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2021 was an important year for Raytheon Technologies as we laid out our strategy at the beginning of last year.
And that strategy, of course, is to drive top-line growth, margin expansion, and robust free cash flows through 2025 and beyond while at the same time continuing to invest in our businesses and returning significant capital to shareowners.
Our continued focus on operational excellence and program execution, along with our industry leading technologies, positions us well to continue to capitalize on the commercial aerospace recovery and to grow our defense franchises.
That's more than double of what we delivered in 2020 on a pro forma basis.
Our performance in 2021 gives us confidence in the long-term fundamentals of our businesses and that we're able to -- and that we're on track to deliver to the 2025 targets that we outlined last May at our investor conference.
Before I turn to the highlights, let me first provide some comments on the current market environment.
During the quarter, commercial air traffic remained resilient despite the omicron variant, with global available seat miles, ASMs, growing about 1% sequentially in Q4.
That's reflecting a continued recovery in air traffic despite the typical seasonal trends.
Here in the U.S., passenger traffic through TSA checkpoints also remained steady at about 1.9 million passengers per day.
That's up almost 125% versus the fourth quarter of 2020, a remarkable recovery.
On the defense side, we're pleased to see the President sign the bipartisan defense authorization bill into law at $740 billion.
That's about $25 billion higher than the original Presidential request.
And given the global threat environment, we continue to see strong demand internationally for our products and services.
Are focus to aerospace and defense portfolio, along with our $156 billion backlog, gives us confidence in our ability to grow the business in 2022 and beyond.
Turning to Slide 2, some highlights from the fourth quarter.
As I said, we delivered strong financial performance in '21, organic sales grew 1%, which is in line with our expectations, while adjusted earnings per share and free cash flow for the year were both above our initial expectations and importantly, we saw margin expansion in all four of our businesses with strong commercial aftermarket.
Our defense backlog remained robust at over $63 billion, where IRS and RMD both ended the year with book-to-bills slightly above 1.0.
In addition to several large awards earlier in the year, we also had several notable awards during the fourth quarter, including over $1.3 billion in classified bookings, plus over $670 million for the Electro-Optical Infrared awards at IRS, as well as $730 million in standard Missile 2 production awards in RMD.
We also remain focused on operational excellence and program execution to drive structural cost reduction and productivity in our operations.
In 2021, we achieved about $760 million in incremental cost synergies from the RTX merger, bringing us to over $1 billion since the completion of the merger in April of 2020.
That meets our original merger cost synergy target two years ahead of schedule.
And there's always, of course, more to come and more to do there.
It's also worth noting that the Rockwell or the Collins Aerospace team achieved over $600 million in total Rockwell-Collins synergies since the acquisition in November of 2018.
They're meeting their commitment a year ahead of schedule despite the significant downturn in our commercial aerospace business.
We also continue to fine tune our portfolio during the year.
As you know, we completed the acquisition of SEAKR Engineering and FlightAware, which will expand and enhance our capabilities in key growth areas, and we completed the divestitures of Forcepoint.
And in December, we completed the sale of IRS' global training and services business.
On the capital allocation front, we returned $5.3 billion to shareholders in '21 for a total of $7.4 billion since we closed down the merger, well on track to the $20 billion-plus that we've committed to in the first four years after the merger.
As you saw in December, our board of directors also authorized a $6 billion share repurchase program, positioning us to continue returning significant capital to shareowners, including at least $2.5 billion of repurchases that we expect to complete in 2022.
In addition to our strong financial performance during the year, we also achieved several notable strategic and operational milestones that I'd like to highlight.
Let me start with Collins Aerospace.
The business completed more than 750 lean events in 2021.
By utilizing our best practices from our core operating system, the team was able to reduce labor content on the F-18 heat exchanger by over 30%.
That's reducing cost and importantly, creating capacity to support increased demand.
At Pratt, the team introduced the GTF Advantage engine, which reduces fuel consumption and CO2 emissions by a total of 17% compared to the prior generation engines.
It extends the GTF's lead as the most efficient powerplant for the A320neo family.
The engine will also be compatible with 100% sustainable aviation fuels, supporting the aviation industry's goal to significantly reduce emissions in the coming decades.
At both IRS and RMD, they achieved significant program milestones in the quarter ahead of schedule.
Through strong program execution in IRS, the Joint Precision Approach and Landing System program completed delivery on the first LRIP units 60 days ahead of schedule.
This achievement has given the Navy the confidence to certify JPALs on the CVM carrier and two amphibious ship classes.
RMD team also successfully completed the initial integration of the SPY-6 radar on the USS Jet -- Jack Lucas in the quarter.
This is the first time power was simultaneously applied to the entire radar system, completing a critical milestone for integration of the ship, its combat system, and the SPY-6 radar.
I'm on Slide 3.
I'm pleased with how we finished the year, as well as our performance in the quarter where we continue to see solid growth in organic sales, adjusted earnings per share, and free cash flow.
Sales of $17 billion were in line with our expectations and were up 4% organically versus prior year on an adjusted basis.
Our performance was primarily driven by the continued recovery of domestic short-haul international air travel, partially offset by continued supply chain pressures and lower 787 OE volume.
It's worth noting that the global training and services divestiture at IRS closed in early December, resulting in a sales headwind of about $100 million versus our prior outlook.
Adjusted earnings per share of $1.08 was ahead of our expectations, primarily driven by commercial aftermarket strength at both Collins and Pratt, as well as favorability in our effective tax rate.
On a GAAP basis, earnings per share from continuing operations was $0.46 per share and included $0.62 of acquisition accounting adjustments, and net significant and/or non-recurring items.
And finally, free cash flow of $2.2 billion was in line with our expectations and resulted in full year free cash flow of $5 billion, which was $500 million better than our expectations at the beginning of the year, primarily driven by higher net income and lower capex.
With that, let me hand it over to Jennifer to take you through the segment results, and I'll come back and share our thoughts on 2022.
Starting with Collins Aerospace on Slide 4, sales were $4.9 billion in the quarter, up 13% on both an adjusted and organic basis, driven primarily by the continued recovery in commercial aerospace and markets.
By channel, commercial aftermarket sales were up 47%, driven by a 59% increase in parts and repair, a 52% in provisioning, and a 17% increase in modification and upgrades.
Sequentially, commercial aftermarket sales were up 10%, driven by strength in parts and repair.
Commercial OE sales were up 4% with strength in narrowbody, offsetting headwinds from lower 787 deliveries.
And military sales were down 3% on another tough compare.
Recall, Collins military sales were up 7% organically in the same period last year.
The decline in the quarter was driven primarily by lower F-35 volume.
Adjusted operating profit of $469 million was up $380 million from the prior year.
Drop-through on higher commercial aftermarket sales more than offset higher E&D and SG&A expense.
Shifting to Pratt & Whitney on Slide 5, sales of $5.1 billion were up 14% on an adjusted basis and up 15% on an organic basis, driven primarily by the continued recovery of the commercial aerospace industry.
Commercial OE sales were up 32% by higher GTF deliveries within Pratt's large commercial engine business, as well as general aviation and biz jet platforms at Pratt Canada.
Commercial aftermarket sales were up 28% in the quarter with legacy large commercial engine shop visits up 30% and Pratt Canada shop visits up 37%.
Sequentially, commercial aftermarket sales were up 17%.
In the military business, sales were down 6% as expected on another difficult compare.
Recall Pratt's military sales were up 18% in the same period last year.
The decrease in the quarter was driven by lower spare sales on legacy programs.
Adjusted operating profit of $162 million was up $57 million from the prior year.
Drop-through on higher commercial aftermarket sales volume more than offset lower military volume, higher SG&A, E&D, and the impact of higher commercial OE volume.
Turning now to Slide 6, IRS sales of $3.9 billion were down 2% versus prior year on an adjusted basis and down 1% on an organic basis, reflecting four fewer work days in the fourth quarter of 2021 versus the prior year.
Adjusted operating profit in the quarter of $400 million was up $39 million versus prior year, primarily driven by higher net program efficiencies.
IRS had $3.4 billion of bookings in the quarter, resulting in a book-to-build of 0.97 and a backlog of $18 billion.
In addition to the significant bookings that Greg discussed, IRS also booked $227 million for the next-generation Jammer Mid-Band program in the quarter.
IRS' book-to-bill for the year was 1.01.
Turning now to Slide 7, R&D sales were $3.9 billion, down 10% on an adjusted basis and down 8% on an organic basis, primarily driven by four fewer workdays in the quarter, as well as lower material receipts and expected declines in several international production contracts.
Adjusted operating profit of $486 million was $93 million lower than the prior year, driven by lower net program efficiencies and lower sales volume.
RMD's bookings in the quarter were approximately $3.2 billion, resulting in a book-to-build of 0.83 and backlog of $29 billion.
In addition to the SM2 bookings Greg mentioned, RMD also booked $269 million for Evolved SeaSparrow Missile Block 2.
RMD's book-to-build for the year was 1.02.
Before moving on, I would also like to comment on the previously disclosed DOJ investigation into Costa County matters at legacy Raytheon's Companies former Integrated Defense System business, or IDS, which is now part of RMD.
As you will see in our upcoming 10-K filing, we have made progress in our internal investigation into the matter.
And we now have determined that there is a probable risk of liabilities for damages, interest and penalties.
In addition to the amount recorded in the first quarter of 2021, in connection with the finalization of purchase accounting, we recorded an incremental accrual in the amount of $147 million during the fourth quarter relating to the matter, bringing our total reserve to approximately $290 million.
We still do not currently believe the resolution of this matter will result in a material adverse impact to our financial condition, and we will continue to cooperate with the government's investigation.
I'm on Slide 8.
So before I get into the specifics of our '22 financial outlook, let me give you some perspective on how we are thinking about the environment as we look ahead.
Let me start with the positives.
Despite the impact of COVID variants, we expect the commercial aerospace recovery will continue into 2022 with continued growth in commercial, aftermarket and narrowbody deliveries driven by further strength in domestic traffic and growth in international traffic.
By the end of the year, we are assuming global RPMs recover to about 90% of 2019 levels, with domestic travel recovering to be approximately in line with the 2019 levels and an international travel recovery to between 75% and 80% of 2019 levels.
The reopening of international borders, specifically in the Asia-Pacific region and the related widebody traffic will be a significant factor in the timing and extent of the related aftermarket recovery.
Ultimately, the timing and trajectory of the overall recovery this year isn't likely to be linear, and it will depend on our customer's fleet decisions and buying behavior.
Looking longer term, we continue to expect commercial traffic to return to 2019 levels by the end of next year.
On the defense side, we expect continued organic growth in 2022 as we deliver on our $63 billion backlog, continued bipartisan support for the fiscal '22 defense budget, and international demand for our products and technologies.
And across RTX, we remain laser-focused on driving operational excellence to deliver cost reduction and further margin expansion, including $335 million of incremental RTX merger cost synergies during 2022.
And this keeps us on track to achieve $1.5 billion in gross cost synergies by Q1 of 2024.
On the challenges side, we anticipate that global supply chain and inflation pressures will continue and that 787 build rates will remain low.
With respect to the supply chain, we anticipate that COVID-related labor disruptions will persist through the first half of the year but will ease through the second half of the year.
And as we've discussed, a significant portion of our material spend is under long-term agreements.
That said, we're assuming a level of inflationary pressure across our businesses in our outlook that will be partially offset by productivity improvements.
And of course, we're continuing to monitor the U.S. and global tax environment and the current and potentially protracted continuing resolution.
So with that backdrop, let me tell you how this translates to our financial outlook for the year.
At the RTX level, we expect full year 2022 sales of between $68.5 billion and $69.5 billion.
This represents organic growth of between 7% and 9% year over year.
Keep in mind, the sale of IRS' global trading and services businesses creates about $1 billion of sales headwind year over year, as well as the associated profit.
From an earnings perspective, we expect adjusted earnings per share of $4.60 to $4.80, up 8% to 12% year over year, and we expect to generate free cash flow of about $6 billion.
That's up about 20% versus 2021.
It's important to note that this free cash flow outlook assumes that the legislation requiring R&D capitalization for tax purposes is deferred beyond 2022, which as we said before,the free cash flow impact of this legislation is approximately $2 billion.
It's also worth noting that if the legislation is not deferred, we will see about a $0.10 earnings per share benefit as well from the impacts of the R&D capitalization that would have components -- would have on components of our U.S. taxable income.
And as Greg mentioned, we expect to buyback at least $2.5 billion of RTX shares over the year , subject to market conditions.
With that, let's move to Slide 10 for the segment outlook.
At Collins, we expect full year sales to be up low double digits and adjusted operating profit to grow between $650 million and $800 million versus last year.
This is primarily driven by higher narrowbody OE deliveries and growth across all three commercial aftermarket channels, supporting both narrow and wide-body aircraft.
And military sales at Collins are expected to be a low single digit for the year.
Turning to Pratt & Whitney, we see full year sales growing low double digits versus prior year, principally driven by higher OE deliveries in both Pratt's large commercial engine and Pratt Canada businesses, as well as continued growth in legacy large commercial engine and Pratt Canada shop visits.
Military sales at Pratt are expected to be down mid-single digit, driven by lower F135 production inputs, partially offset by higher F135 sustainment volume.
With respect to operating profit, we see Pratt's adjusted operating profit growing between $500 million and $600 million versus last year, primarily on higher aftermarket volume and partially offset by higher large commercial OE engine deliveries and lower military volumes.
Turning to IRS, we expect full year sales to be down slightly versus prior year on a reported basis and to grow low single digit on an organic basis with strength coming from classified programs and production ramps and airborne ISR and AWS.
And we expect year-over-year adjusted operating profit at IRS to be flat to up $50 million, driven by higher net program efficiencies and volume.
At RMD, we see sales growing low, single to mid-single digit, driven by growth across multiple programs and for adjusted operating profit to be up in the range of $150 million to $200 million versus prior year, driven by improved program performance and the volume.
