidiaries are defending lawsuits seeking class certification, including wage-and-hour, vehicle-use payroll deduction, termite services, and bed bug service matters. Management believes the matters are without merit and not likely to have a material adverse effect, but an unfavorable outcome could materially affect an individual quarter.
- The company is involved in state tax audits and a jurisdiction has proposed income adjustments. Management believes the adjustments are without merit, while acknowledging a potentially significant charge if the matter is resolved unfavorably.
- Environmental matters are described as arising primarily in the ordinary course of business and are not expected by management to be material.
- Goodwill and other indefinite-lived intangible assets were tested as of September 30, 2010; no impairment was indicated.
- The company adopted certain fair-value disclosure amendments without material impact. It expected to adopt revised multiple-element revenue recognition guidance in fiscal 2011 and was evaluating the effect.
- Management reported effective disclosure controls and no material weaknesses in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the effect of the Waltham Services acquisition on organic revenue growth, margins, goodwill, and future integration costs.
- Monitor commercial, residential, and termite revenue trends and assess the impact of seasonality and foreign currency translation.
- Evaluate the sustainability of strong earnings growth relative to revenue growth and the company’s ability to maintain gross-margin improvements.
- Review liquidity after acquisitions, dividends, share repurchases, pension contributions, and the $30.3 million of letters of credit that reduce borrowing capacity.
- Track the $95.7 million unearned-revenue balance and whether related services convert into revenue and cash as expected.
- Assess developments in class-action litigation, state tax audits, self-insurance reserves, and termite-contract claims.
- Verify compliance with the credit facility’s debt-to-EBITDA covenant and the effect of variable interest rates.
- Reconcile the three-for-two stock dividend and the subsequent per-share metrics after the December 2010 distribution.