Business Context and Reporting Period
Company: Rollins, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: Rollins, Inc. operates as a family of leading pest control companies, primarily through its subsidiary Orkin, providing commercial and residential pest and termite control services domestically and internationally. The company has one reportable segment.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Revenues | $284,567 | $527,539 |
| Net Income | $25,482 | $41,290 |
| Diluted EPS | $0.26 | $0.42 |
| Operating Cash Flow | N/A | $64,095 |
| Cash and Equivalents | $22,575 (Balance Sheet) | $22,575 (Balance Sheet) |
| Debt (Line of Credit) | $55,000 | $55,000 |
| Total Assets | $578,642 | $578,642 |
| Total Liabilities | $341,272 | $341,272 |
Margins: Gross margin for the quarter ended June 30, 2009, was 50.2% (up from 48.7% in the prior year quarter). Year-to-date gross margin was 49.4% (up from 48.2% in the prior year).
Material Changes vs. Prior Period
- Revenue: Q2 2009 revenue was flat ($284.6M vs. $284.5M in Q2 2008). YTD revenue increased 6.7% to $527.5M, driven by the HomeTeam Pest Defense and Crane Pest Control acquisitions, partially offset by a weaker Canadian dollar.
- Profitability: Net income increased 12.1% in Q2 and 12.9% YTD compared to the prior year periods. Diluted EPS rose to $0.26 in Q2 (from $0.23) and $0.42 YTD (from $0.37).
- Expenses: Cost of services decreased 3.0% in Q2 due to lower fuel costs and reduced fleet size. SG&A expenses were flat in Q2 but increased 6.3% YTD, largely due to including a full six months of HomeTeam expenses in 2009 versus only three months in 2008.
- Acquisitions: The company completed the acquisition of Crane Pest Control on December 31, 2008. The HomeTeam Pest Defense acquisition (April 2008) continues to contribute to revenue and amortization expenses.
Guidance, Outlook, and Risks
- Capital Allocation: The company repurchased 1.3 million shares YTD at a weighted average of $16.11. Approximately 3.3 million shares remain available under the repurchase program. The quarterly dividend was increased to $0.07 per share (a 12% increase from the prior year).
- Liquidity: The company maintains a $175 million revolving credit facility with $55 million outstanding as of June 30, 2009. Management believes cash flows and borrowing capacity are sufficient for operations and expansion.
- Debt Covenants: The company is in compliance with its debt-to-EBITDA covenant (limit 2.5 to 1) and expects to remain compliant.
- Legal Proceedings: Orkin is defending several class-action lawsuits regarding wage/hour and termite services. One case (Sheppard) was dismissed in June 2009. Management does not believe pending litigation will have a material adverse effect.
- Pension Plan: The defined benefit plan is underfunded. Management is considering a $5.0 million contribution in fiscal 2009.
- Seasonality: Revenue is historically higher in the second quarter due to increased pest pressure and termite activity.
Investor Verification Checklist
- Verify the impact of foreign currency exchange rates (specifically the Canadian dollar) on future revenue growth.
- Monitor the status of pending class-action litigation (Maciel and Krzyzanowsky cases) for potential accruals.
- Confirm the timing and amount of the potential $5.0 million pension plan contribution.
- Track the utilization of the $175 million credit facility and adherence to the 2.5x debt-to-EBITDA covenant.
- Assess the integration progress and financial contribution of the HomeTeam Pest Defense and Crane Pest Control acquisitions.