It's worth mentioning that we expect both IRS and RMD to again have a book-to-bill greater than 1.0 for the year.
And finally, we expect intercompany sales volumes to grow in line with total company sales.
So turning now to Slide 11 for our '22 adjusted earnings per share walk, starting with the segments, we expect the segments to generate about $0.83 of earnings per share growth at the midpoint of our outlook range.
From there, pension will be a headwind, primarily due to lower cash recovery and higher discount rates.
Our tax rate in '22 is expected to be between 18.5% and 19.5% versus the 15.5% in 2021, primarily due to onetime tax benefits associated with the prior year optimization of our legal entity and operating structure that we realized in the third quarter that will not repeat.
This will result in a $0.19 headwind.
We expect corporate expenses to be a $0.06 headwind year over year due to higher investment-related RTX synergy projects and digital transformation initiatives that are partially offset by lower LTAM spend.
And finally, lower share count, interest, and other items are expected to be a $0.07 tailwind.
All of this brings us to our outlook range of $4.60 to $4.80 per share.
Now turning to free cash flow on Slide 12.
We expect strong operational growth, along with lower restructuring to contribute about $1.5 billion of free cash flow growth in 2022.
These will be partially offset by expected pension headwinds and higher cash taxes to get to our free cash flow outlook of about $6 billion.
Again, this outlook assumes the legislation requiring R&D capitalization for tax purposes is deferred.
And lastly, before turning it back to Greg, a couple of comments on the first quarter.
With respect to sales, we expect sales to be up mid-single digit organically versus prior year, driven by the continued commercial aerospace recovery and partially offset by lower defense sales, driven by continuing supply chain pressures and the impact of omicron.
And again, just to remind you, the prior year included Q1 sales of about $200 million, as well as the associated profit for the divested IRS services business.
On the adjusted earnings per share side, we see low double digit to mid-teens growth in the quarter versus prior year.
And for cash, we expect to see an outflow of about $500 million in the quarter due to typical seasonal factors and the timing of collections.
So with that, let me hand it back to Greg to wrap things up.
We're on Slide 13.
So a lot of moving pieces, as always.
But I would tell you, we actually exited 2021 with really good momentum across the businesses, and we expect to make further progress on our priorities here as we enter into 2022.
First and foremost, let me repeat that we're focused on keeping our employees safe, keeping our commercial customers flying, and protecting the war fighter while they defend our country and allies.
And of course, supporting our suppliers.
We're also going to continue to invest in differentiated technology and innovation to maintain our industry leading positions, which will drive growth over the long term.
And of course, to capitalize on our growing end markets.
At the same time, our leadership team is making significant progress to reduce structural costs, drive operational efficiency through our core operating system and to deliver on our synergy commitments.
Finally, we remain disciplined with capital allocation.
We've got very strong balance sheet, along with our cash generating capability, supports investments in our businesses and our commitment to returning capital to shareowners, including at least $20 billion in the first four years following the merger, as I said earlier.
I'm confident in our ability to deliver both top- and bottom-line growth and margin expansion across our businesses this year as we continue to leverage the growth opportunities that are in front of us.
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raytheon technologies q3 gaap earnings per share $0.93 from continuing operations.
q3 adjusted earnings per share $1.26.
q3 gaap earnings per share $0.93 from continuing operations.
q3 sales $16.2 billion.
sees fy adjusted earnings per share $4.10 to $4.20.
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We're obviously quite content to being able to provide black numbers, maybe to the surprise of many of you.
Q1 '21 was a fairly quiet quarter corporate-wise as we are in a good position financially and no major transactions were concluded during the quarter.
We continue from Frontline a high focus on the well-being of our seafarers as they are out there being exposed to the global ebb and flow of COVID-19 infections.
Our technical and operations team are doing a fantastic job in mitigating the challenges that arise and I'm very happy to report that they are well under way in vaccinating our sailors.
Let's move to Slide 3 and have a look at the highlights.
The Q1 '21 performance is very much a testament to keeping true to our strategy.
Being mostly spot exposed and not expecting an imminent recovery in the market, our charter investment remains true to trading the ships in a month where we allow our vessels to commit to long voyages securing income but potentially giving away upside.
Our modern fuel-efficient fleet is built for this purpose and it also gives us this flexibility.
This proved to be the right call.
In the first quarter of 2021, we made $19,000 per day our VLCC fleet, $15,000 per day on our Suezmax fleet, and $12,000 per day on our LR2/Aframax fleet.
So far in Q1, we have booked 70% of our VLCC days at $18,100 per day, 63% of our Suezmax days have $13,600 per day, and 59% of LR2/Aframax days have $14,200 per day.
All these numbers in the table are on the load to this chart basis.
Before Inger takes you through the financial highlights, let me quickly comment on the fleet development as well.
We took delivery of two of our four LR2s coming this year.
Front Fusion and Front Future in March and April respectively, bringing our number of LR2s on the water to 20.
Further, subsequently, we confirmed acquisition through the resale of six high-spec ECO-scrubbers fleet of VLCCs to be delivered from Hyundai Heavy Industries in Korea.
Five in 2022 and one early in 2023.
I'll now let Inger take you through the financial highlights.
Let's turn the slide to Slide 4 and look at the income statement.
As I said, we are happy to report numbers in black, and Frontline achieved total operating revenues and work expenses of $107 million in the first quarter.
We also have an adjusted EBITDA of $59 million and net income of $28.9 nine million, or $0.15 per share.
Further, we have an adjusted net income of $8.8 million or $0.04 cents per share.
The adjustments consist of a $15.7 million gain on derivatives, a $3.1 million unrealized gain on marketable securities, a $1.2 million on amortization on acquired time charters, and $0.1 million results of associated companies.
The adjusted net income in the first quarter has increased by $21 million compared with the previous quarter.
The increase was driven by a decrease in ship operating expenses of $11 million, mainly as a result of $6.4 million lower dry-docking fund.
We also had an increase of cash and cash equivalents of $6.4 million and that was due to the prior TCE rates, as well as we had a $11.2 million decrease in other costs.
Let us then take a look at the balance sheet on Slide 5.
The total balance sheet numbers have increased by $10 million in the first quarter.
The balance sheet movements in the quarter were related to taking delivery of the energy sector from Fusion in addition to ordinary debt payments and depreciation.
As of March 31, 2021, Frontline had $318 million in cash and cash equivalents including undrawn amounts under our senior unsecured loan facility, marketable securities, and minimal cash requirements.
Let's then take a closer look on Slide 6 on the cash breakeven rates and the opex.
We estimate that risk cash costs break-even rate will remain for 2021 of approximately $21,500 per day for VLCC, $17,700 for days for the Suezmax tankers, and $15,900 per day for LR2 tankers.
This gave a fleet average of about $18,100 per day.
These rates, they are all-in day rates.
That's our vessel rates to cover budgeted operating costs and dried up estimated interest expenses, TCE, and bearable high, and installments on loans, and G&A expenses.
In the quarter, we recorded opex expenses of $7,300 per day for the VLCCs, $7,100 a day for the Suezmax tankers, and $7,200 for the LR2 tankers.
We did dry dock one Suezmax tanker in the first quarter only, and we expect to dry dock up two Suezmax tankers and four LR2 tankers in the second quarter.
Let's then look at the graph on the right hand of the slide.
As usual, we show the incremental cash flow after debt service per year and per share.
Assuming $10,00, $20,000, $30,000, or $40,000 per day achieve rates in excess of all the cash breakeven rates.
The numbers include vessel on timeshare are distant from building deliveries.
And then looking at the period of 365 days from April 1, 2021.
So in this graph, as an example, with a fleet average cash possibly breakeven rates of $18,100 per day and assuming $30,000 on top of the average fleet earnings, then the TCE rate would be $48,100 one per day.
A strong fund would then generate a cash flow per share of the debt service of $3.45.
With this, I'll leave the word to Lars again.
And let's move to Slide 7 and have a look here for a recap of the Q1 '21 tanker market.
And it goes without saying that it's been somewhat demanding.
So total world oil consumption rose by 4.3 million barrels from January to March and reached to 96.5 million barrels per day.
On the other hand, supply fell by 0.5 million barrels.
This was mostly fueled by the actions from Saudi Arabia and their volunteer cuts to -- turn it up at 93.5 million barrels per day at the end of the quarter.
As we continued to draw on inventory, tanker demand remained basically unchanged.
We did, during the quarter, see return of Libyan volumes.
And we had toward the end of the quarter a U.S. -- the U.S. cold snap that created a lot of volatility.
So tanker rates firmed toward the end of the quarter, and this is I find quite positive because it actually is indicating a thinner balance than what may be perceived.
So basically, to wrap up Q1, we see demand or consumption is running ahead of supply and the draw on inventories is come for mitigating that volume.
If you look at the chart on the right-hand side, you see what I refer to as a ripple rather than a very strong market, but we see how quickly rates react where we saw, firstly, the Aframax market move in line with the Libya opening up.
cold snap, affecting what was inside of the U.S. Gulf.
So let's move on to Slide 8 and look at the tanker order books.
On all asset classes, we are observing delayed recycling.
We see very little support for keeping older tonnage in this market.
But they remain in the fleets.
Recycling prices are up 30% year to date and are now count being negotiated around %550 per long ton or $23 million for a VLCC.
This is, to some extent, being outcompeted by the fact that we continue to see demand for vintage tonnage from undisclosed price -- buyers with relatively firm prices.
The overall tanker order book has shrunk year to date by approximately 4%.
This as vessels deliver and new ordering has been fairly muted.
We've seen on the VLCC's 20 new -- 28 new orders placed, but as 25 vessels are delivered at the same time, the order book remains to be fairly flat.
The VLCC order book stands at around 9% of the existing fleet, and the overall order book for tankers is up to around 7% of the existing fleet.
Let's move to Slide 9 and recap what's going on the asset prices.
So the asset prices are on the move.
We have, over the last six months, see more -- seen more than 170 new orders for containerships.
We've also seen quite some ordering on LPG.
And also seeing confirmation of LNG orders, which has further contributed to the activity.
And in line with the entire commodity space, steel prices have appreciated sharply.
The fundamentals of the tanker market suggest a tightening of capacity over the coming years.
And the regulatory tightening in respect of greenhouse gas emissions further supports the case of investing in modern fuel-efficient ships.
Propulsion is yet not the driver.
Right now, it's the yard capacity or rather the lack of it which is driving prices together with the steel.
So let's move to Slide 10 and look at the short-term outlook.
So we're currently right in the middle of OPEC plus productions increasing.
They are increasing somewhat slowly, but they are adding to transportation demand.
Currently, Asia, and in particular, China, are coming out of refinery maintenance.
And oil demand continues to recover.
and Europe in focus as we're coming out of lockdowns.
Inventories, both on land and floating, are now normalized and at pre-COVID-19 levels.
From where we are now, according to EIA, oil supply is expected to grow by 6 million barrels by year-end.
If you look at the graph on the left-hand side below, we see that most of these increases are expected to happen basically from where we stand now and over the summer.
The key to the demand bounces in 2021, you can find on the right-hand side.
We know that gasoline demand fell by 3.3 million barrels per day in 2020.
And it's now expected to grow by 1.8 million barrels per day in 2021.
For jet, it's affected the crude oil balances by 3.2 million barrels per day and negative in 2020 and about 1.3 million barrels per day is expected to return this year.
For diesel, we're actually adding more than we lost, 1.2 million barrels per day.
For fuel oil, we're keeping at level.
Other kind of uses of oil is also linked to this at 0.7 million barrels per day.
Let's move over to Slide 11 and my summary.
So basically, to wrap this up, all key macro indicators points toward a firm recovery.
And global GDP is expected up 6% this year.
Asset prices are on the move as yard capacity is tightening and steel prices are increasing.
I've just mentioned, global oil supply is expected to grow by 6 million barrels by the end of 2021.
The COVID-19 vaccination pace in the developed countries is very encouraging and countries are opening up.
We can see on the graph below, which indicates activity within the various key segments of the shipping sector.
That the cyclical recovery run has started.
All key shipping sectors are firm.
The tankers are lagging.
Frontline is ideally positioned to capitalize on the anticipated recovery in tanker markets with our modern, spot-exposed, fuel-efficient fleet.
And with that, I would like to open up for question-and-answer session.
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frontline q1 net income at usd 28.9 mln.
q1 net profit 28.9 million usd.
q1 diluted earnings per share 0.15 usd.
reg-fro - first quarter 2021 results.
net income of $28.9 million, or $0.15 per diluted share for q1 of 2021.
reported spot tces for vlccs, suezmax and lr2 tankers in q1 of 2021 were $19,000, $15,200 and $12,000 per day, respectively.
high number of ballast days at end of quarter will limit amount of additional revenues to be booked on a load-to-discharge basis.
will recognize certain costs during uncontracted days up until end of period.
we expect spot tces for full q2 of 2021 to be lower than tces currently contracted, due to impact of ballast days at end of q2 as well as current freight rates.
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I'm Monica Vinay, Vice President of Investor Relations and Treasurer at Myers Industries.
If you've not yet received a copy of the release, you can access it on our website at www.
myersindustries.com, under the Investor Relations tab.
These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and involve risks, uncertainties and other factors, which may cause results to differ materially from those expressed or implied in these statements.
Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings.
I'd like to start the call by expressing my sincere appreciation to our entire Myers team for all their efforts in 2020.
I'm especially proud of how well they faced the challenges that were presented throughout the year due to the COVID-19 pandemic.
As a result of the resilience and hard work, we're able to continue to produce and deliver essential products to our customers.
We delivered strong bottom-line results for the year, increasing adjusted earnings per share at 9% from $0.78 to $0.85.
Sonal brings a proven track record of providing strong leadership in transformational environments along with considerable experience in capital markets, mergers and acquisitions and investor relations.
I look forward to partnering with her as we continue to drive and execute our One Myers strategy.
