Rollins, Inc. 2021 Form 10-K Summary
Business Context and Reporting Period
Rollins, Inc. is an international pest and wildlife control services company operating through brands including Orkin, HomeTeam Pest Defense, Clark Pest Control, Western Pest Services, Critter Control and others. It serves more than two million residential and commercial customers through more than 800 company-owned and franchised locations in over 70 countries. The Company operates as one reportable segment covering residential, commercial, and termite services.
This filing is the Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The filing includes fourth-quarter results within the full-year figures but does not provide a separate fourth-quarter income statement in the supplied text.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $2.424 billion | $2.161 billion | 12.2% increase |
| Operating income | $440.0 million | $368.1 million | 19.5% increase |
| Income before income taxes | $474.8 million | $354.7 million | 33.9% increase |
| Net income | $350.7 million | $260.8 million | 34.5% increase |
| Basic and diluted EPS | $0.71 | $0.53 | Increase |
| Operating margin | 18.1% | 17.0% | 110 basis-point expansion |
| Net margin | 14.5% | 12.1% | 240 basis-point expansion |
| Effective tax rate | 26.1% | 26.5% | 40 basis-point decrease |
Revenue growth was broad-based: residential pest control increased 13%, commercial pest control increased 10%, and termite and ancillary services increased 14%. Revenue mix was approximately 46% residential, 34% commercial, and 20% termite and ancillary services. Foreign operations represented approximately 8% of revenue, compared with 7% in 2020.
Cash provided by operating activities was $401.8 million, down from $435.8 million in 2020, primarily because the Company paid employer payroll taxes deferred under the CARES Act. Capital expenditures were $27.2 million, compared with $23.2 million. Cash paid for acquisitions was $146.1 million, and proceeds from asset sales were $74.4 million, largely related to Clark Pest Control sale-leaseback transactions.
Cash and cash equivalents totaled $105.3 million at December 31, 2021, compared with $98.5 million at December 31, 2020. Approximately $78.1 million was held in foreign bank accounts. The Company paid $208.7 million in dividends, or $0.42 per share, including a $0.08 special dividend, compared with $160.5 million, or $0.33 per share, in 2020.
Debt, Liquidity, and Capital Resources
- At December 31, 2021, borrowings consisted of $107.0 million outstanding under a $175.0 million revolving credit facility and $48.0 million under the term loan, for total debt of approximately $155.0 million.
- The effective interest rate on outstanding debt was 0.85%, based on one-month LIBOR plus a margin.
- The Company maintained approximately $37.2 million of letters of credit, primarily supporting self-insured workers’ compensation and casualty programs.
- The Company was in compliance with its maximum 3.00-to-1.00 leverage covenant.
- On January 27, 2022, after year-end, the credit agreement was amended and an additional $252.0 million term loan was advanced, resulting in $300.0 million of aggregate term loans. The amendment replaced LIBOR with BSBY and reset the amortization schedule.
- Management stated that cash, operating cash flow, and available credit were sufficient to fund operations, obligations, expansion, acquisitions, and expected 2022 capital expenditures of $25 million to $35 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 12.2%, while operating income and net income grew faster than revenue, producing margin expansion.
- Other income improved materially, primarily because the Company recognized a $35.7 million gain in 2021, largely from sale-leaseback transactions involving 17 Clark Pest Control properties. The prior year included a $1.6 million loss and $6.7 million of accelerated stock-compensation vesting expense.
- Interest expense declined to $0.8 million from $5.1 million because of lower average debt balances.
- Operating cash flow decreased 7.8% because of repayment of CARES Act payroll-tax deferrals.
- The Company completed 39 acquisitions in 2021, compared with 31 in 2020, with cash purchase prices of $146.1 million and $147.6 million, respectively.
- Goodwill increased to $721.8 million from $653.2 million, primarily due to acquisitions. No goodwill or indefinite-lived intangible-asset impairment was identified in the 2021 annual analysis.
- Employees increased to 16,482 from 15,616, reflecting continued expansion.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued revenue growth, ongoing acquisitions, international expansion, continued dividends subject to earnings and financial condition, and 2022 capital expenditures of $25 million to $35 million. No specific revenue or earnings guidance was provided.
- The SEC is investigating the Company’s accrual and reserve practices for periods from January 1, 2016 through December 31, 2018, including potential effects on reported EPS in the first quarter of 2016 and second quarter of 2017. Rollins accrued $8.0 million as of December 31, 2021; the ultimate liability could differ materially from that amount.
- A related Audit Committee supplemental internal investigation concluded in the fourth quarter of 2021. Management believes no restatement of prior-period financial statements will be required, but regulatory sanctions, litigation, additional remediation, or restatement remain possible.
- In October 2021, a third-party managed service provider experienced a cybersecurity incident that shut down customer relationship management software used by subsidiaries representing less than 11% of revenue. The Company reported no known material service disruption or compromise of customer or employee information.
- COVID-19, labor shortages, wage and cost inflation, fuel and materials costs, changing mandates, and reduced customer spending remain risks. Management stated that the duration and economic effects of the pandemic remain difficult to predict.
- Weather, climate change, seasonality, acquisition integration, international operations, foreign exchange, cybersecurity, privacy compliance, environmental regulation, consumer-protection regulation, franchise disputes, insurance claims, and termite liabilities could materially affect results.
- Insurance reserves and termite-related accruals depend on actuarial and other estimates. Actual claims could exceed recorded reserves.
- A sale-leaseback gain of $31.5 million before tax was recognized on Clark Pest Control properties, contributing materially to the improvement in other income.
- Management and affiliates controlled approximately 53% of outstanding common stock at year-end, allowing substantial influence over elections, acquisitions, corporate transactions, and other matters.
Investor Verification Checklist
- Verify the final resolution, penalties, litigation exposure, and any potential restatement related to the SEC investigation.
- Reconcile the post-year-end $252.0 million term-loan borrowing and assess resulting leverage, interest expense, maturities, and covenant headroom.
- Determine how much 2021 earnings growth came from recurring operations versus the $35.7 million gain on asset sales and other unusual items.
- Assess whether operating cash flow can support dividends, acquisitions, capital expenditures, lease obligations, and debt service.
- Monitor labor availability, wage inflation, fuel and materials costs, and their effect on service margins.
- Evaluate acquisition integration, goodwill and customer-contract balances, and potential impairment risk.
- Review cybersecurity controls and any subsequent developments involving third-party service providers or customer data.
- Confirm the sustainability of the dividend policy, including the distinction between regular and special dividends.
- Review accrued insurance, termite claims, litigation reserves, and the $37.2 million of letters of credit supporting self-insurance programs.