Rollins, Inc. 2023 Second-Quarter Form 10-Q Summary
Business context and reporting period
Rollins, Inc. is a pest-control services company operating residential, commercial, termite, franchise, and related businesses under one reportable segment. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
On April 1, 2023, Rollins acquired Fox Pest Control for preliminary consideration of $339.3 million. Fox contributed $39.4 million of revenue and $2.2 million of net earnings during the second quarter. The acquisition increased goodwill and acquired intangible assets and was primarily funded with borrowings under the new revolving credit facility.
Financial performance and key metrics
| Metric | Three months ended June 30, 2023 | Year-over-year change | Six months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $820.8 million | 14.9% | $1.479 billion | 13.3% |
| Operating income | $154.8 million | 14.9% | $267.0 million | 17.1% |
| Operating margin | 18.9% | Flat | 18.1% | Up 60 bps |
| Net income | $110.1 million | 8.4% | $198.4 million | 13.1% |
| Diluted EPS | $0.22 | 4.8% | $0.40 | 11.1% |
| Operating cash flow | $147.4 million | 15.8% | $248.2 million | 15.5% |
| Free cash flow | $140.6 million | 17.8% | $233.8 million | 17.5% |
Second-quarter organic revenue growth was 7.7%, with acquisitions contributing 7.2% and foreign exchange reducing reported growth by approximately 30 basis points. Six-month organic revenue growth was 8.4%, with acquisitions contributing 4.9% and foreign exchange reducing growth by approximately 40 basis points.
Second-quarter gross profit was $436.6 million, with gross margin of 53.2%, compared with 52.8% in the prior year. Six-month gross margin was 51.9%, compared with 51.5%. Pricing more than offset inflationary pressures, although insurance and legacy auto claims remained a margin headwind.
Second-quarter adjusted operating income was $160.1 million, adjusted operating margin was 19.5%, adjusted net income was $114.1 million, adjusted diluted EPS was $0.23, and adjusted EBITDA was $183.3 million, or 22.3% of revenue. These non-GAAP measures exclude Fox acquisition-related expenses and should not be viewed as substitutes for GAAP results.
Liquidity, debt, and balance sheet
| Balance-sheet item | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $154.7 million | $95.3 million |
| Total assets | $2.599 billion | $2.122 billion |
| Long-term debt, net of issuance costs | $337.5 million | $39.9 million |
| Total liabilities | $1.257 billion | $854.8 million |
| Stockholders’ equity | $1.342 billion | $1.267 billion |
Rollins entered a new $1.0 billion revolving credit facility maturing February 24, 2028. Gross borrowings under the facility were $340.0 million at June 30, 2023, with a 6.5% aggregate effective interest rate. The company also had $71.7 million of letters of credit, primarily supporting its high-deductible insurance program. Rollins reported compliance with its debt covenants, including the 3.50-to-1.00 consolidated total net debt-to-EBITDA covenant, subject to a temporary 4.00-to-1.00 limit following certain acquisitions.
Six-month investing cash outflows were $331.6 million, including $327.9 million for acquisitions and $14.4 million for capital expenditures, partially offset by $10.2 million of asset-sale proceeds. Financing activities generated $140.2 million, including net credit-agreement borrowings of $285.0 million, while dividends paid were $128.0 million, or $0.26 per share.
Material changes versus the prior comparable period
- Revenue growth accelerated through the Fox acquisition, organic expansion, pricing actions, and continued demand across residential, commercial, and termite services.
- Operating performance improved, with six-month operating margin increasing 60 basis points; second-quarter GAAP operating margin remained flat because of higher acquisition-related amortization and insurance and claims costs.
- Interest expense increased to $4.8 million in the second quarter and $5.3 million for the six months, primarily because of higher debt balances and interest rates. Management expects interest expense to remain elevated for the remainder of 2023.
- The effective tax rate increased to 27.1% in the second quarter and 25.8% for the six months, compared with 25.1% and 23.7%, respectively, primarily because of higher foreign income taxes.
- Goodwill increased to $1.046 billion from $846.7 million, and customer contracts increased to $407.2 million from $298.6 million, mainly reflecting acquisitions.
- Dividends increased to $0.13 per share per quarter from $0.10 per share in the comparable 2022 period. The board declared another $0.13 per-share dividend payable September 8, 2023.
- The company revised certain prior-period amounts in its 2022 Form 10-K-related disclosures, including lower depreciation and amortization and higher income tax expense for the 2022 comparative periods.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that demand was favorable entering the third quarter, described the balance sheet as healthy, and said Rollins was positioned to deliver strong 2023 results and continue investing in growth. The filing does not provide formal quantitative full-year revenue or earnings guidance.
Management expects higher advertising spending during the second and third quarter peak season and is evaluating streamlining initiatives for corporate and support functions. Pricing actions have helped offset inflation, but insurance and legacy auto claims remain unfavorable. The company continues to face risks from inflation, higher interest rates, labor shortages, supply-chain disruption, natural disasters, adverse weather, cybersecurity incidents, regulatory compliance, acquisition integration, and economic conditions.
Fox acquisition valuations remain provisional, including goodwill, intangible assets, and certain liabilities. The company recorded $1.0 million of second-quarter expense for fair-value adjustments to Fox contingent consideration and excluded acquisition-related expenses from certain non-GAAP measures.
Rollins is involved in ordinary-course litigation, employment matters, environmental matters, regulatory investigations, and claims involving services, vehicles, acquisitions, and insurance. California authorities are investigating alleged environmental compliance violations involving Orkin and Clark Pest Control operations. Management does not expect the investigation to have a material effect, but acknowledges that adverse outcomes in litigation or claims could materially affect an individual quarter or year.
Disclosure controls were considered effective as of June 30, 2023. The internal-control assessment excluded Fox while the company integrates the acquired business.
Important facts for investors to verify
- Confirm Fox Pest Control integration progress, final purchase-price accounting, contingent consideration, and realized synergies.
- Monitor leverage, interest expense, variable-rate debt exposure, and compliance with the credit-agreement covenants.
- Assess whether pricing and productivity gains continue to offset inflation, insurance costs, legacy auto claims, and higher customer-acquisition spending.
- Track organic revenue growth separately from acquisition-driven growth and foreign-exchange effects.
- Review goodwill and intangible-asset impairment risk as acquisition valuations are finalized and economic assumptions change.
- Evaluate cash generation after acquisitions, capital expenditures, dividends, and debt repayment.
- Follow California environmental investigations and other litigation, regulatory, employment, and insurance contingencies.
- Consider that management’s 2023 outlook is qualitative; the filing does not provide clear quantitative full-year guidance.