He did a great job helping us lay a strong foundation and we will continue to benefit from Dan's contributions as he returns to his role as Vice President and Corporate Controller.
Before I discuss our performance, I'd like to review with you our long-term vision, the strategic pillars that we have in place to drive its execution, and the progress we've made against those pillars.
I introduced this strategy and vision in our October 2020 earnings call, and we are successfully executing against it.
To review, we're currently in Horizon-1, which consist of three elements: self-help, organic growth, and bolt-on M&A.
Self-help focuses on purchasing, pricing and SG&A optimization, and you're going to hear about a number of strategic steps we've recently implemented along these lines in our discussion today.
In terms of organic growth, we are strengthening our commercial capabilities, which includes going to market as one company, One Myers.
Our third element, bolt-on M&A, is primarily focused on growing our plastics businesses by acquiring companies that build out our three technology platforms within the Material Handling segment.
We will continue to focus on companies that manufacture durable, sustainable and/or reusable end products.
Once the foundational drivers of Horizon-1 are in place, we will move to Horizon-2, where we will execute larger enterprise level acquisition.
Our long-term vision culminates with Horizon-3, which is focused on growing the company globally.
Our long-term vision is ambitious, but it's well-grounded and focused on building out the technology in markets that we know well.
Granted, it's in their early innings, but we are making solid progress.
The first pillar focuses on organic growth and addresses four critical areas: sales and commercial excellence, innovation and new product development, sustainability and eCommerce.
Our second pillar, strategic M&A, is geared around bolt-on M&A opportunities that build out our Plastics platforms.
You've already seen us executing one exciting acquisition in Elkhart Plastics during the fourth quarter, and our pipeline of opportunities continues to grow.
Core to this effort is our integration playbook that will ensure a world-class approach to acquisition integration.
The third pillar, operational excellence, continues the work we've done around continuous improvement, while also building our capabilities in what we call self-help, doing a world-class job in pricing, in purchasing and in internal integration, which is the process of transforming into a single company, our One Myers approach.
As a part of this journey, we will also optimize SG&A, redeploying our dollars into investments, in sales, engineering and manufacturing resources.
The final pillar is the heart of our company, our people.
We are on our way to building a high-performance culture, focused on developing our employees and promoting from within, having a culture that's focused on employee's safety, and having an inclusive work environment in a culture of servant leadership.
We continue to build out our values, focusing on integrity, customer focus, optimism, all with a can-do attitude.
Our transformation opportunities through our culture are very exciting to me.
In the organic growth pillar, we made significant progress in the second half of 2020, in particular in the area of sales and commercial excellence in eCommerce.
Our Vice President of Sales and Commercial Excellence, Jim Gurnee, launched our new commercial structure that standardized and strengthened our focus in sales, marketing and product management.
These elements will become critical parts of how we run our business.
Jim also launched a new sales training curriculum focused on growth.
This program will help our team improve their ability in cross-selling and in growing the new One Myers approach.
One of the more meaningful parts of today's discussion is the new and more aggressive approach Myers Industries is taking to eCommerce.
We believe that eCommerce will be a compelling channel for the future and we believe that Myers is well suited to capitalize on this trend.
Just last year, in 2020, eCommerce sales grew more than 30% from our 2019 base.
We achieved this growth with what was largely a skunk-works type project.
In order to turbocharge eCommerce at Myers, we've now stood up an independent, focused organization to spearhead this channel in the market.
E-commerce business will be led by Chad Collins, who was previously the President of our Akro-Mils and Jamco business units.
Chad also helped develop our original relationship with Amazon for that business.
Sales in the eCommerce channel for 2020 approached 5% of our total revenue.
Our goal is to double that by the end of 2023.
This is an ambitious target, but one that we believe is attainable.
As I noted earlier, we are well under way with our strategic M&A pillar, having strengthened our portfolio with the acquisition of Elkhart Plastics in November.
As a bolt-on acquisition within rotational molding, Elkhart fits perfectly into our strategy and our developing culture.
The integration of Elkhart has gone smoothly.
It has been instrumental to help us further advance our integration playbook and our deal flow.
We continue to build out a healthy funnel of potential acquisitions.
Next, I'd like to talk about our accomplishments in the third pillar, operational excellence.
Last month we announced that we consolidated our Material Handling businesses into three distinct technology platforms: injection molding, rotational molding and blow molding.
We believe that we are unique in having strength in all three of these core molding technologies.
We strengthened our injection molding capabilities by combining Akro-Mils, Jamco and Buckhorn into one collective team.
We've done the same in rotational molding by merging Ameri-Kart with our recent acquisition Elkhart Plastics.
Our third technology platform, blow molding, is currently comprised of our Scepter business.
This platform has tremendous opportunity for both organic and inorganic growth.
By combining Akro-Mils, Jamco and Buckhorn into a single platform, and by combining Ameri-Kart and Elkhart Plastics into a single platform, we will be able to streamline our SG&A investments in overhead and redeploy these dollars into sales, engineering and manufacturing.
As larger units with more scale and reach, these platforms will be more robust and we'll be able to deliver more innovation and more value for our customers.
We are excited about this change in approach, and believe it moves us forward in Horizon-1, enabling growth while also managing costs.
One last piece I'll mention on pillar three is that we consolidated our purchasing function and created a single centralized purchasing team across the company.
This new approach allows us to aggregate our purchases and become an easier company to do business with.
Longer term, this should help us negotiating more secure supply position and a more competitive cost position.
Moving to the last of our four pillars.
In order to execute and achieve breakthrough performance, we need to have a high performing culture.
One of our noteworthy achievements this year is goal alignment.
In order to ensure that we are collectively focus on achieving companywide success and fully executing our One Myers strategy, we replaced multiple legacy bonus plans with a single plan, centered on one performance metric: adjusted EBITDA.
We believe this new one team approach will drive alignment, unity and will help us deliver solid results in the future.
We also added talent in a number of leadership positions in our business.
Most recently, on Tuesday, we announced the addition of Paul Johnson to lead our Distribution segment.
Paul brings 30 years of leadership in the automotive and auto aftermarket industry, which includes the recent role as the President of International Brake Industries, and prior leadership positions with Federal-Mogul and General Motors.
I believe Paul is the right leader to build, grow and take this business forward.
Chris did an excellent job of leading the recent transformation of the Distribution segment, which led to sales growth and improved profitability.
I'd like to wish Chris well, as he pursues the next chapter of his career and to returning back to his roots in healthcare.
Finally, two dynamic leaders with significant transformation in growth experience joined our Board in February: Yvette Bright and Jeff Kramer.
I've already had a chance to see both in action this quarter and look forward to their ongoing counsel and leadership.
As you can see, we've made a lot of good progress against our strategic initiatives.
We still have a lot of work to do, but I'm pleased with what we've been able to accomplish in a short time.
Now turning to our fourth quarter performance, which starts on Slide 6.
I'm pleased with our results for the fourth quarter, all things considered.
In spite of several manufacturing plants being impacted by the COVID surge in mid-November and December, we're still able to finish the quarter with sales up 8% on an organic basis and 18%, including contributions from Elkhart acquisition.
Top line organic growth was driven by continued momentum in the RV auto aftermarket and consumer end markets.
We also saw demand improvement in our industrial and automotive markets, which gives me confidence that an economic recovery post-pandemic is on the horizon.
During the quarter, we experienced rising raw material costs and an unfavorable sales mix, which impacted our gross margin.
The raw material increases that began toward the end of 2020 has continued and accelerated into 2021; specifically, we have seen significant increases in resin prices as a result of tightening supply on the U.S. Gulf Coast.
In response, we announced an 8% price increase across the broad portfolio of our products, primarily in the Material Handling segment, which was effective March 1, 2021.
Please note, we will continue to be vigilant about managing our pricing actions throughout the year to offset these unprecedented cost increases.
In addition to costs being a headwind, the recent freeze on the Gulf Coast has had a significant impact on the short-term supply of polyethylene and polypropylene.
Certain grades of resin continue to be tight and we are working closely with our suppliers to secure materials to ensure that we can continue to meet the needs of our valued customers.
As we enter 2021, we have solid top line momentum, balance with near term headwinds I just spoke to.
While the majority of our top line growth will come from the Elkhart acquisition, both volume growth and pricing will also contribute.
We expect organic sales growth across most of our end markets as a result of the continuation of the demand trends in select end markets and our enhanced focus on our sales capability and eCommerce.
Sonal will provide more detail regarding our annual outlook, which includes both sales and earnings per share guidance.
We are rapidly driving significant change in our organization, in our capabilities to ensure that we execute our Horizon-1 of our long-term strategy and create and deliver long-term shareholder value.
Let me begin by saying I'm delighted to be joining Myers at this inflection point in the company's history, and I look forward to working with the team to drive and execute our long-term strategy.
Turning to fourth quarter results on Slide 7.
Net sales were up $21 million, an increase of 18%.
On an organic basis, net sales increased 8%, excluding the impact of the Elkhart acquisition.
Increased sales in both Material Handling and Distribution segments contributed to growth.
Adjusted gross profit was up $1.2 million while gross margin decreased from 33.6% in the prior year to 29.4% in the quarter.
Margin was negatively impacted by an unfavorable price-to-cost relationship, repairs and maintenance, employee benefit cost, and an unfavorable product mix.
The addition of Elkhart benefited profit but impacted gross margin unfavorably due to product mix sold.
As a reminder, we are targeting $4 million to $6 million in annual cost synergies over the course of the upcoming two years.
Adjusted operating income decreased $700,000.
The increase in gross profit was more than offset by higher SG&A expenses mostly due to the addition of Elkhart.
Adjusted EBITDA was $11.3 million, a decline of $1.6 million compared to the prior year.
Adjusted EBITDA margin was 8.2%.
Lastly, adjusted earnings per share was $0.11 versus $0.12 in the prior year.
Turning now to Slide 8 for an overview of segment profit performance in the quarter.
Beginning with Material Handling, net sales increased 26% or 10% on an organic basis.
Excluding Elkhart, sales in the Food and Beverage and Vehicle markets were up double digits, driven by increased sales in feed boxes and in the RV, marine and automotive end markets.
Organic sales in the consumer market were up high single-digit due to fuel container sales while the industrial market was flat.
Material Handling adjusted operating income was essentially flat at $9.1 million, as the impact of higher sales was offset by unfavorable price-to-cost relationship, repairs and maintenance, employee benefit cost, and an unfavorable product mix.
In the Distribution segment, sales increased 4%, driven by increased sales of equipment and consumables, partially offset by lower sales of tire repair products and advance traffic marking tapes.
Distribution's adjusted operating income increased 13% to $3.6 million, primarily as a result of higher sales.
Turning to Slide 9.
Fourth quarter free cash flow was $10.7 million, an increase of $7.8 million, reflecting an increase in cash provided by operating activities, including the benefit of working capital, net of deferred taxes.
During the quarter the company utilized approximately $63 million in cash to fund the Elkhart acquisition.
Cash on hand at year-end was $28 million.
Based on our trailing 12 month adjusted EBITDA of $66.4 million, leverage was 1.2 times.
Let me conclude my comments with additional color on our outlook for 2021.
Turning to Slide 10.
Net sales are expected to increase by mid to high 20%, including an incremental 10.5 month of sales related to the Elkhart acquisition and the expected impact of the March 1st price increase.
As a reminder, Elkhart's annual net sales at the time of acquisition were approximately $100 million.
Continued momentum in RV and marine business along with the rebound in industrial and automotive related revenues are expected to drive growth.
As a reminder, fuel container sales in 2020 were unusually strong due to one of the most active hurricane seasons on record.
Overall, commodity costs are projected to be higher, driven by increases in resin cost.
As Mike mentioned, the company announced an 8% price increase, primarily across the Material Handling segment, effective March 1st.
Higher cost versus price realization is expected to compress margins in the first half of 2021.
Our teams continue to stay close to the changing market dynamics, including the need for additional pricing actions.
SG&A expenses are expected to approximate 24% of net sales, benefiting from larger scale.
The low operating income, we are projecting approximately $4 million of interest expense and an effective tax rate of 26%.
Our guidance reflects the weighted average share count of 36.5 million shares.
Taking all of these assumptions into account, we expect adjusted earnings per share to be in the range of $0.90 to $1.05 per share.
Other key assumptions impacting EBITDA and cash flow include depreciation and amortization expenses of approximately $23 million in capex of approximately $15 million.
Capex is expected to trend higher than past years given our renewed focus on investing in our facilities.
In closing, let me reiterate that our One Myers vision is gaining momentum as we continue to execute against our strategy and strengthen the building blocks to drive long-term growth.
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compname reports q3 adjusted earnings per share $0.30 from continuing operations.
q3 adjusted earnings per share $0.30 from continuing operations.
revised its outlook for 2020 revenue.
now expects full-year revenue to decline in low-to-mid single digits.
does not expect events that drove sales in consumer end market to recur in q4.
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As usual, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives.
During our call, management may discuss certain items which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.
Q2 was a dynamic quarter, and Joe is going to walk you through the details.
You know, as we think about all the craziness 2020 brought across our industry and our world, we're also appreciative of the invaluable lessons we gained.
We learned we have the right team in the field and here at the restaurant support center.
Our operators are working tirelessly every day to deliver great experiences for our guests and team members as we aggressively pursue opportunities to grow our business organically.
We learned that we can drive our business and increase market share despite the hurdles brought on by a global pandemic and widespread civil and political interest.
In the second quarter, Chili's increased its two-year trend of taking share and leading the category with an 18% beat in sales and a 25% beat in traffic according to KNAPP-TRACK.
We learned that our strategies work.
The ways we leveraged our scale and our ownership model and the investments we continue to make in technology and improving our operational systems, they were working well for us prior to the pandemic and continued to work even more effectively throughout the year.
