Rollins, Inc. 2017 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates one reportable segment: pest and termite control. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Results are seasonal, with higher pest and termite activity generally increasing second- and third-quarter revenue.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Revenue | $433.6 million | $411.1 million | $808.8 million | $763.9 million |
| Income before taxes | $86.1 million | $77.0 million | $143.4 million | $128.1 million |
| Net income | $53.7 million | $47.8 million | $94.0 million | $79.7 million |
| Basic and diluted EPS | $0.25 | $0.22 | $0.43 | $0.36 |
| Dividends per share | $0.115 | $0.10 | $0.23 | $0.20 |
- Second-quarter revenue increased 5.5%; six-month revenue increased 5.9%.
- Second-quarter net income increased 12.4%; six-month net income increased 17.9%.
- Reported gross margin was 52.8% in the quarter versus 52.3% in the prior-year quarter, and 51.3% year-to-date versus 51.1%.
- Second-quarter SG&A declined to 29.9% of revenue from 30.8%; six-month SG&A declined to 30.3% from 31.3%.
- Effective tax rate was 37.7% for the quarter and 34.5% year-to-date, compared with 37.9% and 37.8%, respectively, in 2016. The year-to-date rate benefited from $4.6 million of excess tax benefits under ASU 2016-09.
- Cash and cash equivalents were $194.8 million at June 30, 2017, versus $142.8 million at December 31, 2016. Total assets were $980.5 million and stockholders’ equity was $617.5 million.
- Net cash provided by operating activities was $119.9 million for the first six months, compared with $96.5 million in 2016. Investing cash outflows were $16.8 million, including $11.2 million of capital expenditures and $6.2 million for acquisitions. Financing cash outflows were $57.8 million, principally dividends.
- The company had no outstanding borrowings under its unsecured $175.0 million revolving credit facility and reported compliance with debt covenants. No material third-party debt was outstanding at June 30, 2017.
- Unearned revenue increased to $113.0 million from $99.8 million at year-end 2016, representing customer payments received in advance of services.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based: second-quarter commercial pest control increased 5.1%, residential pest control 5.9%, and termite and ancillary services 6.1%. Year-to-date growth rates were 5.2%, 6.4%, and 6.7%, respectively.
- Management attributed substantially all second-quarter revenue growth to customer additions and pricing; acquisitions contributed less than 1% of revenue. Foreign operations represented approximately 7% of revenue.
- Routing and scheduling efficiencies, lower service and administrative salaries as a percentage of revenue, and lower insurance and claims costs improved margins. Higher gasoline, leased-vehicle, maintenance, technology, advertising, and sales-related costs partially offset these benefits.
- Depreciation and amortization increased 9.7% in the quarter and 13.9% year-to-date, primarily from the BOSS customer relationship management system, acquisitions, equipment purchases, and amortization of acquired customer contracts.
- Acquisition spending declined to $6.2 million from $35.0 million in the prior-year six-month period. The company completed 14 acquisitions during the first six months of 2017.
- No open-market share repurchases were made during the first six months of 2017, compared with approximately 0.4 million shares repurchased in the prior-year period. Employee-related share repurchases for tax withholding totaled $7.7 million year-to-date.
- Cash dividends increased to $50.1 million from $43.7 million year-to-date.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects cash balances, operating cash flow, and available credit to fund operations, obligations, expansion, and planned capital needs for the foreseeable future.
- Capital expenditures were $11.2 million in the first six months, and management expected approximately $17.0 million of additional capital expenditures for the remainder of 2017.
- Management was considering approximately $5.5 million of additional defined-benefit plan contributions during 2017 and did not expect them to materially affect liquidity.
- On July 25, 2017, the company declared a $0.115 per-share quarterly dividend payable September 11, 2017.
- On July 25, 2017, Rollins announced an agreement to acquire Northwest Exterminating Co., Inc. for approximately $120 million in cash, plus potential earnout payments. Northwest serves approximately 120,000 customers through 23 offices in five southeastern states. Closing was expected in early August, subject to customary conditions and regulatory approval.
- Rollins settled the Killian Pest Control antitrust litigation for a $21,000 payment; the case was dismissed with prejudice on July 3, 2017. A related putative class action was dismissed on June 8, 2017. Management did not believe pending litigation would materially affect financial position, results, or liquidity, but noted that an unfavorable outcome could materially affect an individual period.
- The company expects to adopt the revenue recognition standard in the first quarter of 2018 using the modified retrospective method and currently expects no material impact. The effects of the new lease standard and other recently issued standards were still under evaluation where stated.
- Key risks include weather and climate conditions, competition and pricing, labor availability and costs, regulatory and environmental requirements, acquisition integration, technology changes, termite-treatment effectiveness, foreign exchange, and litigation.
- Foreign exchange movements reduced second-quarter revenue by approximately $10.4 million and pretax earnings by approximately $2.0 million. The company uses foreign currency forwards and does not expect foreign exchange risk to have a material forward impact.
- Disclosure controls were deemed effective as of June 30, 2017, with no material weaknesses identified.
Facts Investors Should Verify
- Verify the planned closing, final consideration, earnout terms, and accounting treatment of the Northwest Exterminating acquisition.
- Reconcile the MD&A reference to $121.2 million of year-to-date operating cash flow with the consolidated cash-flow statement, which reports $119.9 million.
- Assess whether revenue growth and margin gains remain sustainable after seasonal effects, wage, fuel, fleet, insurance, and technology costs.
- Monitor the effect of the 2018 revenue-recognition adoption and the subsequent lease-accounting adoption on reported liabilities, equity, and disclosures.
- Evaluate the company’s ability to maintain dividends, fund acquisitions and capital expenditures, and potentially contribute $5.5 million to pension plans without using debt.
- Review litigation, environmental, insurance, termite-accrual, and foreign-exchange exposures, including the potential for charges material to an individual quarter or year.