Rollins, Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
Rollins, Inc. provides residential and commercial pest control, termite services, ancillary services, and franchised services. The filing covers the three months ended March 31, 2024, compared with the same period in 2023. Results include Fox Pest Control, acquired April 1, 2023.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $748.3 million | $658.0 million | 13.7% increase |
| Gross profit | $382.8 million | $331.2 million | 15.6% increase |
| Gross margin | 51.2% | 50.3% | 90 bps increase |
| Operating income | $132.4 million | $112.2 million | 18.0% increase |
| Operating margin | 17.7% | 17.1% | 60 bps increase |
| Net income | $94.4 million | $88.2 million | 7.0% increase |
| Diluted EPS | $0.19 | $0.18 | 5.6% increase |
| Cash flow from operations | $127.4 million | $100.8 million | 26.5% increase |
| Free cash flow | $120.3 million | $93.1 million | 29.1% increase |
Management reported organic revenue growth of 7.5%, with acquisitions contributing approximately 7.0% of reported growth. Adjusted operating income was $137.7 million, adjusted EBITDA was $160.8 million, and adjusted EPS was $0.20; these are non-GAAP measures.
At March 31, 2024, cash and cash equivalents were $113.0 million, long-term debt was $510.9 million on a GAAP balance-sheet basis, and outstanding borrowings under the credit facility were $513.0 million before unamortized debt issuance costs. Net debt was $400.0 million and the reported net leverage ratio was 0.6x. The company had $68.4 million of letters of credit and stated that it was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth reflected broad-based demand, Fox Pest Control contributions, pricing, and organic growth. Residential revenue increased approximately 16%, commercial revenue approximately 11%, and termite and ancillary revenue approximately 12%.
- January revenue was affected by unfavorable weather, while demand strengthened during February and March. Organic growth during February and March was 10.8%.
- Gross margin improved due to pricing, operating leverage in people costs, fleet, and materials, and a 40-basis-point contribution from Fox.
- SG&A increased 13.6% but declined to 29.8% of revenue from 29.9%. Depreciation and amortization increased 21.4%, primarily due to acquisition-related intangible amortization.
- Net interest expense increased to $7.7 million from $0.5 million because of higher debt and interest rates, principally related to the Fox acquisition and prior share repurchases.
- Cash used in investing activities increased to $52.5 million, including $47.1 million for acquisitions, compared with $13.6 million in the prior-year quarter.
- Dividends paid increased to $72.6 million, or $0.15 per share, from $64.1 million, or $0.13 per share.
- The company made no open-market share repurchases. Shares withheld for employee tax obligations totaled $11.3 million.
Guidance, outlook, risks, contingencies, and unusual items
Management expects 2024 organic revenue growth of 7% to 8% and inorganic growth of 2% to 3%. Management stated that demand was favorable entering the second quarter, the acquisition pipeline remained healthy, and current cash flows and available credit should fund operations, acquisitions, and other obligations for the foreseeable future.
Key risks include inflation, higher interest rates, weather variability, natural disasters, employee shortages, supply-chain issues, one-time business volatility, and the ability to maintain staffing levels. Results are seasonal and management cautioned that first-quarter performance is not necessarily indicative of the full year.
The quarter included $5.3 million of Fox acquisition-related expenses, including intangible amortization and a $1.0 million adjustment to contingent consideration. The company also revised its non-GAAP measures to exclude gains and losses on non-operational asset sales.
Rollins is involved in ordinary-course litigation, regulatory, employment, environmental, tax, and insurance matters. California governmental authorities are investigating alleged environmental compliance issues involving hazardous-waste and pesticide-disposal practices at Orkin and Clark operations. Management does not currently expect a material effect, but an unfavorable outcome could be material to an individual period. Fox remains excluded from management’s assessment of internal control over financial reporting while integration continues.
Important facts for investors to verify
- Reconcile reported growth with the 7.5% organic growth and approximately 7.0% acquisition contribution, particularly the continuing impact of Fox.
- Monitor interest expense, debt balances, borrowing costs, and compliance with the 3.50x consolidated total net debt-to-EBITDA covenant.
- Assess whether pricing and operating leverage continue to offset inflation, labor costs, and acquisition-related amortization.
- Evaluate the sustainability of acquisition spending and its effect on goodwill, intangible assets, contingent consideration, and leverage.
- Track weather, seasonality, staffing, and demand trends against the 7%–8% organic growth objective.
- Review developments in the California environmental investigation and the company’s retained insurance and litigation reserves.
- Consider non-GAAP adjustments when comparing adjusted results with GAAP net income, operating income, and cash flow.