Leveraging those competitive advantages, open up opportunities for us to grow our business in unique and innovative ways, like elevating our digital guest experience at both brands and leaning into virtual brands.
Those things are hard to execute and even harder to replicate.
So we're taking those lessons into 2021 as we prepare to accelerate organic growth in a post-vaccine environment.
We believe like most others that a widespread vaccine will indeed release pent-up dining room demand, and our operators are excited to return to full capacity and deliver more great guest experiences in person.
But we don't expect a return to the old normal.
2020 fundamentally changed us as consumers.
We were forced to use technology to enjoy our favorite restaurants in new ways like third-party delivery.
Crop side takeout, QR code menus, and mobile payment.
And now that we've experienced greater convenience and control over our experience, we're not likely to give it all back.
The Brinker team knew that convenience was a big opportunity even before the pandemic.
2020 just accelerated our commitment to embrace consumers' gravitation toward digital interaction and meet them where they are.
We believe digital sales and traffic will continue to be a strategic driver of our results in both the near and long term.
So in preparation for fiscal '22, we're dedicating even more time, effort, and capital to accelerate in our competitive advantage as a digital leader in the category and aggressively pursuing opportunities to drive our top and bottom line.
At Chili's, we're testing a fully integrated digital experience that gives our guests control over the pace of their experience and level of interaction with our team, whether they're dining in or off-premise.
It's still early, but the team is making tremendous progress, and the guests and our test restaurants are responding really well.
We anticipate a rollout beginning fourth quarter.
We've also spent a great deal of time and effort systematizing what goes out the side door at both our brands.
We got really good at takeout and delivery during the height of quarantine.
So while our dining rooms are still at limited capacity, we're ensuring we have strong systems in place to support our operators and execute a robust off-premise business even as our dining rooms returned to full capacity.
Delivering a best-in-class off-premise experience also supports virtual brands, which is a key component of our growth strategy.
Our scale and our ownership model, coupled with our ability to mine data and develop systems, is proving very effective in this new world of virtual brands.
It's Just Wings is on track and performing well.
We believe there's significant upside.
So we're focused on building it into a strong, sustainable brand.
Some of the biggest brands in the world right now are virtual.
So we know the model resonates with consumers as long as you deliver a great product.
Right now, we have a one-channel solution.
We're working to optimize that channel through incremental marketing opportunities and expanded consumer touchpoints.
We're also going to grow the brand through additional channels like takeout.
We're ensuring we have the right systems in place that will best support our operator's ability to execute at a high level, especially as dining rooms reopen.
Once we know we're consistently delivering a great guest experience and our operator at -- from our operators at full volumes, we'll move strategically to launch another virtual brand.
I anticipate that by the end of this fiscal year, we'll have a clear line of sight and be able to share more details with you.
Listing 2020 was a crazy year, but through it, we confirm that our strategies are working and that we have an outstanding team in the field and at the restaurant support center.
Every day, they demonstrate their ability to adapt for severe and win.
As vaccines roll out and our country begins to leave their homes once again, I firmly believe we'll continue to win.
Let me finish our prepared comments by providing some detail and context to our second-quarter results, as well as offer a few insights for our January's period's sales performance.
The second-quarter fiscal 2021, Brinker delivered adjusted diluted earnings per share of $0.35.
Brinker's total revenues were $761 million, and consolidated reported net comp sales were negative 12.1%.
A couple of items to note for the quarter.
First, let me highlight impacts to the consolidated quarter resulting from Maggiano's performance, which was highly constrained by COVID restrictions and appropriate consumer reactions to the pandemic.
As a reminder, the second quarter is traditionally their highest performing quarter.
However, this year, COVID eliminated most of their typically robust banquet and corporate catering channels, both of which tend to overdeliver to results for their second quarter.
The brand's operating profit was $22 million below last year, constituting virtually all of the reduction in consolidated operating profit for Brinker.
The impact on consolidated comp sales and restaurant operating margin were also outsized with the brand reporting net comp sales of negative 47% and a restaurant operating margin of 5.5%, down more than 11% from prior year.
With the second quarter now behind us, we expect the impact from Maggiano's to the consolidated performance of Brinker to be more muted as we head into the rest of the fiscal year, particularly as the brand recovers from both an improved operating environment and the implementation of performance driving initiatives.
Now, moving on to Chili's.
The brand continued its relative strong performance, although also impacted by COVID restrictions during the latter half of the quarter.
Operating income for the brand was relatively close to last year and only $1.6 million.
Chili's reported net comp sales for the second quarter of negative 6.3%.
This result does contain a holiday flip, which benefited the brand by approximately 100 basis points as Christmas moved out of Q2 and into Q3.
The brand continues to meaningfully outperform the Casual-Dining sector with our gap strengthening in both sales and traffic through the second quarter.
Traffic gaps in the KNAPP index exceeded 20% throughout the quarter.
Performance relative to the competition was strong throughout the country, with double-digit sales gaps recorded in regions from East to West Coast.
Included in the consolidated adjusted net income for the quarter with a tax benefit of approximately $2.4 million, primarily driven by employment tax credits.
Part of this benefit is a $1.8 million catch-up related to Q1, which was over accrued relative to our current expectations for our annual tax liability.
The consolidated restaurant operating margin for the second quarter was 10.7%.
Most of the variance to prior year is the result of the lower-than-normal contribution from Maggiano's, which impacted the consolidated margin by 130 basis points.
The leverage due to top-line softening in November and December was the secondary influence.
A food and beverage expense was unfavorable year over year by 40 basis points primarily a result of menu mix, some higher costs from items such as cheese and produce.
Labor costs were favorable 10 basis points with savings in hourly expenses, offset by deleverage.
Included in this performance is a consistent level of manager bonus compared to last year's second quarter.
We remain committed to retaining our restaurant leadership teams as they are critical to our success, both in the short term and as the operating environment returns to more normal conditions.
Restaurant expense was unfavorable year over year by 170 basis points, driven by top-line deleverage, increased delivery, and packaging, partially offset by lower advertising and restaurant maintenance expenses.
Even with the volatile operating environment, Brinker has delivered solid cash flow, generating $130 million of operating cash flow year to date.
After capital expenditures of $37 million, our free cash flow for the first six months totaled nearly $93 million.
As I mentioned last quarter, we first used our cash to invest in the business.
Unit expansion is progressing with six new or relocated restaurants opened year to date.
We also continue to invest in restaurant reimages, technology, and equipment to further enhance our guest experience and allow for better execution as our sales volumes, both on and off-premise grow.
Our second priority is to pay down debt.
So far, during this fiscal year, we have retired over $66 million of revolving credit borrowings, and plan for further meaningful reductions as we progress through the second half of the year.
As I've indicated during prior earnings calls, we are strengthening our balance sheet by deleveraging to below 3.5 times lease-adjusted debt, which we anticipate achieving next fiscal year.
From a total liquidity perspective, we ended the quarter with $64 million of cash and total liquidity of just under $658 million.
While we are not providing specific guidance for the third quarter due to the ongoing operational environment, I do want to offer some perspective on January.
While the first week of January was negatively impacted by the holiday flip of Christmas moving to our third quarter, top-line results for Chile's strengthened as we move through the remaining four weeks of the period.
Underlying this performance is improvement in the net comp sales to a range of negative 5% to negative 6% for the last four weeks combined.
These results obviously included the impact of ongoing COVID-related restrictions, particularly dining room closures in our No.
3 and 4 markets of California and Illinois.
Factoring out these two markets, the rest of the brand during the last four weeks of the January period should record net comp sales of approximately positive 2%, again, clearly indicating the brand's ability to perform in a strong positive sales manner with dining rooms open.
Also supporting the January results is the performance of It's Just Wings.
As you might expect, the brand does well in conjunction with sports, and our ability to market on the delivery platform around major events allowed highly incremental sales and set a number of sales records during the period.
Overall, we are hopeful for an improved operating environment as we move through the quarter with the opportunity to return to recovery level performance we delivered in the early fall.
In March, we start to lap at the initial pandemic outbreak, which we anticipate will create meaningful year-over-year positive net comp sales comparisons.
Looking beyond the short-term volatility caused by the ways of COVID restrictions to the solid long-term strategy being executed by our operators, I'm confident as to what this company can deliver for our shareholders.
Our focus and execution will enable our continued performance as a leader for the Casual-Dining sector for the rest of this fiscal year and the years ahead.
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sees fy earnings per share $3.50 to $3.80 excluding items.
q1 earnings per share $0.34 excluding items.
q1 gaap earnings per share $0.28.
sees fy revenue about $3.75 billion to $3.85 billion.
sees fy total revenues approximately $3.75 billion to $3.85 billion.
sees fy net income per diluted share excluding special items, in range of $3.50 and $3.80.
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I'll begin with a few highlights for the quarter.
Through these uncertain times the employees of American States Water once again delivered solid results.
Our consolidated results for the third quarter were $0.72 per share as compared to adjusted earnings of $0.69 per share for the third quarter of 2019, an increase of $0.03 per share or 4.3%.
The adjusted earnings for the third quarter of 2019 exclude a $0.07 per share retroactive adjustment booked in that quarter for the August 2019 electric general rate case decision for periods prior to the third quarter of 2019.
I'm pleased to report that in July of this year, the Company's Board of Directors approved a 9.8% increase in the quarterly cash dividend from $0.305 per share to $0.335 per share.
This increase is in addition to dividend increases of 10.9% in 2019 and 7.8% in 2018.
Along with providing essential services and assistance to our customers and communities to get through the pandemic, we are working our way through some regulatory processes with the California Public Utilities Commission or CPUC which I'll discuss later on.
In addition, we continue to pursue new military base contracts and our service levels remain high for all three of our subsidiaries.
Now that we're going on month eight of the COVID-19 pandemic, I wanted to reflect on the achievements of our personnel across the United States, both customer facing and those who provide support in a remote working environment.
Since March, our field personnel have worked tirelessly to keep the water, electricity and wastewater services operating smoothly for over 1 million customers, including 11 military bases.
They've embraced more stringent safety protocols as we look to keep our employees and customers healthy, while doing this, we've kept our commitments to strengthen our infrastructure for the short and long-term benefit of our customers.
For the nine months ended September 30, 2020, our water and electric utility segments spend $82.3 million in Company-funded capital expenditures.
On track to spend $105 million to $120 million for the year, barring any scheduling delays resulting from COVID-19.
This would be about 3.5 times our expected annual depreciation expense.
While we hope for a return to normal sooner rather than later, I'm proud of the resiliency that our people have shown.
Let me start with a more detailed look at our third quarter financial results on slide 7.
As Bob mentioned, consolidated earnings for the quarter were $0.72 per share compared to $0.69 per share as adjusted for the same period in 2019.
Earnings at our water segment increased $0.04 per share for the quarter.
There continues to be volatility in the financial markets due at least in part to COVID-19 pandemic.
This volatility resulted in an increase in gains on investments held to fund one of Golden State Water's retirement plan contributing a $0.02 per share increase in the water segment's earnings for the quarter.
The remaining increase in the water segment's earnings for the third quarter of 2020 was due to a higher water gross margins from new water rates partially offset by increase in operating expenses, interest expense and the effective income tax rate as well as lower interest income earned on regulatory assets.
Excluding the $0.07 per share retroactive impact front August 2019 CPUC decisions, our electric segment's earnings for the third quarter was $0.04 per share as compared to $0.03 per share as adjusted for the third quarter of 2019 largely due to an increase in the electric gross margins, resulting from new rates authorized by the CPUC partially offset by increases in legal and other outside service costs.
The final August 2019 decision also approved a recovery of previously incurred incremental tree trimming costs totaling $302,000 which resulted in a reduction in maintenance expense that was recorded in the third quarter of last year.
It was no equivalent item in 2020.
Earnings from our contracted services segment were $0.10 per share for the third quarter of 2020 as compared to $0.12 per share for the same period in 2019.
There was an overall decrease in construction activity resulting from weather delays and slowdowns in permitting for construction projects and government funding for new capital upgrades caused in part by the impact of COVID-19.
The Company expect construction activity to pick up during the fourth quarter relative to the first three quarters barring any further delays due to the weather condition.
This decrease was partially offset by increase in management fee revenue and lower travel related costs.
Water revenues increased $3.5 million during the third quarter of 2020 due to full second -- full second year step increases for 2020 as a result of passing earnings test.
The decrease in electric revenues were largely due to $3.7 million in retroactive revenues recorded in the third quarter of 2019 for periods prior to that.
Contracted services revenue for the quarter decreased to $500,000 for the reasons previously discussed.
The decrease was partially offset by increases in management fee due to the successful resolution of various economic price adjustments.
Looking at slide 9, our water electric supply costs were $32.3 million for the third quarter of 2020 as compared to $31.8 million for the third quarter of 2019.
Any changes in the supply cost as compared to the adopted supply costs are tracked in balancing account for both the water and electric segments.
Total operating expenses excluding supply costs increased $1.5 million versus the third quarter of 2019.
There was an increase in construction costs at our contracted services business, American States Utility Services or ASUS due to higher cost incurred on certain projects as well as increases in depreciation expense and property and other taxes as a result of additions of utility plant and fixed assets at all of our business segments.
There was also a $302,000 reduction to maintenance costs to reflect the CPUC's approval in August of 2019 for recovery of previously incurred tree trimming as previously mentioned.
There was no similar reductions in 2020.
Interest expense, net of interest income and other including investments held in a trust to fund the retirement benefit plan decreased $1.1 million due to higher gain because of the recent market condition.
This was partially offset by lower interest income on regulatory assets and lower interest income earned on certain as ASUS construction projects.
Slide 10 shows the earnings per share bridge, comparing the third quarter of 2020 with the same quarter of 2019.
The slide reflect our year-to-date earnings per share by segments.
Fully diluted earnings for the first nine months of 2020 or $1.79 per share as compared to $1.79 per share as adjusted for the same period of 2019.
