Rollins(US:ROL)2023-10-26 20:12PART I FINANCIAL INFORMATION Financial Statements The financial statements for the nine months ended September 30, 2023, show significant growth driven by acquisitions, with total assets increasing to $2.64 billion and Q3 revenues rising 15.2% to $840.4 million Condensed Consolidated Statements of Financial Position Key Balance Sheet Items (in thousands of dollars) | Account | Sep 30, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $2,639,957 | $2,122,028 | +24.4% | | Goodwill | $1,053,965 | $846,704 | +24.5% | | Customer contracts, net | $402,349 | $298,559 | +34.8% | | Total Liabilities | $1,537,114 | $854,831 | +79.8% | | Long-term debt | $596,642 | $39,898 | +1395.4% | | Total Stockholders' Equity | $1,102,843 | $1,267,197 | -13.0% | - The significant increase in Goodwill, Customer Contracts, and Long-term Debt is primarily attributable to the acquisition of Fox Pest Control, while the decrease in Stockholders' Equity reflects the impact of a large share repurchase112482 Condensed Consolidated Statements of Income Q3 2023 vs Q3 2022 Performance (in thousands of dollars, except per share data) | Metric | Q3 2023 | Q3 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $840,427 | $729,704 | +15.2% | | Operating Income | $177,124 | $145,404 | +21.8% | | Net Income | $127,777 | $108,943 | +17.3% | | Diluted EPS | $0.26 | $0.22 | +18.2% | Nine Months 2023 vs 2022 Performance (in thousands of dollars, except per share data) | Metric | Nine Months 2023 | Nine Months 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Revenues | $2,319,192 | $2,034,433 | +14.0% | | Operating Income | $444,153 | $373,471 | +18.9% | | Net Income | $326,154 | $284,329 | +14.7% | | Diluted EPS | $0.66 | $0.58 | +13.8% | - The company incurred $5.2 million in restructuring costs during the third quarter of 2023, which were not present in the prior year1298 Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Nine Months Ended Sep 30 (in thousands of dollars) | Activity | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $375,541 | $342,537 | +$33,004 | | Net cash (used in) investing activities | ($362,334) | ($123,378) | -$238,956 | | Net cash provided by (used in) financing activities | $33,743 | ($196,285) | +$230,028 | | Net increase in cash | $46,901 | $16,575 | +$30,326 | - The significant increase in cash used for investing activities was driven by acquisitions, which totaled $349.3 million, primarily for Fox Pest Control, while the shift in financing activities from a use of cash to a source was due to net borrowings of $599 million funding acquisitions and a $314.9 million share repurchase, also covering $191.8 million in dividends19 Notes to Condensed Consolidated Financial Statements - On April 1, 2023, the Company acquired 100% of Fox Pest Control for $339.5 million, funded by borrowing $305.0 million under its Credit Agreement, with Fox contributing $81.0 million in revenues and $1.9 million in net earnings from April 1 to September 30, 20232426 - The company entered into a new $1.0 billion revolving credit facility on February 24, 2023, with outstanding borrowings of $599.0 million at an effective interest rate of 6.4% as of September 30, 2023666769 - In September 2023, the Company repurchased 8,724,100 shares of its common stock from LOR, Inc. for approximately $300 million8295 - A restructuring program was executed in Q3 2023 to modernize the workforce, resulting in $5.2 million in costs, primarily for one-time termination benefits98 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management reported strong Q3 2023 results with revenues up 15.2% to $840.4 million, driven by 8.4% organic growth and acquisitions, while operating margin expanded 120 basis points to 21.1% Results of Operations Q3 2023 vs Q3 2022 Performance Summary | Metric | Q3 2023 | Q3 2022 | Change | Key Drivers | | :--- | :--- | :--- | :--- | :--- | | Revenues | $840.4M | $729.7M | +15.2% | 8.4% organic growth, 6.8% from acquisitions | | Residential Revenue | - | - | +20% | Strong demand and acquisition contribution | | Commercial Revenue | - | - | +12% | Continued market penetration | | Termite & Ancillary | - | - | +11% | Solid growth in services | | Gross Margin | 53.8% | 52.3% | +150 bps | Accretive Fox acquisition, favorable claims experience | | Operating Margin | 21.1% | 19.9% | +120 bps | Gross margin