Rollins, Inc. 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates a single reportable segment focused on pest and termite control services. This filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company remained operational globally during the COVID-19 pandemic because pest control was designated an essential service.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $583.7 million | $556.5 million | $1.625 billion | $1.509 billion |
| Net income | $79.6 million | $44.1 million | $198.2 million | $152.6 million |
| Diluted EPS | $0.24 | $0.13 | $0.60 | $0.47 |
| Operating cash flow | Not separately provided | Not separately provided | $340.6 million | $243.9 million |
| Gross margin | 52.8% | 51.7% | 51.9% | 51.0% |
- Q3 revenue increased 4.9%; nine-month revenue increased 7.6%.
- Q3 net income increased 80.6%, while nine-month net income increased approximately 29.9%.
- Q3 sales, general and administrative expense was 28.8% of revenue versus 30.0% in the prior-year quarter. For the nine-month period, SG&A was 30.6% versus 31.0%.
- Q3 effective tax rate was 26.9%, compared with 4.5% in 2019. The nine-month rate was 26.0%, compared with 19.3% in 2019.
- Cash and cash equivalents were $95.4 million at September 30, 2020, compared with $94.3 million at December 31, 2019.
- Total assets were $1.806 billion and stockholders’ equity was $932.7 million at September 30, 2020.
- Total debt was $170.0 million, consisting of $15.6 million current debt and $154.4 million long-term debt, versus $291.5 million at December 31, 2019.
- The $175.0 million revolving facility had no outstanding borrowings at September 30, 2020; the $250.0 million term loan had $170.0 million outstanding.
- The company invested $17.7 million in capital expenditures and $79.9 million in acquisitions during the first nine months of 2020.
Material Changes Versus the Prior Comparable Period
- Residential revenue increased 10.6% in Q3 and 14.2% for the first nine months, while commercial revenue decreased 2.5% in Q3 and 0.5% year to date. Termite and ancillary revenue increased 6.2% in Q3 and 9.8% year to date.
- Management attributed revenue growth to customer and pricing growth, with acquisitions contributing approximately 1.4 percentage points in Q3 and 4.0 percentage points for the first nine months.
- Gross margin improved due primarily to service salary and benefit savings, lower fuel prices, and routing and scheduling efficiencies.
- Operating cash flow increased $96.7 million year over year, while acquisition spending declined substantially from $431.2 million to $79.9 million.
- Financing cash flow shifted from a $199.4 million inflow in the first nine months of 2019 to a $245.5 million outflow in 2020, primarily reflecting debt repayments, dividends, and lower new borrowings.
- Q3 2020 included a $6.7 million non-cash accelerated stock-vesting expense following the August 2020 death of Chairman R. Randall Rollins. Q3 2019 included no comparable expense but reflected a $49.9 million pension settlement loss, which materially reduced prior-year income.
- The company adopted the current expected credit loss standard, ASC 326, on January 1, 2020, increasing beginning retained earnings by approximately $2.5 million net of tax.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects the adverse effect of COVID-19 on commercial pest control to persist through the remainder of 2020 and beyond, depending on the duration and severity of the economic contraction.
- Residential demand remained strong, supported by increased time spent at home; VitalClean sanitation services helped certain commercial customers reopen.
- Management stated that it did not anticipate a significant long-term revenue or cash-flow decline that would approach the level required for impairment of goodwill or other intangible assets. The company’s September 30 impairment analysis identified no impairment.
- Management expects cash, operating cash flow, and available credit capacity to fund operations, obligations, and expansion for the foreseeable future. The company remained in compliance with its debt covenant requiring a leverage ratio no greater than 3.00:1.00 and expected to remain compliant through 2020.
- The company had $157.6 million of unearned revenue at September 30, 2020, including $17.9 million classified as long term. Unearned revenue represents customer payments or billings in advance of service delivery.
- Pending lawsuits, regulatory matters, employment claims, and environmental matters were not expected by management to have a material aggregate effect, although an unfavorable outcome could materially affect an individual quarter or year.
- The SEC is investigating the company’s establishment of accruals and reserves at period ends for periods beginning January 1, 2015. The company cannot predict the outcome. An internal investigation by independent counsel concluded in October 2020; management stated that the relevant financial statements fairly presented the company’s financial position and results.
- COVID-19-related estimates, credit losses, customer retention, labor availability, supply-chain conditions, acquisitions, foreign exchange, weather, regulation, cybersecurity, and litigation remain key risks.
- After quarter end, the board approved a three-for-two stock split and declared a regular $0.08 per-share dividend plus a special $0.13 per-share year-end dividend, both payable December 10, 2020 on pre-split shares.
Most Important Facts for Investors to Verify
- Assess the potential financial, regulatory, and disclosure implications of the ongoing SEC investigation and related third-party litigation risk.
- Monitor commercial customer retention and revenue recovery as COVID-19 restrictions and economic conditions evolve.
- Verify continued compliance with the 3.00:1.00 leverage covenant and the repayment schedule for the $170.0 million term loan.
- Evaluate whether strong operating cash flow is sustained after considering acquisitions, dividends, lease obligations, and contingent acquisition payments.
- Review the assumptions supporting goodwill and intangible-asset impairment conclusions, particularly in light of pandemic-related commercial weakness.
- Confirm the effect of the three-for-two stock split and the regular and special dividends on per-share data and future comparability.