The 2019 adjusted earnings exclude a $0.04 per share retroactive impact, book the last year, resulting from the August 2019 electric TRC decision for the full year of 2018, which is shown on a separate line in the table on this slide.
In terms of the Company's liquidity, net cash provided by operating activities for the first nine months of 2020 was $87.8 million as compared to $84.3 million for the same periods in 2019.
The increase was largely due to a $7.2 million refund to the water customers in 2019 related to the 2017, tax law changes.
Partially offset by a decrease in cash flow from higher accounts receivable from utility customers due to the economic impact of COVID-19 and the suspension of service disconnections of customers for non-payment.
Our regulated utilities invested $82.3 million in Company-funded capital projects during the first nine months of 2020, while the utilities capital program has been somewhat affected by COVID-19 resulting in certain project delays.
However, our regulated utility is still trying to spend $105 million and $520 million in Company-funded capital expenditures for the year, further delays due to the pandemic.
As we mentioned in the last quarter, Golden State Water issued unsecured private placement notes totaling $160 million in July and repaid a large portion of its intercompany note issued to AWR parent.
Currently American States Water has a credit facility of $200 million to support water and contracted services operations.
We also put in place a separate three year $35 million revolving credit facility for the electric segment that is not guaranteed by the parent.
At this time, we do not expect American States Water to issue additional equity.
I'd like to provide an update on our recent regulatory activity.
In July, Golden State Water filed a general rate case application for all of its water regions and the general office.
This general rate case will determine new water rates for the years 2022, 2023 and 2024.
Among other things, Golden State Water requested capital budgets in this application of approximately $450.6 million for the three-year rate cycle and another $11.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed.
A decision in the water general rate case is scheduled for the fourth quarter of 2021 with new rates to become effective January 1, 2022.
On August 27, 2020, the CPUC issued a final decision in the first phase of the CPUC's order instituting rule making evaluating the low income payer assistance and affordability objectives contained in the CPUC's 2010 Water Action Plan which also addressed other issues, including matters associated with the continued use of the water revenue adjustment mechanism or RAM by California water utilities.
The final decision also eliminates the modified supply cost balancing account or MCBA which is a full cost balancing account used to track the difference between the adopted and actual water supply costs including the effects of changes in both rates and volume.
Based on the language in the final decision, any general rate case application filed by Golden State Water and the other California water utilities after the August 27, 2020 effective date of the decision may not include a proposal to continue the use of the RAM or MCBA but may instead include a proposal to use a limited price adjustment mechanism called the Monterey style Ram and an incremental supply cost balancing account.
This decision will not have any impact on Golden State Water's RAM or MCBA balances during the current rate cycle, which runs from 2019 through 2021.
In addition, the language in the decision supports Golden State Water's position that it does not apply to its general rate case application filed in July of this year, which will set new rates for the years 2022 through 2024.
At this time, we cannot predict the potential impact of this decision, if any, on the pending water general rate case.
On or prior to October 5, 2020 Golden State Water, three other California water utilities and the California Water Association filed separate applications for rehearing on the decision in the low income proceeding.
As you know there are water utilities in the state that have been under the Monterey-Style RAM and incremental supply cost balancing account since 2008 and they seem to be able to successfully manage the effects of these mechanisms.
While we are disappointed by this PUC decision, we believe we are well positioned to strategize and adapt to the new requirements.
As you'll see from this slide, the weighted average water rate base as adopted by the CPUC has grown from $717 million in 2017 to $916 million in 2020 which is a compound annual growth rate of 8.5%.
The rate base amounts for 2020 do not include the $20.4 million of advice letter projects approved in Golden State Waters last general rate case.
Let's move on to ASUS on slide 17.
ASUS' earnings contribution for the quarter was $0.10 per share versus $0.12 per share in the year prior.
The decrease was mainly due to a reduction in construction activity due to weather delays as well as slowdowns in permitting for construction projects and in government funding for new capital upgrades that has occurred throughout 2020.
Company expects construction activity to be stronger in the fourth quarter relative to the first three quarters barring any further delays due to weather conditions, but because of the previous delays, we now estimate ASUS' 2020 earnings contribution to be at the low end of the $0.46 to $0.50 per share range we have previously provided.
In light of continued uncertainty associated with the effects of COVID-19, we project ASUS to contribute $0.45 to $0.49 per share for 2021.
We are still involved in various stages of the proposal process at a number of military bases considering privatization of their water and wastewater systems.
The US government is expected to release additional bases for bidding over the next several years.
While we are disappointed that ASUS was not awarded with the most recent military base water and wastewater privatization contract, we are confident that we will win a fair share of the future awards.
I would like to turn our attention to dividends outlined on slide 18.
We believe achieving strong and consistent financial results along with providing a growing dividend allows the Company to continue to attract capital to make necessary investments in the utility infrastructure for the communities and military bases that we serve and return value to our shareholders.
American States Water has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 66 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result.
Company's current dividend policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
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q3 earnings per share $0.72.
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As a reminder, before we begin, the Company has a slide deck to accompany the earnings call this quarter.
Because these statements deal with future events, they are subject to various risk and uncertainties and actual results could differ materially from the Company's current expectations.
I'm going to pass it over to Tom to begin.
I'm going to tie my comments to the slide deck and I'm going to start on Slide five, which is the results table and comparative 2020 through -- to 2021.
Our operating revenue for the quarter was up to a $147.7 million from $125.6 million in the first quarter of 2020 and we'll talk about the reasons for that in a moment.
And our net loss decreased from $20.3 million to $3 million, as well as our earnings per share, loss per share rather went from $0.42 loss to a $0.06 loss for the quarter.
Capital investments, I'll point out on this slide, were up very slightly and according to our plan.
And then switching to Slide six, our financial highlights.
So as we mentioned -- as I mentioned a moment ago, the net loss decreased by $17.3 million and that was primarily the result of the adoption of the California General Rate Case late last year.
So we had a couple of different factors associated with that.
The first was obviously, the rate increases associated with that, that added $4 million of revenue.
In addition to that, if you'll recall back in the 2020 first quarter, we did not recognize our balancing mechanisms that's WRAM and the MCBA coupling mechanisms, as well as our pension and healthcare balancing accounts.
And by recognizing them here in the first quarter of 2021 as they were continued and adopted in the rate case.
We're adding $7.6 million of revenue associated with that.
We did have as you'd expect increases in our other operations, depreciation and associated costs and that offset somewhat the revenue increases from the rate case as well as the recognition of the mechanisms.
As we have mentioned at year-end, our AFUDC equity that's the funds used during construction -- the equity funds used during construction is lower and as a result of a lower amount of construction work in progress during 2020, we had a significant capital project associated with the Palos Verdes Peninsula Water Reliability Project and that was adding to our AFUDC equity all year.
So we're expecting to see lower AFUDC equity here in the quarter, it was down about $1 million.
I mentioned is up slightly.
We believe we're on target for capital for the year.
And then two other items that are outside of our general control, but I did want to mention because they are fairly significant in the quarter.
The market value of certain of our retirement plan assets was in -- so the market value increased $0.3 million as compared to a loss of $4.7 million in the first quarter of 2020.
So kind of a return to normal for that -- for that item [Technical Issues] now first quarter of 2020.
And then our unbilled revenue very similar, we had a $1,000 loss on unbilled revenue, very small and probably more typical as compared to a negative $3.7 million in 2020 which was a sort of an atypical drop in that unbilled revenue accruals.
And so those two items I'd say are a little bit more normal compared to the abnormal amounts that were in the last year.
Flipping to Slide seven, I won't talk in detail about this, but this is our waterfall earnings per share bridge chart that covers those same topics.
Next on Slide eight, I'll just make a brief comment about the tax rate, I know some of the analysts look at the effective tax rate of the company.
Just wanted to remind everyone that during 2021 we are refunding to customers in rates, $19 million of excess deferreds associated with the change in tax rate for the Tax Cuts and Jobs Act.
And that drives down the effective income tax rate to 6%.
So there is a -- the revenue is down and the tax rate is down and so we aren't making any money on that, but just when you see the headline tax rate it's very low.
The second thing, there was a big benefit at the end of 2020 related to our mains and services repairs investments and the state tax deduction that we're allowed to take there.
And just to update you on the estimates, in 2020 we had $160 million of deductible mains and services repairs investments, and our current estimate for 2021 is that we will have $60 million that qualifies for that tax treatment, and so that's going to be a factor that's going to be a little bit lower for the year 2021.
Capital spending is still anticipated to be between $270 million to $300 million.
That hasn't changed, but it's just the timing of the close of certain projects that is going to change that tax qualification.
So the first one is our cost of capital filing.
The cost of capital, if you will remember is filed once every three years.
Our last one was in 2017, because we had a one-year extension.
We will be filing that cost of capital application on Monday, May 3rd, and in our application that we will be filing with the Commission we're requesting a return on equity of 10.35%, that is up from the currently approved 9.2% cost of equity.
We also will be taken advantage of refinancings, and new debt issuances.
So that our embedded cost of debt is going down a 128 basis points from the previously authorized 5.51% cost of debt, to a new cost of debt of 4.23%.
Coupling those two together the increase in cost of equity and the decreased cost of debt means that our rate of return -- authorized rate of return that we are requesting would go up just slightly from 7.48% to 7.5%, and what that really means from a customer perspective is that the median bill increase should be about $0.34 a month.
So, really not a big change on the customer's bill at all.
Now we do recall that though -- the cost of capital filing will be reviewed by the Commission, and would be approved for -- to be effective in January 2022.
I might also point out that our capital structure, which is about 53% equity and 47% debt will remain unchanged in this particular application.
Not only are we refinancing existing debt with new lower-cost debt, but because we've been investing so much capital, and have been obtaining new debt at a lower cost, that is really what's helping drive our overall cost of debt down, which is a benefit to our customers.
The second item I'll talk about just briefly is our our three-year General Rate Case filing that will be filed in -- on July 1st, actually July 3rd, because the 1st is a weekend.
We are working on that right now, and we will provide more information to you all when we get to our next quarterly conference call.
I want to provide a quick update on our continued efforts in responding to the COVID-19 pandemic.
First and foremost, let me start off by saying we have continued to see the incremental benefits of people being vaccinated in all four states that we operate in.
Currently over one-third of our employees have been vaccinated, which is great news.
The vaccine rollout was a little bumpy at first, but we've seen those bumps kind of smooth out, and we continue to see daily increases in a number of employees that we've seen vaccinated, as well as we have seen a steep decline in the number of cases of COVID found within the Cal Water family or from our employees.
We only had a -- five cases in the first quarter that we've seen where employees have become sick, and then recovered.
To date we've had no -- we've sustained no loss of the life with Cal Water employees for which we're very grateful for.
In terms of supporting our customers, we have maintained a suspension of all collection activities in all four states.
You're starting to see that lifted in different states around the U.S., in the four states that we operate in our suspension of collection activities is still in full force.
We have seen and continue to see an increase in customer account aging from suspension of collection activities, that bills currently over 90 are about $11.6 million, and we have adjusted our bad debt reserve, an additional $0.5 million from $5.2 million to $5.7 million, and I'll talk more about some creative things we're doing working with the Commission a little bit later on collection activities.
The incremental expenses associated with our COVID response was approximately $300,000.
That gets recorded in a memo account for a potential recovery at later dates in Hawaii and California.
Interesting to note that water sales have been a 105% of adopted, really driven by the fact the residential demand has been higher and that's been offset by lower business and industrial use.
And so as we start to see business use just kind of pick back up, and things get back to normal, we'll expect to see that the business and industrial sales pick up.
Our liquidity has remained strong.
We had $84.4 million of cash, and additional capacity of about $115 million on the lines of credit, subject to some borrowing conditions.
So I think we weathered the worst of the COVID storm, and we're starting to come out of it.
California, which is the largest entity that we operate in, is scheduled to be fully opened back up for business here on June 15th.
Going on to the next slide, I want to just take a moment to talk about our recently published ESG report.
Our report was published a few weeks ago, that aligns with SASB and referencing GRI is now available.
There is a link in the deck that will take you to the report.
Additionally, for those of you that get the hard copy of the Annual Report and proxy, there is a summary ESG report that's included in our annual report.
A lot of hard work went into producing our first ESG report.
We're very, very proud of it, and we're very proud of the work we're doing on the ESG frontier.
And I look forward to reporting more on this as we work on our ESG-related projects throughout 2021.
I'm going to hand it back over to Paul to give you a quick update on acquisitions.
The business development effort at Cal Water has been very active, and very successful.
You will recall that last year we closed upon two deals.
That was the Rainier View Water System in Washington and the Kahao system -- I'm sorry, the Kalaeloa system in Hawaii or you can see on Slide 12, we have six other announced acquisitions that we are working on.
The first one, the Kapalua Water and Wastewater System, we actually expect to close that here within the next few days.
It's very exciting to be adding another system to the Cal Water, or in this case the Hawaii Water family.
And the other items listed on this list The Preserve at Millerton, Animas Valley, Keahou, Skylonda, Strohs, you can see we have activity in all of our operating states, and we are working to get all of those closed as well.
So they are announced -- a number of announced systems.
A number of other systems still in the pipeline.
It is an exciting time for acquisitions with our company.
And with that, Marty, I will give it back to you.
Actually it will go over to Tom.
Yup, I am going to grab it.
Tom will take it to the next slide.
So we're on Slide 13, and this is our traditional graph of capital investment.
Last quarter, we added a line for depreciation.
So you can see the relationship between the capex that we're making and the depreciation that occurs every year in our systems.
And the point there being that we've been averaging about three times our depreciation accrual every year for the last five years.
And so this chart, and projection only goes through system there are of $285 million is the midpoint between our window of $270 million to $300 million of capex during the year, and we --- when we have our second quarter call, and we release the details of our General Rate Case in California, I'll be updating this slide.
So you'll see the years 2022 through 2024 on here as well.
Flipping to Slide 14.
