Rollins, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Rollins, Inc. provides residential, commercial and termite pest-control services, primarily through the Orkin brand and other operations. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. The company continues to operate under one reportable segment and reorganized its operating structure effective January 1, 2023, including the transition of Jerry E. Gahlhoff, Jr. to Chief Executive Officer.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $658.0 million | $590.7 million | 11.4% |
| Organic revenue growth | 9.2% | Not separately disclosed | Acquisitions contributed 2.2% |
| Gross profit | $331.2 million | $295.3 million | 12.1% |
| Gross margin | 50.3% | 50.0% | Up 30 basis points |
| Operating income | $112.2 million | $93.4 million | 20.2% |
| Operating margin | 17.1% | 15.8% | Up 130 basis points |
| Net income | $88.2 million | $73.8 million | 19.6% |
| Diluted EPS | $0.18 | $0.15 | 20.0% |
| EBITDA | $139.5 million | $117.8 million | 18.4% |
| EBITDA margin | 21.2% | 19.9% | Up 130 basis points |
| Operating cash flow | $100.8 million | $87.5 million | 15.1% |
Revenue growth was broad-based: residential revenue increased 9%, commercial revenue increased 12%, and termite and ancillary services increased 14%. The United States generated $609.3 million of revenue, while other countries generated $48.7 million.
Cash and cash equivalents were $112.5 million at March 31, 2023, compared with $95.3 million at December 31, 2022. Total assets were $2.139 billion and stockholders’ equity was $1.288 billion. Current assets of $367.9 million were below current liabilities of $467.4 million, although the company reported access to a substantial revolving credit facility and recurring operating cash flow.
Investing activities used $13.6 million, including $15.5 million for six acquisitions and $7.6 million of capital expenditures, partially offset by $8.9 million of asset-sale proceeds. Financing activities used $71.1 million, including $64.1 million of dividends, $55.0 million of term-loan repayments, $115.0 million of revolving-borrowing repayments and $11.4 million of employee-related share purchases; the company also borrowed $180.0 million under the revolving commitment.
At March 31, 2023, outstanding debt was $62.4 million under the new credit facility, with an effective interest rate of 6.1%. The facility provides $1.0 billion of revolving capacity, matures February 24, 2028, and permits up to an additional $750 million of commitments or term loans subject to lender approval. The company was in compliance with its debt covenants through the filing date. Letters of credit totaled $194.2 million, unusually high because of overlapping letters during the transition to the new facility.
Material changes versus the prior comparable period
- Revenue increased 11.4%, consisting of 9.2% organic growth and 2.2% contribution from acquisitions. Currency reduced reported revenue growth by approximately 60 basis points.
- Pricing actions, including an earlier and more consistent price increase, more than offset inflationary pressures and improved gross and operating margins.
- SG&A increased 9.9% but declined to 29.9% of revenue from 30.3%. Insurance and claims costs remained a margin headwind.
- The effective income tax rate increased to 24.3% from 21.6%, primarily due to higher foreign and state income taxes.
- Operating cash flow rose $13.2 million, while cash provided by financing activities in the prior year shifted to a $71.1 million use in 2023, largely because the prior year included substantially higher net borrowings.
- The company entered into a new $1.0 billion revolving credit agreement on February 24, 2023, refinancing its prior credit arrangements.
- Prior-period financial statement amounts were revised; for Q1 2022, depreciation and amortization decreased by $1.7 million and income tax expense increased by $0.4 million.
Guidance, outlook, risks and unusual items
Management did not provide quantified full-year revenue or earnings guidance in the filing. Management stated that demand remained favorable entering the second quarter and that acquisitions were expected to have a larger effect on second-quarter revenue growth because of the Fox Pest Control transaction. Management also expects higher customer-acquisition costs in the second quarter and potentially lower incremental margins than in the first quarter, while stating that the company is positioned to deliver strong operating results in 2023.
On April 1, 2023, after quarter-end, Rollins acquired Fox Pest Control for $318 million plus up to $32 million of contingent consideration tied to future growth and profitability. On April 3, 2023, the company borrowed $305 million under the new credit agreement to fund the acquisition, together with cash on hand. The purchase-price allocation was not complete as of the filing date.
Key risks include inflation, higher interest rates, employee shortages, supply-chain disruptions, natural disasters, insurance and claims costs, foreign-currency movements, acquisition integration and the uncertainty of management estimates. The company retains certain general liability, workers’ compensation and auto-liability risks. Management does not expect pending legal, regulatory or environmental matters to materially affect the company overall, but an unfavorable outcome could materially affect an individual quarter or year. California authorities are investigating alleged environmental compliance issues involving Orkin and Clark Pest Control operations; the company does not currently expect a material impact.
The company concluded that its disclosure controls were effective as of March 31, 2023, and reported no material changes in internal control over financial reporting during the quarter. No goodwill impairment was identified in connection with the reporting reorganization.
Important facts for investors to verify
- Whether the Fox Pest Control acquisition produces the expected growth and profitability and how the $305 million incremental borrowing affects leverage and interest expense.
- The company’s ability to sustain the Q1 margin improvement after anticipated increases in customer-acquisition spending and continued insurance-cost pressure.
- Compliance with the credit facility’s consolidated total net debt-to-EBITDA covenant, generally capped at 3.50-to-1.00, subject to a temporary 4.00-to-1.00 level following certain acquisitions.
- The eventual purchase-price allocation, goodwill and intangible-asset amounts, and contingent consideration associated with Fox Pest Control.
- Developments in the California environmental investigation and other litigation, employment, regulatory and retained-insurance claims.
- Whether cash generation and available revolving capacity remain sufficient after the Fox acquisition, dividends and other capital uses.
- The effect of higher tax rates, interest rates, inflation and foreign-exchange movements on full-year results; the filing does not provide clear quantified full-year guidance.