Rollins, Inc. 2019 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates primarily in pest and termite control and reports one segment. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial Results and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $556.5 million | $487.7 million | $1.509 billion | $1.377 billion |
| Income before taxes | $46.1 million | $89.9 million | $189.2 million | $239.3 million |
| Net income | $44.1 million | $66.6 million | $152.6 million | $180.7 million |
| Basic and diluted EPS | $0.13 | $0.20 | $0.47 | $0.55 |
| Operating cash flow | Not separately provided | Not separately provided | $230.3 million | $213.3 million |
- Q3 revenue increased 14.1%; approximately 7.7 percentage points came from acquisitions and 6.4 points from customer growth and pricing. Nine-month revenue increased 9.6%, with 4.9 points from acquisitions and 4.7 points from customer growth and pricing.
- Q3 gross margin was 51.7%, compared with 51.6% in the prior year. Nine-month gross margin was 51.0%, down from 51.1%.
- Q3 net margin was approximately 7.9%, compared with 13.7% in 2018. Nine-month net margin was approximately 10.1%, compared with 13.1%.
- Q3 SG&A was $167.2 million, or 30.0% of revenue, versus 29.7% in the prior-year quarter. Nine-month SG&A was $468.6 million, or 31.0% of revenue, versus 30.1%.
- Cash and cash equivalents were $104.4 million at September 30, 2019, compared with $115.5 million at December 31, 2018.
- Total debt was $326.0 million, consisting of $103.0 million outstanding under the revolving facility and $223.0 million under the term loan. The company had approximately $72.0 million of unused revolving capacity, before consideration of other facility provisions.
- Total assets were $1.765 billion and stockholders’ equity was $806.9 million at September 30, 2019.
- Dividends paid during the first nine months were $103.1 million, or $0.315 per share. A regular $0.105-per-share quarterly dividend and a $0.05-per-share special year-end dividend were declared after quarter-end.
Material Changes Versus the Prior Comparable Period
- Rollins acquired Clark Pest Control on April 30, 2019. The company paid $431.2 million in cash for acquisitions during the first nine months, compared with $71.8 million in the prior-year period. Clark contributed approximately $37.4 million of Q3 revenue and $68.0 million of nine-month revenue from acquisitions overall.
- The Clark transaction materially increased goodwill, customer contracts and other intangible assets. Goodwill rose to $570.8 million from $368.5 million at year-end 2018, while customer contracts increased to $283.8 million from $178.1 million.
- The acquisition was financed partly with new borrowings. At September 30, 2019, debt was $326.0 million versus no outstanding borrowings at December 31, 2018.
- Net income declined 33.9% in Q3 and 15.6% for the first nine months, primarily because of a $49.9 million non-cash pension settlement expense. Excluding the pension item, reported earnings would have been materially higher, although the filing does not provide a formal adjusted earnings measure.
- The company completed the termination of its fully funded pension plan, transferring approximately $198.3 million of pension obligations. Approximately $25.9 million of benefit plan assets remained at quarter-end.
- Operating lease right-of-use assets and liabilities of approximately $195.7 million and $195.5 million, respectively, were recognized upon adoption of ASC 842 on January 1, 2019.
Guidance, Outlook, Risks and Unusual Items
- Management expects cash, operating cash flow and available credit to fund operations, obligations and expansion for the foreseeable future.
- Management expects to repay the Clark-related borrowings within two years of the acquisition and expected approximately $4.7 million of additional capital expenditures during the remainder of 2019.
- The company was in compliance with its maximum 3.00:1.00 leverage-ratio covenant and expected to remain compliant through 2019.
- Management expects to continue paying cash dividends, subject to earnings, financial condition and other relevant factors.
- Key risks include acquisition integration and purchase-price allocation revisions, debt and interest-rate exposure, foreign exchange movements, labor availability and costs, weather and climate conditions, competition and pricing, regulatory and environmental matters, data security, reputational damage and litigation.
- The company is involved in ordinary-course lawsuits, employment claims and environmental matters. Management does not expect a material adverse effect, but an unfavorable outcome could materially affect an individual quarter or year.
- The company uses interest-rate and foreign-exchange derivatives. It estimated that approximately $0.4 million of derivative-related accumulated other comprehensive loss would be reclassified into interest expense over the following 12 months.
Important Facts for Investors to Verify
- Whether Clark Pest Control delivers expected revenue, margins and synergies and whether the preliminary purchase-price allocation changes materially.
- Debt repayment progress, interest costs, available revolver capacity and compliance with the 3.00:1.00 leverage covenant.
- The effect of the pension termination, including future use or potential reversion of the remaining benefit plan assets.
- Underlying operating earnings and cash generation excluding the one-time pension settlement expense.
- Growth and margin trends by residential, commercial, termite and ancillary service lines, including the contribution from acquisitions versus pricing and customer growth.
- Potential exposure from litigation, environmental matters, labor costs, regulatory changes and acquisition integration.