This is our rate base slide and similar comment here, which is that we will project rate base out from 2023 through 2025 on the basis of the rate case filing, and you'll see that in the second quarter slide decks.
So not too much new on the rate base estimate on Slide 14 right now.
Just a couple of things ticked as we close out our call and get ready for Q&A.
First and foremost, Q1's our slowest quarter.
It's always nice to get it done.
Administratively, it's a very heavy quarter because we have our year-end audit, get the annual report done, and then this year, we got the ESG report done.
That takes us us into a very, very busy Q2 administratively with the filing of our cost of capital proceeding that Paul talked about, where we're requesting a slight increase as well as filing our 2021 General Rate Case.
And our 2021 General Rate Case is voluminous, there's tens of thousands of pages that gets filed here with the commission this quarter, and a lot of effort go into pull in that rate case off.
So we look forward to getting that on file and moving forward and as Tom said we'll update everyone during our second quarter earnings call on where our request came in at for the 2021 General Rate Case.
Additionally, and this is more kind of late breaking news, some of you may have seen in the press, the last 24 hours to 48 hours, a few parts of the state of California have declared drought emergencies.
In particular Governor Gavin Newsom in the state of California declared a drought emergency for Sonoma and Mendocino counties, in Northern California.
Given that the very mild winter season that we had this year coupled with the fact that our snow pack as of earlier this week was only 25% of normal, we fully expect to see more drought declarations at the local level happen throughout 2021.
For those of you that know we spend a -- remember, we spend a lot of time on our emergency preparedness and emergency planning, likewise as part of the rate case process, we are updating our water supply master plans, which also include drought contingency master plans.
What does that mean at a 25,000 foot level, the reservoirs in California, currently, they're in decent shape, I wouldn't say they're in great shape.
But they're in decent shape going into the summer months.
The real issue from a drought perspective is what is winter going to look like this year and if it's a light winter again what happens in 2022?
So that'll be something to watch as we move into what is potentially a more disruptive fire season and a more disruptive public safety power shut down season given the fact it's been such a dry winter for us.
As we think about fire season and PSPS season as we point out in our ESG report despite the many challenges of operating in a COVID environment over 97% of our employees have completed their emergency response training this year and our efforts are well under way to be prepared for early fire season and the various PSPS events that could happen throughout the state.
As you may recall, last year despite a number of PSPS events throughout the state that went on, in some cases for two, three, four days, none of our customers went without water due to successful planing by the company -- contingency planning and the ability to move resources up and down the state to make sure we kept our systems pressurized and our pumps running.
As we get into kind of hopefully what will be the final throes here of COVID-19 and we are seeing things improve.
And as I mentioned earlier, June 15th is the official date declared by the California Governor that the state will officially reopen back to some amount of normal, then that's to be defined.
We continue to work with the commission on creative solutions for our customers that have been impacted by COVID.
In particular, as part of the low income OIR Phase-II we did propose a program for wage management.
Similar to what the electric utilities got approved recently and as part of our proposal, we propose that people who have past-due balances due to COVID as long as they keep paying their water bill that we would give them a credit equal to one-twelfth of the outstanding balance, provided if they keep making their payments until they are paid in full and current.
And then that credit that gets issued every month would go into a balancing account for recovery at a later date.
This program for the water industry has not been approved yet, but it has been approved for the electric industry.
So we're waiting to see what the commission does with that.
Obviously, we'd like to see those past-due balances get paid down as we get back to a more normal operating environment.
Having said all that, it is very nice to get Q1 done.
It's very nice to see the light, hopefully, at the end of the tunnel with COVID and seen employees get vaccinated and it's starting to get back to what is a normal environment.
We do not have our of employees back in the office yet, 90% of our employees have been at work every day, because they are field employees.
Our corporate employees are the ones at our corporate offices have been the ones that have been working more remotely and we are in the process of finalizing our back-to-work plans and we'll continue to monitor the local jurisdictional requirements to bring people back to work.
So that can vary kind of county by county in the state of California.
But our plans are developed and we're ready to roll, once we get the green light to bring people back to work.
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chevron q4 earnings per share $2.63.
q4 adjusted earnings per share $2.56.
q4 earnings per share $2.63.
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pb.com and by clicking on Investor Relations.
Additionally, we have provided slides that summarize many of the points we will discuss during the call.
These slides can also be found on our Investor Relations website.
Let me start by saying how delighted I am that Ana is joining the team as our Chief Financial Officer.
Ana held several executive positions at GE Capital; most recently been President and CEO of GE Capital's Global Legacy Solutions and prior to that, the Chief Operating Officer and CFO of that business.
Ana brings with her strong financial and operational experience and will fit into the PB culture very well.
No one could have predicted how the world changed in 2020, but I'm very proud of how our team was prepared and managed through the challenges.
Their efforts and hard work show in the progress we made in our business throughout the year.
If I had to choose one word to sum up our employees in 2020, it will be determined.
That is exactly what our team personifies.
The fourth quarter was a remarkable ending to an extraordinary year.
Revenue at constant currency grew 23%.
To the best of our knowledge, this is the highest modern-day organic growth rate on record for Pitney Bowes.
And our shipping-related revenues comprised 54% of our total revenue.
For the quarter, Global Ecommerce grew 60%, with profit improving from prior year and prior quarters, resulting in positive EBITDA.
Presort turned in flat revenue performance, which is a significant improvement from prior quarters and better than the market.
And SendTech turned in strong performance, growing both revenue and profit over prior year.
This was powered by strong equipment sales, double-digit growth in our SaaS-based shipping offerings and a solid performance in our services business.
SendTech is a business that many considered a melting ice cube.
However, the investments we have made in our digital channel and products, while also expanding our shipping offerings, have given new life to this business.
In all, these accomplishments would have been hard to imagine a few short years ago.
But this is what a determined and focused team can do.
Looking at the year from a broader lens, when the pandemic hit, we had two objectives.
First, we needed to focus on the health and well-being of our employees and ensuring the company remains strong financially during this unpredictable time.
Secondly, we wanted to come out of this terrible moment a stronger company.
It is often true that moments of economic dislocation create opportunities, and our team was determined to leverage the investments we have made over the last several years to capture those opportunities.
We pivoted to change our work protocols and practices.
We provided our employees the necessary PPE to be safe, as they did their essential work.
We also took the important actions to fortify our balance sheet by refinancing our debt, and we made prudent decisions to ensure we had a solid liquidity position.
It was apparent early on that the company's financial position was solid and we turned to coming out of this pandemic stronger, which we are well on our way of achieving.
From an annual perspective, Global Ecommerce turned in $1.6 billion in revenue, growing at a record rate of just over 40%.
This business won new customers and achieved scale much earlier than we had planned.
Simultaneously, we accelerated our planned network build out by several years.
This certainly wasn't always smooth sailing, but the business is in a much better place than it was 12 months ago.
While e-commerce's astonishing growth understandably gets a lot of attention, the transformation of our SendTech business tells an equally remarkable story.
Importantly, the business performed well relative to the mail market.
But even more enduring, business has moved to a natural adjacency in shipping.
This is a new large growth area, which, along with the ongoing transformation of our financial services business and a meaningful contribution from our Global Services group, leverages our core strengths.
Epitomizing the transformation of SendTech is the growth of shipping revenue, which is now a meaningful offset to our decline in mail business.
Also notable, U.S. shipments of our low-end and middle-market devices grew 13% for the year.
These multipurpose devices provide new value to clients as compared to our previous generation single-purpose mailing machines.
I'm also particularly pleased with our cash performance in the fourth quarter in the year.
The increase in our cash is a result of disciplined execution and a great team effort.
It's a fairly remarkable accomplishment to meaningfully increase operating cash flow in the middle of a pandemic and one of the most significant economic associations since the depression.
All that being said, transformations are always messy and never a straight line, and transformations in the middle of a pandemic are particularly complicated.
The unprecedented increase in demand in the e-commerce market created cost inflation, particularly in labor and transportation costs in the fourth quarter, which had a deleterious impact on our profit in e-commerce.
This quarter tested capacity throughout [Technical Issues].
Admittedly, it was a challenge.
In order to optimize our service, we more than doubled our labor and set up three new facilities to help meet the demand.
While these facilities, along with the newer flagship sites we opened late last year, works through typical growing pain, they have also become a critical part of our overall network, handling over one-quarter of our total domestic parcels in 2020.
In addition, our use and reliance of third-party transportation this peak, both in cost and service, was challenged, which was in line with the broader industry trends.
To mitigate this, we proactively upgraded packages at a cost to try to maintain service.
Going forward, we see opportunity to balance our use of third-party transportation and our own PB fleet assets, which performed above expectations this peak.
We will continue to invest to become more efficient across each of these areas.
As I've said in the past, it's now within our four walls to manage the cost structure and generate efficiencies.
I'm often asked about the anatomy of transformations and I think it's worth repeating.
Transformations have a certain arc to them; quick wins, sustained investments, revenue growth and then profitable revenue growth.
The most highly correlated factors for successful transformations are revenue growth and employee engagement.
We have achieved revenue growth the last several years, and our employee engagement in the middle of pandemic reached new highs.
While there continues to be tremendous uncertainty in our economy and how the pandemic will play out, we are poised to enter the last stage of successful transformations, profitable revenue growth.
I am proud of what the team has accomplished.
But we all recognize there is more work to do.
I'm excited about this next chapter of our transformation.
We are on the precipice of accomplishing what very few companies have ever done.
Let me start by providing an overview of our full-year results, followed by the details of our fourth quarter.
For the full year, revenue was $3.6 billion, which was growth of 11% over prior year and is our fourth consecutive year of constant currency revenue growth.
Global Ecommerce grew 41%, Presort Services declined less than 2% and SendTech declined 7%.
Adjusted earnings per share was $0.30 and GAAP earnings per share was a loss of $1.06.
As a reminder, GAAP earnings per share includes a non-cash goodwill impairment charge that we recorded in the first quarter.
GAAP cash from operations was $298 million and free cash flow was $279 million.
Free cash flow increased $91 million over prior year.
Through the year, there were a few noteworthy items that principally benefited free cash flow.
First, our focus on collections resulted in a strong improvement in our DSO.
We also saw a higher level of Presort and PB Bank customer deposits, in part due to initiatives to support our clients.
Second, finance receivables declined at a greater rate, largely in the second quarter as a result of the lower placements of our SendTech equipment due to the pandemic.
You can see the trend starting to improve as our SendTech business built momentum through the second half of 2020 as businesses began to reopen.
Early on when the pandemic surfaced, we made the prudent decision to reprioritize investments and reduce spending, given the level of uncertainty in the market at that time.
There were other puts and takes through the year as we typically experience, but these areas are the key drivers to understanding the strong free cash flow we generated for the year.
Looking at our balance sheet and capital allocation, we ended the year with $940 million in cash and short-term investments.
For the year, we used free cash flow to return $34 million to our shareholders in the form of dividends.
Our capital expenditures totaled $105 million and reflect investments made throughout the year in new and existing facilities, our technology and our products.
As part of our ongoing transformation, we also made $20 million in restructuring payments.
Within our Pitney Bowes Bank, customer deposits grew to $617 million and Wheeler Financial funded $16 million in new deals for the year.
From a debt perspective, we ended the year with $102.6 billion in total debt, which is a reduction of $175 million from prior year.
In terms of our net debt, when you take our cash and short-term investments and finance receivables into consideration, our implied net debt position on an operating company basis was about $550 million at year-end.
Turning to the details of the fourth quarter.
We delivered $1 billion in revenue, which represents growth of 23%.
Global Ecommerce grew 60%, and both Presort and SendTech were flat to prior year.
For the quarter, adjusted earnings per share was $0.13 and GAAP earnings per share was $0.11.
EPS for the quarter reflects a $0.03 tax benefit, primarily related to deferred tax balances in certain international tax jurisdictions.
GAAP cash from operations was $111 million in the quarter and free cash flow was $97 million.
Free cash flow grew $16 million over prior year, predominantly driven by the timing of working capital.
During the quarter, we used free cash flow to reduce debt $31 million, invest $24 million in capital expenditures and pay $9 million in dividends.
Turning to the P&L, starting with revenue performance as compared to prior year.
Business services grew 43% and equipment sales grew 15%.
We had declines in support services of 4% and rentals of 8%, while financing and supplies both declined approximately 10%.
Gross profit was $311 million and gross margin was 30%.
This is a decline of about nine points from prior year, which largely reflects the shifting mix of our portfolio and higher cost of service, driven by the influx of parcel demand in Global Ecommerce.
SG&A was $242 million or just under 24% of revenue, which is a six-point improvement from prior year.
Within SG&A, unallocated corporate expenses were $54 million, which were $2.5 million higher than prior year.
It is important to note that full-year unallocated corporate expenses were $200 million, which were $11 million lower than prior year, primarily due to lower employee-related expenses.
R&D expense was $9.5 million or about 1% of revenue, which was about half-point improvement from prior year.
EBIT was $62 million and EBIT margin was 6%.
Compared to prior year, EBIT declined $3 million and EBIT margin declined about 2%, largely driven by the lower gross profit.
Interest expense, including financing interest expense, was $38 million, which was relatively flat to prior year.
The provision for taxes on adjusted earnings was less than $1 million and our tax rate for the quarter was 1%, bringing our annual tax rate to 13%.
Average diluted weighted shares outstanding at the end of the quarter were about $177 million.
Let me now discuss the performance of each of our business segments this quarter.
Within Global Ecommerce, revenue was $518 million, which was growth of 60% over prior year and the first time we achieved over $500 million in quarterly revenue.
Compared to prior year, volumes grew by 50% or more across each of our lines of business.
Domestic parcel volumes grew 76% to just under 65 million parcels.
Digital volumes grew 50%, and cross-border volumes grew 76%.
Looking at EBIT, we recorded a loss of $15 million.
This was an improvement of $3 million from prior year and $5 million from prior quarter.
