Kenneth D. Krause
Executive Vice President, Chief Financial Officer and Treasurer at Rollins
Thanks, Jerry, and good morning, everyone. The third quarter reflects continued strong execution by the Rollins' team. Let me begin with a few highlights. First, we delivered robust revenue growth of over 15% year-over-year. We saw good growth across each of our service offerings. Organic revenue was up over 8%. Acquisitions drove the other 7% of the total revenue growth. Second our gross margins were healthy approaching 54% this quarter. We continue to be positive on the price cost equation and saw good performance across several key cost categories. Adjusted EBITDA margin of 24.8% was strong improving 150 basis points driven by leverage across the P&L. Our GAAP earnings were $0.26 per share, and excluding certain expenses related to the Fox acquisition and severance costs for the restructuring that Jerry just mentioned, adjusted earnings per share were up 27% to $0.28 per share. And last but not least, we delivered operating cash flow of $127 million and free cash flow of $121 million, both up slightly versus last year. Cash flows were impacted by the timing of certain payables the payment of payables at quarter end. Let's look at the quarterly results in a little bit more detail. Quarterly revenue was $840 million, up 15% on a reported basis. Currencies reduced revenue growth by 10 basis points. Organic revenue growth was very healthy at above 8% this quarter, improving from the second quarter levels. We continue to see good demand for our services and our acquisitions, most notably Fox, continue to deliver value in the third quarter.
Turning to profitability. We realized a 150 basis point improvement in gross profit margin as pricing more than offset inflationary pressures. While Fox was accretive to gross margins by about 30 basis points, we saw 120 basis points improvement in organic margins in the quarter. Setting aside improvements associated with the more favorable claims experience and the contribution of Fox, we saw 50 basis points of improvement in gross margin as leverage from people costs as well as materials and supplies more than offset pressure from fleet due to lower gains on the sales of leased vehicles versus a year ago. We are pleased with our ability to leverage our cost of services provided as we continue to benefit from a more consistent pricing discipline across all of our brands this year. SG&A costs as a percentage of revenue decreased by 20 basis points in the quarter. Excluding the earn-out adjustment for the Fox acquisition, SG&A costs as a percentage of revenue decreased by 30 basis points in the quarter. Peeling back the SG&A layers a bit more, people costs advertising and selling costs along with insurance and claims, make up the bulk of our SG&A spend. Margins benefited year-over-year associated with improved claims experience and we saw leverage on our people costs but were negatively impacted by increased advertising and selling expenses as we invested to drive growth in our business.
As Jerry mentioned, for the first time in 20 years we executed a restructuring program at our Atlanta Support Center to further support our modernization efforts. Roughly 15% of our back-office employee population was impacted and we intend to reinvest associated cost savings in both people and systems that can drive further change and increase productivity as we work to become a better, more efficient provider of shared services for our frontline operations. As I mentioned earlier, we had non-GAAP adjustments this quarter for restructuring costs and for Fox acquisition-related items. These totaled approximately $10 million on a pretax basis and were related primarily to Atlanta Support Center severance costs along with purchase accounting amortization and the fair value of contingent consideration on the Fox acquisition. GAAP operating income was $177 million, up 22% year-over-year. Adjusted operating income was $187 million, up approximately 29% versus the prior year on 15% total revenue growth. EBITDA was $202 million, up 19% year-over-year and EBITDA margin was a healthy 24.1%. Our adjusted EBITDA was $208 million, up over 22% and representing a 24.8% margin. Margins were up 150 basis points versus a year ago primarily related to the improvements in gross margin discussed previously. Fox was neutral to EBITDA margins in the quarter. Year-to-date our adjusted EBITDA margins improved 90 basis points versus a year ago with 20 basis points of that improvement coming from the Fox acquisition.
Excluding this, 70 basis points, was driven across the remainder of the business. As we have consistently indicated, we like to look at the business using incremental margins or meaning what percentage of every additional dollar of revenue growth is converted to EBITDA. On an as-reported basis, we generated incremental margins of over 29% and excluding the restructuring costs and the additional costs associated with the earn-out on our recent acquisition, incremental margins were almost 35%. Year-to-date we generated incremental margins on an as-reported basis of over 27%. And on an adjusted basis, incremental margins were almost 30%.Quarterly GAAP net income was $127 million or $0.26 per share increasing from $0.22 per share in the same period a year ago. Adjusted net income was $136 million or $0.28 per share. The effective tax rate was approximately 26% in the quarter and for the first nine months the ETR was 26% as well, up over 100 basis points compared with 2022 driven by higher foreign income taxes. Turning to cash flow and the balance sheet. Quarterly free cash flow remained healthy. We generated $121 million of free cash flow in the quarter versus $119 million a year ago. As previously discussed, quarterly free cash flow was impacted by the timing of certain payables primarily related to our door-to-door sales. Year-to-date free cash flow was $354 million, an increase of 11% versus last year.
During the quarter, we made acquisitions totaling $21 million. We paid $64 million in dividends and we completed a share repurchase of $300 million at below $35 a share. We repurchased 8.7 million shares and used our revolver to fund this purchase. We expect this to be less than 1% dilutive to results in the first year and minimally accretive in the second year. Debt remains negligible and debt-to-EBITDA is below one time on a gross and net level. Our strong cash flow profile has enabled us to execute a very balanced capital allocation strategy this year. Year-to-date, we have invested approximately $350 million in acquisitions, repurchased $300 million of our shares and paid $192 million in dividends, a 30% increase year-to-date. Additionally we just announced another 15% increase to our dividend earlier this week. This marks over two decades of consecutive increases in annual cash dividend payments. We remain active in pursuing additional acquisitions. And looking at multiples, we remain very disciplined. Year-to-date we have invested approximately $350 million in acquisitions and the market remains highly fragmented and we continue to be an acquirer of choice and a very active participant in our markets. In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our team. Our family of brands are driving profitable growth and we are focused on continuous improvement across the business. We remain focused on providing our customers with the best customer experience and driving growth both organically and through disciplined acquisitions.
With that, I'll turn the call back over to Jerry.
