Rollins, Inc. 2022 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, Northwest Exterminating and Critter Control. It serves more than two million residential and commercial customers through more than 800 company-owned and franchised locations in approximately 70 countries. The company operates as one reportable segment across residential, commercial, and termite services.
This filing covers the fiscal year ended December 31, 2022. The filing is an annual Form 10-K rather than a quarterly filing; fourth-quarter information is included within the annual results. Rollins completed 31 acquisitions during 2022 and employed 17,515 people at year-end. Jerry Gahlhoff, Jr. became President and CEO effective January 1, 2023, succeeding Gary Rollins as CEO.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $2.696 billion | $2.424 billion | Up 11.2% |
| Gross profit | $1.387 billion | $1.262 billion | Up 10.0% |
| Gross margin | 51.5% | 52.0% | Down 50 bps |
| Operating income | $493.4 million | $447.6 million | Up 10.2% |
| Operating margin | 18.3% | 18.5% | Down 20 bps |
| Income before taxes | $498.9 million | $482.5 million | Up 3.4% |
| Net income | $368.6 million | $356.6 million | Up 3.4% |
| Diluted EPS | $0.75 | $0.72 | Up 4.2% |
| Operating cash flow | $465.9 million | $401.8 million | Up 16.0% |
| Capital expenditures | $30.6 million | $27.2 million | Up $3.4 million |
| Cash paid for acquisitions | $119.2 million | $146.1 million | Down $26.9 million |
| Dividends paid | $211.6 million | $208.7 million | Up 1.4% |
Revenue growth was broad-based: residential revenue increased 10%, commercial revenue increased 10%, and termite and ancillary revenue increased 15%. Foreign operations represented approximately 7% of consolidated revenue, compared with 8% in 2021.
At December 31, 2022, cash and cash equivalents were $95.3 million. Outstanding debt was $54.9 million under the term loan, with no revolving borrowings, compared with $155.0 million of total borrowings at year-end 2021. The effective interest rate on outstanding debt was 5.123%. The company also maintained approximately $71.3 million of letters of credit, primarily supporting its high-deductible insurance program.
Total assets were $2.122 billion and total stockholders’ equity was $1.267 billion at year-end. Total operating lease liabilities were approximately $281.4 million net of interest, with total future minimum lease payments of $315.3 million.
Material changes versus the prior comparable period
- Revenue reached a record $2.7 billion, increasing 11.2% year over year.
- Gross and operating margins declined modestly because of higher casualty reserves, medical costs, labor-related costs, fleet costs and materials inflation.
- Strategic pricing partially offset inflationary pressures; management expected another price increase in the first quarter of 2023.
- Operating cash flow increased substantially to $465.9 million, primarily because of stronger operating results and timing of customer receipts and payments.
- Debt declined by approximately $100 million during 2022, and the revolving facility was undrawn at year-end.
- The company paid $119.2 million for acquisitions and continued to identify acquisitions as a major growth strategy.
- Other income declined because 2021 included a $31.5 million gain from Clark Pest Control sale-leaseback transactions.
- The company partially changed its assertion regarding foreign earnings in the fourth quarter of 2022 and expects to repatriate certain unremitted foreign earnings.
- Prior-period financial statement amounts were revised for an immaterial correction related to the accounting for certain acquisitions completed between 2012 and 2019. The correction increased reported 2021 goodwill by $64.7 million and did not require amended filings.
Guidance, outlook, risks and unusual items
Management stated that demand remained strong, citing 11% revenue growth in January 2023, a strong acquisition pipeline and expectations for additional acquisitions in 2023. Management believes cash, operating cash flow and available credit capacity will be sufficient to fund operations, obligations and expansion for the foreseeable future. The company plans to evaluate renegotiation of its credit facility before its April 2024 expiration and expects to remain in compliance with debt covenants during 2023.
Key risks include inflation, higher interest rates, fuel and materials costs, labor shortages and wage pressure, supply-chain disruptions, unfavorable weather and climate-related effects, economic weakness affecting commercial and residential customers, cybersecurity and privacy incidents, regulatory compliance, environmental liabilities, franchisee and vendor conduct, acquisition integration, foreign exchange exposure and international expansion.
Insurance reserves are a significant area of estimation uncertainty and were identified as the critical audit matter. Rollins retains certain general liability, workers’ compensation and automobile liability risks, and unfavorable claims development could materially affect results. Termite claims, litigation, wage-and-hour matters, environmental matters and regulatory proceedings may also produce charges that could be material in an individual period, although management does not believe currently pending matters will materially affect financial position, results of operations or liquidity.
The controlling group, including members of the Rollins family and management, held approximately 51% of outstanding common stock at December 31, 2022. This concentration limits minority-stockholder influence and may affect takeover prospects and trading liquidity. Management and Grant Thornton concluded that internal control over financial reporting was effective as of December 31, 2022, and Grant Thornton issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether pricing actions can offset labor, medical, casualty, fuel and materials cost inflation without further margin compression.
- The sustainability and integration effectiveness of the acquisition program, including the 31 acquisitions completed in 2022 and expected 2023 acquisitions.
- Debt repayment progress, floating-rate exposure, covenant compliance and the terms of any refinancing before April 2024.
- The adequacy of accrued insurance and termite claim reserves, including sensitivity to adverse claims development.
- The financial and tax effects of repatriating foreign earnings and the company’s continuing permanent-reinvestment assertions.
- Whether strong January 2023 demand continued and translated into full-year revenue and earnings growth.
- Potential effects of labor shortages, cybersecurity events, regulatory changes, weather volatility and economic weakness on service capacity and margins.
- The implications of approximately 51% insider and family control for governance, capital allocation, dividends, acquisitions and minority-stockholder rights.