EBIT margin also improved three points from prior year and two points from prior quarter.
EBITDA was $3 million, which was an improvement from prior year and prior quarters.
Revenue growth over prior year benefited from the significant demand.
This was offset by higher cost, driven partly by the market dynamics, which we are seeing a significant higher transportation spot market and higher labor costs.
The increase in peak demand also put pressure on our productivity.
We will continue to invest across our network to drive efficiencies, reduce costs and improve service for our clients, which will come in part from automation across our network.
We are addressing our labor structure, shifting more from temporary labor to permanent, which will yield a more productive workforce.
We are also looking at our transportation network and opportunities where it makes sense for us to become less reliant on the spot market, along with becoming more efficient at capturing deeper postal discounts.
Additionally, similar to the market, we will capture a surcharge in 2021, along with our annual general rate increase.
Within Presort Services, revenue was $135 million, which is flat to prior year.
Overall average daily volumes declined 2%.
First Class Mail volumes declined 3%, while Marketing Mail volumes grew 2%.
Marketing Mail Flats and Bound Printed Matter volumes grew 26%.
As we have discussed in the past, this is still a relatively small part of the portfolio, but representing new revenue and profit stream for us.
EBIT was $13 million and EBIT margin was 10%.
EBITDA was $21 million and EBITDA margin was 16%.
EBIT and EBITDA margins were relatively in line with prior quarters and declined from prior year, largely due to higher medical claims and increased labor costs as well as COVID-related direct costs for the health and safety of our facility workers.
Turning to our SendTech segment.
Revenue was $376 million, which was flat to prior year, excluding the impact of currency, and represents growth of 1% on a reported basis.
Marc talked about the investments we have made in our SendTech business around our digital capabilities, including our channel and products.
We are bringing new value to our clients through our multi-purpose devices and we are leveraging our digital channel to attract new clients to our offerings.
In the fourth quarter, SendTech's shipping-related revenues grew nearly 30% to $35 million and our SaaS-based SendPro online offering grew its paid subscriptions by over 70%.
Shipping is a high-margin stream that contributes about 10% to SendTech's overall revenue today, with great opportunity for future growth still in front of us.
The impact of shipping is also resonating in our financing portfolio, as those clients through their shipping volumes by 65% over prior year.
Equipment sales grew 15% over prior year, driven by strong placements of our SendPro C and MailStation multipurpose products.
Our value proposition continues to resonate with our clients.
Our SendPro MailStation is a replacement option for lower-volume mailers and ideal for remote setups or branch offices of larger organizations.
Since launching in April, we have shipped approximately 20,000 MailStation units.
The growth in equipment sales is a significant improvement from prior quarters, particularly against the decline of 32% we saw in the second quarter, at the height of the COVID lock-downs.
Supplies declined 10%, which is an improvement from prior quarters on increased usage and demand.
In the U.S., 70% of our supplies transactions were conducted online in the fourth quarter, which is up nine points from the same period last year.
Support services declined 4%, which is also an improvement from recent quarters.
When combined, rentals and financing revenues declined 9% in the quarter.
We turned in strong EBIT performance of $118 million, which represents growth of $5 million over prior year.
EBIT margin was 31%, which improved one point over prior year and is within the range projected in our long-term model.
EBITDA was $126 million and EBITDA margin was 34%, both improving over prior year.
The quality of our financing portfolio remains healthy, and delinquency rates are trending down from the initial small uptick that we saw earlier in the year as a result of the pandemic.
We continually monitor our delinquency rates and take a very disciplined approach to managing our credit risk.
Let me close with an update on 2021.
Given the ongoing uncertainty in the market around the pandemic and uncertain macroeconomic conditions, we will speak more broadly to our 2021 outlook.
We expect annual revenue to grow over prior year in the low-to-mid single digit range, making 2021 the fifth consecutive year of constant currency growth.
We also expect adjusted earnings per share to grow over prior year.
Within our segments, we expect Global Ecommerce revenue to grow in the low double-digit range and we also expect this business to demonstrate significant profit improvement.
We expect the momentum we saw in the second half of 2020 for SendTech, particularly around our shipping capabilities and new multipurpose devices, to continue through 2021 and help partially offset the decline in recurring related revenues.
We also expect the improvement in volume trends we saw in Presort in the second half of 2020 to continue through 2021.
There are also a few headwinds to be aware of on a year-to-year basis that will partly offset the overall business unit improvements.
In 2020, we recorded RIV insurance proceeds.
In 2021, we expect higher employee-related cost as it relates to variable compensation.
Additionally, we expect our annual tax rate on adjusted earnings to be in the 23% to 27% range, which is higher than where we ended 2020.
We expect lower free cash flow in 2021, primarily due to the specific items I discussed earlier in my comments that benefited 2020 and are not expected to continue at the same level in 2021.
Looking at the timing through the year.
Our portfolio continues to shift to markets that are growing, particularly around shipping.
As a result, the fourth quarter will continue to be our largest quarter for the year.
Specifically in the first quarter, we expect revenue to grow over prior year in the high single-digit to low double-digit range and earnings per share to be relatively in line with prior year.
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q4 adjusted earnings per share $0.13.
q4 gaap earnings per share $0.11.
expects 2021 revenue to grow over prior year in low-to-mid single digit range.
expects 2021 adjusted earnings per share to grow over prior year.
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I'm Monica Vinay, Vice President of Investor Relations and Treasurer at Myers Industries.
If you've not yet received a copy of the release, you can access it on our website at www.
myersindustries.com, under the Investor Relations tab.
These comments are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectations and involve risks, uncertainties and other factors, which may cause results to differ materially from those expressed or implied in these statements.
Further information concerning these risks, uncertainties and other factors is set forth in the company's periodic SEC filings and may be found in the company's 10-K and 10-Q filings.
I'd like to start the call by expressing my sincere appreciation to our entire Myers team for all their efforts in 2020.
I'm especially proud of how well they faced the challenges that were presented throughout the year due to the COVID-19 pandemic.
As a result of the resilience and hard work, we're able to continue to produce and deliver essential products to our customers.
We delivered strong bottom-line results for the year, increasing adjusted earnings per share at 9% from $0.78 to $0.85.
Sonal brings a proven track record of providing strong leadership in transformational environments along with considerable experience in capital markets, mergers and acquisitions and investor relations.
I look forward to partnering with her as we continue to drive and execute our One Myers strategy.
He did a great job helping us lay a strong foundation and we will continue to benefit from Dan's contributions as he returns to his role as Vice President and Corporate Controller.
Before I discuss our performance, I'd like to review with you our long-term vision, the strategic pillars that we have in place to drive its execution, and the progress we've made against those pillars.
I introduced this strategy and vision in our October 2020 earnings call, and we are successfully executing against it.
To review, we're currently in Horizon-1, which consist of three elements: self-help, organic growth, and bolt-on M&A.
Self-help focuses on purchasing, pricing and SG&A optimization, and you're going to hear about a number of strategic steps we've recently implemented along these lines in our discussion today.
In terms of organic growth, we are strengthening our commercial capabilities, which includes going to market as one company, One Myers.
Our third element, bolt-on M&A, is primarily focused on growing our plastics businesses by acquiring companies that build out our three technology platforms within the Material Handling segment.
We will continue to focus on companies that manufacture durable, sustainable and/or reusable end products.
Once the foundational drivers of Horizon-1 are in place, we will move to Horizon-2, where we will execute larger enterprise level acquisition.
Our long-term vision culminates with Horizon-3, which is focused on growing the company globally.
Our long-term vision is ambitious, but it's well-grounded and focused on building out the technology in markets that we know well.
Granted, it's in their early innings, but we are making solid progress.
The first pillar focuses on organic growth and addresses four critical areas: sales and commercial excellence, innovation and new product development, sustainability and eCommerce.
Our second pillar, strategic M&A, is geared around bolt-on M&A opportunities that build out our Plastics platforms.
You've already seen us executing one exciting acquisition in Elkhart Plastics during the fourth quarter, and our pipeline of opportunities continues to grow.
Core to this effort is our integration playbook that will ensure a world-class approach to acquisition integration.
The third pillar, operational excellence, continues the work we've done around continuous improvement, while also building our capabilities in what we call self-help, doing a world-class job in pricing, in purchasing and in internal integration, which is the process of transforming into a single company, our One Myers approach.
As a part of this journey, we will also optimize SG&A, redeploying our dollars into investments, in sales, engineering and manufacturing resources.
The final pillar is the heart of our company, our people.
We are on our way to building a high-performance culture, focused on developing our employees and promoting from within, having a culture that's focused on employee's safety, and having an inclusive work environment in a culture of servant leadership.
We continue to build out our values, focusing on integrity, customer focus, optimism, all with a can-do attitude.
Our transformation opportunities through our culture are very exciting to me.
In the organic growth pillar, we made significant progress in the second half of 2020, in particular in the area of sales and commercial excellence in eCommerce.
Our Vice President of Sales and Commercial Excellence, Jim Gurnee, launched our new commercial structure that standardized and strengthened our focus in sales, marketing and product management.
These elements will become critical parts of how we run our business.
Jim also launched a new sales training curriculum focused on growth.
This program will help our team improve their ability in cross-selling and in growing the new One Myers approach.
One of the more meaningful parts of today's discussion is the new and more aggressive approach Myers Industries is taking to eCommerce.
We believe that eCommerce will be a compelling channel for the future and we believe that Myers is well suited to capitalize on this trend.
Just last year, in 2020, eCommerce sales grew more than 30% from our 2019 base.
We achieved this growth with what was largely a skunk-works type project.
In order to turbocharge eCommerce at Myers, we've now stood up an independent, focused organization to spearhead this channel in the market.
E-commerce business will be led by Chad Collins, who was previously the President of our Akro-Mils and Jamco business units.
Chad also helped develop our original relationship with Amazon for that business.
Sales in the eCommerce channel for 2020 approached 5% of our total revenue.
Our goal is to double that by the end of 2023.
This is an ambitious target, but one that we believe is attainable.
As I noted earlier, we are well under way with our strategic M&A pillar, having strengthened our portfolio with the acquisition of Elkhart Plastics in November.
As a bolt-on acquisition within rotational molding, Elkhart fits perfectly into our strategy and our developing culture.
The integration of Elkhart has gone smoothly.
It has been instrumental to help us further advance our integration playbook and our deal flow.
We continue to build out a healthy funnel of potential acquisitions.
Next, I'd like to talk about our accomplishments in the third pillar, operational excellence.
Last month we announced that we consolidated our Material Handling businesses into three distinct technology platforms: injection molding, rotational molding and blow molding.
We believe that we are unique in having strength in all three of these core molding technologies.
We strengthened our injection molding capabilities by combining Akro-Mils, Jamco and Buckhorn into one collective team.
We've done the same in rotational molding by merging Ameri-Kart with our recent acquisition Elkhart Plastics.
Our third technology platform, blow molding, is currently comprised of our Scepter business.
This platform has tremendous opportunity for both organic and inorganic growth.
By combining Akro-Mils, Jamco and Buckhorn into a single platform, and by combining Ameri-Kart and Elkhart Plastics into a single platform, we will be able to streamline our SG&A investments in overhead and redeploy these dollars into sales, engineering and manufacturing.
As larger units with more scale and reach, these platforms will be more robust and we'll be able to deliver more innovation and more value for our customers.
We are excited about this change in approach, and believe it moves us forward in Horizon-1, enabling growth while also managing costs.
One last piece I'll mention on pillar three is that we consolidated our purchasing function and created a single centralized purchasing team across the company.
This new approach allows us to aggregate our purchases and become an easier company to do business with.
Longer term, this should help us negotiating more secure supply position and a more competitive cost position.
Moving to the last of our four pillars.
In order to execute and achieve breakthrough performance, we need to have a high performing culture.
One of our noteworthy achievements this year is goal alignment.
In order to ensure that we are collectively focus on achieving companywide success and fully executing our One Myers strategy, we replaced multiple legacy bonus plans with a single plan, centered on one performance metric: adjusted EBITDA.
We believe this new one team approach will drive alignment, unity and will help us deliver solid results in the future.
We also added talent in a number of leadership positions in our business.
Most recently, on Tuesday, we announced the addition of Paul Johnson to lead our Distribution segment.
Paul brings 30 years of leadership in the automotive and auto aftermarket industry, which includes the recent role as the President of International Brake Industries, and prior leadership positions with Federal-Mogul and General Motors.
I believe Paul is the right leader to build, grow and take this business forward.
Chris did an excellent job of leading the recent transformation of the Distribution segment, which led to sales growth and improved profitability.
I'd like to wish Chris well, as he pursues the next chapter of his career and to returning back to his roots in healthcare.
Finally, two dynamic leaders with significant transformation in growth experience joined our Board in February: Yvette Bright and Jeff Kramer.
I've already had a chance to see both in action this quarter and look forward to their ongoing counsel and leadership.
As you can see, we've made a lot of good progress against our strategic initiatives.
We still have a lot of work to do, but I'm pleased with what we've been able to accomplish in a short time.
Now turning to our fourth quarter performance, which starts on Slide 6.
I'm pleased with our results for the fourth quarter, all things considered.
In spite of several manufacturing plants being impacted by the COVID surge in mid-November and December, we're still able to finish the quarter with sales up 8% on an organic basis and 18%, including contributions from Elkhart acquisition.
Top line organic growth was driven by continued momentum in the RV auto aftermarket and consumer end markets.
We also saw demand improvement in our industrial and automotive markets, which gives me confidence that an economic recovery post-pandemic is on the horizon.
During the quarter, we experienced rising raw material costs and an unfavorable sales mix, which impacted our gross margin.
The raw material increases that began toward the end of 2020 has continued and accelerated into 2021; specifically, we have seen significant increases in resin prices as a result of tightening supply on the U.S. Gulf Coast.
In response, we announced an 8% price increase across the broad portfolio of our products, primarily in the Material Handling segment, which was effective March 1, 2021.
