Rollins, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Rollins, Inc. is a pest and termite control services provider operating primarily in the United States, with international operations representing approximately 7% of revenue. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the same periods in 2022.
Rollins acquired Fox Pest Control on April 1, 2023, and included Fox’s results from that date. Fox contributed $81.0 million of revenue and $1.9 million of net earnings through September 30, 2023.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Revenue | $840.4 million | $729.7 million | +15.2% |
| Gross profit | $451.9 million | $381.5 million | +18.4% |
| Gross margin | 53.8% | 52.3% | +150 bps |
| Operating income | $177.1 million | $145.4 million | +21.8% |
| Operating margin | 21.1% | 19.9% | +120 bps |
| Net income | $127.8 million | $108.9 million | +17.3% |
| Diluted EPS | $0.26 | $0.22 | +18.2% |
| Adjusted EBITDA | $208.5 million | $169.9 million | +22.7% |
| Adjusted EBITDA margin | 24.8% | 23.3% | +150 bps |
For the nine months ended September 30, 2023, revenue was $2.319 billion, up 14.0%; operating income was $444.2 million, up 18.9%; net income was $326.2 million, up 14.7%; and diluted EPS was $0.66, compared with $0.58 in the prior-year period. Nine-month operating margin increased to 19.2% from 18.4%.
Management reported Q3 organic revenue growth of 8.4%, with acquisitions contributing 6.8%. Residential revenue increased 20%, commercial revenue increased 12%, and termite and ancillary revenue increased 11% year over year.
Cash flow, liquidity, debt and capital allocation
- Nine-month cash provided by operating activities was $375.5 million, up from $342.5 million.
- Nine-month capital expenditures were $21.3 million, producing reported free cash flow of $354.3 million versus $319.6 million in the prior-year period.
- Cash paid for acquisitions was $349.3 million, primarily for Fox, compared with $110.4 million in 2022.
- Cash and cash equivalents were $142.2 million at September 30, 2023, compared with $95.3 million at December 31, 2022.
- Outstanding borrowings under the new revolving Credit Facility were $599.0 million, with an effective interest rate of 6.4%. The balance-sheet debt amount was $596.6 million net of issuance costs.
- The new $1.0 billion Credit Facility matures February 24, 2028. Rollins had $71.7 million of outstanding letters of credit and remained in compliance with its debt covenants.
- The company paid $191.8 million in dividends, or $0.39 per share, during the first nine months, compared with $147.6 million, or $0.30 per share, in 2022.
- Rollins repurchased 8.724 million shares from LOR, Inc. for approximately $300 million at $34.39 per share. The company did not receive proceeds from LOR’s related secondary offering.
Material changes versus the prior comparable period
- Fox Pest Control and 18 other acquisitions increased revenue, goodwill and intangible assets. Goodwill rose to $1.054 billion from $846.7 million at December 31, 2022.
- Long-term debt increased to $596.6 million from $39.9 million at year-end 2022, primarily reflecting acquisition funding and the share repurchase.
- Interest expense increased to $5.5 million in Q3 from $0.8 million and to $10.8 million for the nine months from $2.3 million. Management expects interest expense to remain elevated for the rest of 2023.
- Rollins recorded $5.2 million of restructuring costs in Q3 related primarily to workforce reductions and support-function modernization.
- Q3 adjusted operating income included $5.3 million of Fox acquisition-related expenses and $5.2 million of restructuring costs. Non-GAAP measures exclude these items and certain acquisition-related amortization and contingent-consideration adjustments.
- The nine-month effective tax rate increased to 25.8% from 24.5%, primarily due to higher foreign income taxes; the Q3 rate was unchanged at 25.7%.
- Following LOR’s secondary offering, the Rollins family group no longer held majority voting power. Rollins is no longer a “controlled company” and must phase in additional NYSE independence and committee requirements.
Guidance, outlook, risks and unusual items
Management stated that demand was favorable entering the fourth quarter and that the company remained positioned to deliver strong 2023 results, but did not provide specific full-year numerical guidance in the filing. Management cited a healthy balance sheet and continued investment in growth programs.
Key risks include inflation, higher interest rates, labor shortages, supply-chain constraints, natural disasters and weather, adverse economic conditions, cybersecurity incidents, regulatory compliance, foreign-currency movements, acquisition integration and competition. Claims and insurance reserves, including auto, workers’ compensation and general liability matters, are based partly on actuarial estimates and could prove insufficient.
Rollins disclosed California governmental investigations and information requests concerning hazardous-waste and pesticide-disposal compliance involving Orkin and Clark Pest Control operations. Management does not currently expect a material financial impact, although an unfavorable outcome could affect an individual quarter or year.
The company concluded that no goodwill or indefinite-lived intangible asset impairment existed as of the reported testing dates. Fox valuation remains provisional, and acquisition accounting estimates may be adjusted during the measurement period.
Important facts for investors to verify
- Reconcile reported organic revenue growth with acquisition contributions and foreign-exchange effects.
- Assess Fox Pest Control integration, profitability, contingent consideration and provisional purchase-price allocations.
- Monitor leverage, the 6.4% effective borrowing rate, covenant compliance and the expected increase in interest expense.
- Evaluate whether margin gains are sustainable after excluding favorable claims experience, acquisition effects and restructuring adjustments.
- Review insurance, litigation, employment, environmental and regulatory reserves, including the California investigations.
- Track the effect of the loss of controlled-company status and the required NYSE governance transition.
- Distinguish GAAP results from management’s non-GAAP adjusted operating income, adjusted EPS, adjusted EBITDA and free cash flow measures.