Rollins, Inc. 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
Rollins, Inc. operates one reportable segment focused on residential and commercial pest and termite control. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The filing was signed October 29, 2021.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $650.2 million | $583.7 million | $1,824.0 million | $1,624.9 million |
| Income before taxes | $127.1 million | $108.9 million | $380.9 million | $267.8 million |
| Net income | $93.9 million | $79.6 million | $285.4 million | $198.2 million |
| Basic and diluted EPS | $0.19 | $0.16 | $0.58 | $0.40 |
| Operating cash flow | Not separately provided | Not separately provided | $298.9 million | $340.6 million |
- Q3 revenue increased 11.4%; nine-month revenue increased 12.2%. Management attributed approximately 2.2 percentage points of Q3 growth and 2.7 percentage points of nine-month growth to acquisitions, with the remainder primarily from customer growth and pricing.
- Approximate net margins were 14.4% in Q3 2021 versus 13.6% in Q3 2020, and 15.6% for the first nine months versus 12.2% in the prior-year period.
- Gross margin improved to 53.0% in Q3 from 52.8%, and to 52.6% for the first nine months from 51.9%.
- Sales, general and administrative expense rose 15.6% in Q3, reaching 29.9% of revenue, but increased only 8.6% for the first nine months and declined to 29.6% of revenue from 30.6%.
- Cash and cash equivalents were $117.7 million at September 30, 2021, compared with $98.5 million at December 31, 2020. Approximately $79.5 million was held at foreign banks.
- Total debt was approximately $68.0 million at September 30, 2021, consisting of $53.0 million under the term loan and $15.0 million under the revolving facility, compared with approximately $203.0 million at year-end 2020. The effective interest rate was 0.835%.
- The company reported $373.5 million of current assets and $477.5 million of current liabilities. Management stated that cash, operating cash flow, short-term investments and available credit capacity should fund operations, obligations and planned expansion for the foreseeable future.
- Dividends paid during the first nine months were $119.7 million, or $0.24 per share, compared with $91.7 million, or $0.19 per share, in 2020.
Material Changes Versus the Prior Comparable Period
- Residential revenue increased 11.7% in Q3 and 13.2% for the first nine months; commercial revenue increased 9.6% and 9.8%, respectively; termite and ancillary revenue increased 15.0% and 14.6%.
- Operating cash flow declined $41.7 million, primarily because the company paid employer payroll taxes deferred under the CARES Act in 2020.
- Investing cash flow improved to $11.1 million provided, compared with $94.5 million used in the prior-year period, primarily because of $71.0 million of asset-sale proceeds. Acquisition spending declined to $39.7 million from $79.9 million.
- The company recognized a $33.6 million gain on asset sales for the first nine months, primarily from sale-leaseback transactions involving 17 properties acquired with Clark Pest Control. The gain compares with a $0.6 million loss in 2020.
- Net interest expense declined to $1.3 million from $4.5 million for the first nine months, reflecting lower average debt.
- Stock compensation expense declined because 2020 included $6.7 million of accelerated vesting expense following the death of the company’s Chairman. Q3 2021 included no comparable accelerated vesting expense.
- The company completed 26 acquisitions through September 30, 2021, with total cash purchase price of $39.7 million.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative revenue or earnings guidance is provided in the filing. Management expects existing liquidity and credit resources to support operations and expansion for the foreseeable future and expects to remain compliant with its 3.00:1.00 leverage covenant through 2021.
- On October 26, 2021, the board declared a regular quarterly dividend of $0.10 per share plus a special year-end dividend of $0.08 per share, both payable December 10, 2021.
- The SEC is investigating the company’s period-end accrual and reserve practices for periods beginning January 1, 2015. The internal investigation identified inadequately supported journal entries and other errors, which management considered immaterial to the affected financial statements. The company recorded an accrual related to the matter in Q3 2021, but the amount is not disclosed in the provided filing text. The investigation and supplemental review remain ongoing, and the ultimate liability could differ from the accrued amount.
- The company stated that a previously identified significant deficiency in controls over documentation and review of certain reserves and accruals was remediated as of December 31, 2020. Disclosure controls were assessed as effective as of September 30, 2021.
- An October 2021 cyber incident involving a third-party managed service provider disrupted customer relationship management software used by subsidiaries representing less than 11% of annual revenue. Operations were generally restored, with no known material service impact or evidence of customer or employee information compromise as of the filing date.
- COVID-19 continues to create uncertainty around operating conditions, restrictions, labor availability and management estimates. The company also identifies risks from labor and fuel cost inflation, weather, acquisitions, foreign exchange, interest rates, litigation, regulatory matters and information-technology disruptions.
- Operating lease liabilities totaled approximately $254.1 million net of interest at September 30, 2021, including future minimum payments of $284.5 million before interest.
Most Important Facts for Investors to Verify
- Progress and potential monetary impact of the SEC investigation, including the Q3 accrual amount and any future penalties, litigation or restatement implications.
- Whether revenue growth and improved gross margins persist after the comparison benefits from COVID-related demand and restrictions easing.
- The sustainability of cash generation after CARES Act payroll-tax payments, dividends, acquisitions, capital expenditures and lease obligations.
- The effect of the $33.6 million sale-leaseback gain on reported earnings and the associated long-term operating lease commitments.
- Resolution and financial consequences of the October 2021 third-party cyber incident.
- Compliance with the credit facility’s leverage covenant and exposure to variable interest rates after debt reduction.
- Future acquisition pace, integration results and the recoverability of approximately $665.6 million of goodwill and $402.5 million of customer contracts and other intangible assets.