improvement, offset by restructuring costs | Nine Months 2023 vs 2022 Performance Summary | Metric | Nine Months 2023 | Nine Months 2022 | Change | Key Drivers | | :--- | :--- | :--- | :--- | :--- | | Revenues | $2.32B | $2.03B | +14.0% | 8.4% organic growth, 5.6% from acquisitions | | Gross Margin | 52.6% | 51.8% | +80 bps | Accretive acquisitions and pricing initiatives | | Operating Margin | 19.2% | 18.4% | +80 bps | Gross profit improvement and SG&A leverage | Non-GAAP Financial Measures - The company uses non-GAAP measures such as organic revenues, adjusted operating income, adjusted net income, adjusted EPS, and adjusted EBITDA to provide a consistent comparison of performance over various periods, excluding items like acquisition-related expenses and restructuring costs134135 Q3 2023 GAAP to Non-GAAP Reconciliation (in thousands of dollars) | Metric | GAAP | Adjustments | Non-GAAP (Adjusted) | | :--- | :--- | :--- | :--- | | Operating Income | $177,124 | $10,458 | $187,582 | | Net Income | $127,777 | $7,781 | $135,558 | | EBITDA | $202,285 | $6,246 | $208,531 | Liquidity and Capital Resources - The company's primary source of liquidity is cash from operations, which increased 9.6% to $375.5 million for the first nine months of 2023149150 - A new $1.0 billion revolving credit facility was established in February 2023, with $599.0 million outstanding as of September 30, 2023, used to fund the Fox acquisition and a $300 million share repurchase144145152 - Cash used in investing activities increased significantly to $362.3 million from $123.4 million year-over-year, driven by $349.3 million in acquisition spending149151 Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes to its market risk exposure during the nine months ended September 30, 2023, compared to its 2022 Form 10-K disclosure - There were no material changes to the company's market risk exposure during the first nine months of 2023168 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, excluding the recently acquired Fox Pest Control due to ongoing integration - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of September 30, 2023169 - The assessment of internal controls over financial reporting excludes the recently acquired Fox Pest Control, as the integration process is ongoing170 PART II OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including a California investigation into hazardous waste and pesticide disposal, but management anticipates no material adverse effect - The company is under investigation by California authorities regarding compliance with environmental regulations for hazardous waste and pesticide disposal174 - Management does not believe that any pending legal proceedings, including the California investigation, will have a material adverse effect on the company's financial position or results of operations175 Risk Factors Following a share sale by LOR, Inc., the company is no longer a 'controlled company' under NYSE and SEC rules, necessitating compliance with new corporate governance standards - Following a sale of common stock by LOR, Inc., the company is no longer a "controlled company" under NYSE and SEC rules177 - As a result, the company must now meet heightened corporate governance standards, including requirements for a majority-independent board and fully independent nominating and compensation committees, subject to phase-in periods ending in September 2024178 Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2023, the company repurchased 8,725,003 shares, including a special September repurchase of 8.7 million shares for approximately $300 million Share Repurchase Activity (Q3 2023) | Period | Total Shares Purchased | Weighted Average Price | | :--- | :--- | :--- | | July 2023 | 903 | $44.84 | | August 2023 | 0 | $0.00 | | September 2023 | 8,724,100 | $34.39 | | Total Q3 | 8,725,003 | - | - The September repurchase of 8.7 million shares for ~$300 million was made concurrently with a secondary offering by LOR, Inc. and was approved under a special, one-time authorization, not the main repurchase plan183 Other Information Chief Administrative Officer Thomas D. Tesh adopted a Rule 10b5-1 trading plan on August 10, 2023, for the potential sale of company shares - On August 10, 2023, Chief Administrative Officer Thomas D. Tesh entered into a Rule 10b5-1 trading plan for the sale of company securities186187