Rollins, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Rollins, Inc. is a single-reportable-segment provider of residential and commercial pest control, termite and ancillary services, and franchise services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $729.7 million | $650.2 million | $2,034.4 million | $1,824.0 million |
| Operating income | $143.7 million | $126.8 million | $368.3 million | $348.6 million |
| Operating margin | 19.7% | 19.5% | 18.1% | 19.1% |
| Net income | $107.6 million | $93.9 million | $280.4 million | $285.4 million |
| Diluted EPS | $0.22 | $0.19 | $0.57 | $0.58 |
| Operating cash flow | Not separately provided | Not separately provided | $342.5 million | $298.9 million |
- Q3 revenue increased 12.2%, pretax income increased 14.0%, and net income increased 14.7% year over year.
- Year-to-date revenue increased 11.5%, while pretax income declined 2.5% and net income declined 1.7%.
- Q3 revenue growth included residential pest control of 10%, commercial pest control of 11%, and termite and ancillary services of 19%. Nine-month growth was 10%, 11%, and 16%, respectively.
- Q3 cost of services increased to 47.7% of revenue from 47.0%, primarily due to a higher casualty reserve and increased people, materials, supplies, and fleet costs. Nine-month cost of services increased to 48.2% from 47.4%.
- Q3 SG&A improved to 29.3% of revenue from 29.9%; nine-month SG&A increased to 30.1% from 29.6%.
- Cash and cash equivalents were $121.9 million at September 30, 2022, compared with $105.3 million at December 31, 2021. Total assets were $2.11 billion and stockholders' equity was $1.20 billion.
- Operating cash flow increased 14.6% year to date. Investing cash flow was negative $123.4 million, including $110.4 million for acquisitions and $22.9 million of capital expenditures.
- Debt totaled approximately $124.9 million at September 30, 2022, consisting of term-loan borrowings; there were no revolver borrowings. The effective interest rate was 3.866%.
- The company paid $147.6 million in dividends, or $0.30 per share, during the first nine months, versus $119.7 million, or $0.24 per share, in 2021.
Material changes versus the prior comparable period
- Revenue and operating income grew in Q3 despite COVID-19 effects earlier in the quarter and disruption from Hurricane Ian in the Southeast.
- Year-to-date profitability was pressured by higher operating costs and the casualty reserve, as well as the absence of a $31.5 million gain from 2021 sale-leaseback transactions.
- Interest expense increased because of higher average debt and interest rates.
- The company completed 27 acquisitions through September 30, 2022, with cash purchase price of $107.3 million and $61.0 million of acquisition-related goodwill.
- Debt financing changed materially during the year: the company borrowed $252.0 million under an amended term-loan facility, repaid $175.0 million of term debt and made net debt repayments of approximately $30.0 million.
- Letters of credit increased to approximately $71.3 million from $37.2 million at December 31, 2021, primarily to support the company's high-deductible insurance program.
Outlook, risks, contingencies, and unusual items
The filing provides no specific revenue, earnings, or margin guidance. Management expects existing cash, operating cash generation, and available credit facilities to fund operations, obligations, and expansion for the foreseeable future, and expects to remain within the maximum 3.00:1.00 leverage-ratio covenant through 2022.
- Management identified inflation, fuel costs, employee and vehicle shortages, supply-chain disruptions, natural disasters, and continuing COVID-19 uncertainty as risks to future performance.
- Management is using routing and scheduling changes, advance scheduling, and higher inventory levels to mitigate operating disruptions, but cannot estimate the future effectiveness of these actions.
- The company is subject to claims, litigation, regulatory matters, employment claims, environmental matters, and insurance-related liabilities. Management does not expect current matters to have a material adverse effect overall, but an unfavorable outcome could materially affect an individual quarter or year.
- Insurance reserves are judgmental and may be insufficient if actual casualty, workers' compensation, auto, or general liability claims exceed estimates.
- Foreign currency translation reduced other comprehensive income by $26.2 million year to date. Foreign exchange forward contracts generated a $1.1 million net gain year to date.
- No goodwill or other intangible-asset impairment was indicated by the September 30, 2022 analysis.
- On October 25, 2022, the board declared a quarterly dividend of $0.13 per share payable December 9, 2022.
Important facts for investors to verify
- Whether revenue growth remains sufficient to offset casualty reserves, labor, fleet, advertising, fuel, and other inflationary costs.
- The development of insurance and casualty claims and the adequacy of related reserves.
- The performance and final purchase-price allocations of the 27 acquisitions completed in 2022, including the $61.0 million of added goodwill.
- Debt levels, floating-rate exposure, covenant compliance, and the availability of the $175 million revolving facility.
- Cash conversion, receivables growth, credit-loss provisions, and the effect of dividends and acquisitions on liquidity.
- The effect of COVID-19, weather events, supply-chain constraints, labor shortages, and foreign-currency movements on future results.
- The filing states that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.