Please note, we will continue to be vigilant about managing our pricing actions throughout the year to offset these unprecedented cost increases.
In addition to costs being a headwind, the recent freeze on the Gulf Coast has had a significant impact on the short-term supply of polyethylene and polypropylene.
Certain grades of resin continue to be tight and we are working closely with our suppliers to secure materials to ensure that we can continue to meet the needs of our valued customers.
As we enter 2021, we have solid top line momentum, balance with near term headwinds I just spoke to.
While the majority of our top line growth will come from the Elkhart acquisition, both volume growth and pricing will also contribute.
We expect organic sales growth across most of our end markets as a result of the continuation of the demand trends in select end markets and our enhanced focus on our sales capability and eCommerce.
Sonal will provide more detail regarding our annual outlook, which includes both sales and earnings per share guidance.
We are rapidly driving significant change in our organization, in our capabilities to ensure that we execute our Horizon-1 of our long-term strategy and create and deliver long-term shareholder value.
Let me begin by saying I'm delighted to be joining Myers at this inflection point in the company's history, and I look forward to working with the team to drive and execute our long-term strategy.
Turning to fourth quarter results on Slide 7.
Net sales were up $21 million, an increase of 18%.
On an organic basis, net sales increased 8%, excluding the impact of the Elkhart acquisition.
Increased sales in both Material Handling and Distribution segments contributed to growth.
Adjusted gross profit was up $1.2 million while gross margin decreased from 33.6% in the prior year to 29.4% in the quarter.
Margin was negatively impacted by an unfavorable price-to-cost relationship, repairs and maintenance, employee benefit cost, and an unfavorable product mix.
The addition of Elkhart benefited profit but impacted gross margin unfavorably due to product mix sold.
As a reminder, we are targeting $4 million to $6 million in annual cost synergies over the course of the upcoming two years.
Adjusted operating income decreased $700,000.
The increase in gross profit was more than offset by higher SG&A expenses mostly due to the addition of Elkhart.
Adjusted EBITDA was $11.3 million, a decline of $1.6 million compared to the prior year.
Adjusted EBITDA margin was 8.2%.
Lastly, adjusted earnings per share was $0.11 versus $0.12 in the prior year.
Turning now to Slide 8 for an overview of segment profit performance in the quarter.
Beginning with Material Handling, net sales increased 26% or 10% on an organic basis.
Excluding Elkhart, sales in the Food and Beverage and Vehicle markets were up double digits, driven by increased sales in feed boxes and in the RV, marine and automotive end markets.
Organic sales in the consumer market were up high single-digit due to fuel container sales while the industrial market was flat.
Material Handling adjusted operating income was essentially flat at $9.1 million, as the impact of higher sales was offset by unfavorable price-to-cost relationship, repairs and maintenance, employee benefit cost, and an unfavorable product mix.
In the Distribution segment, sales increased 4%, driven by increased sales of equipment and consumables, partially offset by lower sales of tire repair products and advance traffic marking tapes.
Distribution's adjusted operating income increased 13% to $3.6 million, primarily as a result of higher sales.
Turning to Slide 9.
Fourth quarter free cash flow was $10.7 million, an increase of $7.8 million, reflecting an increase in cash provided by operating activities, including the benefit of working capital, net of deferred taxes.
During the quarter the company utilized approximately $63 million in cash to fund the Elkhart acquisition.
Cash on hand at year-end was $28 million.
Based on our trailing 12 month adjusted EBITDA of $66.4 million, leverage was 1.2 times.
Let me conclude my comments with additional color on our outlook for 2021.
Turning to Slide 10.
Net sales are expected to increase by mid to high 20%, including an incremental 10.5 month of sales related to the Elkhart acquisition and the expected impact of the March 1st price increase.
As a reminder, Elkhart's annual net sales at the time of acquisition were approximately $100 million.
Continued momentum in RV and marine business along with the rebound in industrial and automotive related revenues are expected to drive growth.
As a reminder, fuel container sales in 2020 were unusually strong due to one of the most active hurricane seasons on record.
Overall, commodity costs are projected to be higher, driven by increases in resin cost.
As Mike mentioned, the company announced an 8% price increase, primarily across the Material Handling segment, effective March 1st.
Higher cost versus price realization is expected to compress margins in the first half of 2021.
Our teams continue to stay close to the changing market dynamics, including the need for additional pricing actions.
SG&A expenses are expected to approximate 24% of net sales, benefiting from larger scale.
The low operating income, we are projecting approximately $4 million of interest expense and an effective tax rate of 26%.
Our guidance reflects the weighted average share count of 36.5 million shares.
Taking all of these assumptions into account, we expect adjusted earnings per share to be in the range of $0.90 to $1.05 per share.
Other key assumptions impacting EBITDA and cash flow include depreciation and amortization expenses of approximately $23 million in capex of approximately $15 million.
Capex is expected to trend higher than past years given our renewed focus on investing in our facilities.
In closing, let me reiterate that our One Myers vision is gaining momentum as we continue to execute against our strategy and strengthen the building blocks to drive long-term growth.
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q4 adjusted earnings per share $0.11 from continuing operations.
sees 2021 net sales growth in mid to high 20% range, including impact of elkhart acquisition.
sees 2021 diluted earnings per share in range of $0.88 to $1.03; adjusted diluted earnings per share in range of $0.90 to $1.05.
sees 2021 capital expenditures to approximately be $15 million.
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The Company undertakes no obligation to update new information.
Whitestone's first quarter earnings news release and supplemental operating and financial data package have been filed with the SEC and are available on our website, www.
whitestonereit.com, in the Investor Relations section.
I will provide a brief overview on Whitestone and as well an update on our business, current events in the first quarter.
Following my remarks, I will turn the meeting over to Dave Holeman, who will provide a financial update on how we did during first quarter then we will follow with question and answers.
This quarter's result benefited from the decision to locate our portfolio in some of the country's fastest growing Sunbelt markets, where we are leading in our nation's reopening.
This contributed to our performance on leasing, showing the resilience of our business model and corporate culture.
Our operations team continues to provide their ability to be flexible and quickly adaptable with the support of our strong financial infrastructure.
At the end of Q1 this year, our operating portfolio occupancy was 89.1%, an increase of 0.5% from last quarter and down only 0.6% from a year ago.
Our rent collections versus billings continue to put us at the top of our industry peer group.
During Q1, our collections remains strong approximately 95% of our rents for the quarter and for the month of April.
Our new lease count was 46 in the quarter, significantly higher than last quarter's count of 28 and our total lease count was 94, 12% higher than the previous quarter.
Our blended leasing spread was 7.8%, 1 full percentage point higher than last quarter 6.8%.
And our same-store net operating increase -- decrease 4.3% was flat last quarter yet among the best in the industry.
Additionally, in Q1 we increased our quarterly dividend by 2.4% and have paid a monthly dividend to our shareholders for 120 consecutive months.
Our employees are back working safely at our properties and our tenant businesses are ramping up with increasing customer foot traffic as consumers continue to resume their daily lifestyle routines and visiting our properties while migration continues the flow into our markets.
Our targeted geographic portfolios comprise of institutional qualities open air real estate with predictable cash flow.
Our properties are adjacent to high-income communities and our tenants include grocery stores, pharmacies and restaurants.
Our centers are made up of e-commerce resistant tenants who provide necessities and essentials.
They drive 18 hour traffic, 7 days a week to our properties.
As a result, over the past year our centers have remained open and most of our tenants remained active.
Some of whom today are experiencing higher sales than their pre-pandemic levels.
A reminder of shareholder that Whitestone was built during the recession of 2008 to 2010 and many of the lessons that we learned during we incorporated into the fiber of the company.
Our company has built by acquiring properties that are located in our business friendly states, fast growing and really populated cities and high-income communities.
By creating an interest resistant business model, internet resistant business model that focuses on services and essential needs of consumers.
By creating a diverse portfolio of entrepreneurial tenants, by structuring leases with tenant owner recourse and minimal co-tenancy approval rights.
By providing annual rent increases of 2% to 3%, while passage through triple net expenses and by keeping our focus on training and developing our people for for continuity.
Our swift response to COVID-19 12 months ago strengthened our balance sheet liquidity and financial flexibility to successfully navigate economic impacts of the pandemic.
Fast forward, the first quarter of 2021.
We're activating our strategic growth plan.
We are making plans for future redevelopment and development projects.
We have reduced our overall debt level, we have increased our divided and we are continuing to scale our infrastructure.
Our history has been to grow our portfolio by making single off market, value ad acquisitions in four specific markets.
Austin, Dallas-Fort Worth, Houston and Phoenix Scottsdale.
We intend to continue this strategy to assemble valuable properties in markets where tenants want to lease and consumers want to visit.
By growing this way, we created a substantial value add portfolio of properties.
In fact, we are under contract to acquire a property in one of our identified markets, our first acquisition since the pandemic began and we expect to close this summer.
This acquisition will add just under 200,000 square feet and would be immediately accreted to Whitestone's FFO per share and positively contribute to Whitestone's long-term goals related to debt, leverage and G&A coverage.
In addition, our regional management team is in place giving us operational economies as we scale up our infrastructure.
We look forward to providing more details as we progress in the year.
Moving forward at Whitestone we're well positioned with the improving balance sheet, enhanced liquidity, a laser focus on driving occupancy and revenue growth and leasing, leveraging our deep knowledge of our markets, properties and opportunities along with our business model to provide and craft the tenant mix to lease, to credit entrepreneurial businesses.
This is how we create long-term shareholder value.
First, I would like to provide a little more perspective on the strength of our markets.
Our targeted geographic focus on top MSAs in the Sunbelt continues to produce great results.
Texas and Arizona, continue to see significant population migration and corporate relocations producing jobs from other areas of the countries.
This is best evidenced by our first quarter leasing activity, occupancy levels, leasing spreads and our average base rent per leased square foot.
Our leasing activity in the quarter was very strong with 46 new leases, representing 117,000 square feet of newly occupied spaces.
This level of new lease square footage was 90% higher than our average quarterly lease volume for the previous three year period.
And 21% higher than the highest quarter over the past three years.
On a total lease value basis, this quarter was more than double our average quarterly lease volume for the previous three year period and 38% higher than the highest quarter over the past three years.
Regarding occupancy, our operating portfolio occupancy stood at 89.1%, up 1.5% from the fourth quarter and down only 6 -- 0.6% from a year ago with our Austin market leading the way with almost 4% increase in occupancy from Q4.
Leasing spreads on a GAAP basis have been positive 9% over the last 12 months, and first quarter leasing spreads increased 5.3% on new leases and 9.6% on renewal leases signed.
Our annualized base rent per square foot on a GAAP basis at the end of the quarter grew 1% to $19.71, from $19.58 in the previous quarter, and basically in line with our pre-COVID ABR from a year ago.
Funds from operations core was $0.23 per share in Q1, compared to $0.24 per share in the prior year.
As Jim, mentioned our collection continued to trend toward normal pre-COVID levels, with 95% of our contractual rents collected in Q1.
Restaurants and food service, our largest tenant category, which represents 23% of our ABR and 17% of our leases square footage continued to perform very well, staying 95% in the quarter and we also saw positive movements in some of our impacted customer types, with entertainment representing only 2% of our ABR, and leased square footage paying 73% of their rents in the quarter, up from 48% in Q4.
During the quarter we had minimal rent deferrals, representing 45% of our total contractual billings.
Our same-store net operating income was down 4.3% for the quarter versus the prior year quarter, and we expect our same-store growth to resume as we move throughout the balance of the year and into 2022.
Reflecting the continued improvement in the portfolio, our reserve for uncollectible revenue was $529,000 or 1.8% of revenue, down from 4% of revenue in Q4.
To put this in further perspective, our first quarter reserve equates to only 9% of 2020s full year reserves.
Our interest expense was 8% lower than a year ago, reflecting $15 million in lower average debt, and a decrease in our overall interest rate from 3.9% to 3.6%.
Our first quarter is an encouraging start to 2021, and underscores the resilience of our forward thinking, well-crafted business model and the strength of our strategically chosen high-growth markets.
Let me provide some further details on our collections, and related receivable balances.
Included on Page 27 of our soft data is a breakdown of our tenants by type.
All of our credit category were above 89% collection in Q1, with the exception of entertainment, which I previously discussed.
Our three largest categories, restaurants, grocery and financial services were at 95%, 100% and 99% respectively.
At quarter end, we had $23.3 million in accrued rents and accounts receivable, included in this amount is $16.9 million of accrued straight-line rents, and $1.8 million of agreed upon deferrals.
Our agreed upon deferral balance is down 18% from year end, reflecting tenants honoring their payment plans.
Since early last year, we've implemented various measures to strengthen our liquidity, and navigate the economic pressures caused by the pandemic.
Our total net debt is $632 million, down $17 million from a year ago, and our liquidity representing cash and availability on our corporate credit facility, stands at $39 million at quarter end.
We continue to make progress on our publicly stated goal of reducing leverage.
During April, we paid down an additional $10 million of our corporate credit facility.
Currently, we have a $140.5 million of undrawn capacity, and $25.9 million of borrowing availability under our credit facility.
We are in full compliance with all of our debt and expect to remain so in the future.
As I stated earlier, 2021 is off to a very promising start.
These results are a testament to the resiliency of Whitestone's business model.
We are encouraged by the recovery and we look forward to reengaging our growth strategy, and our continued delivery of value to all of Whitestone stakeholders.
With that, we will now take questions.
Operator, please open the lines.
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board of directors approved a 10% increase in its annual dividend to $7.80 per share.
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Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications.
These discussions will be followed by Q&A period.
We expect the call to last about 60 minutes.
We had another great quarter and all good things to talk about.
So I'll go ahead and turn over to Jose.
Today, I will be reviewing our second quarter results as well as providing my outlook for the markets we serve.
I'd like to start today by highlighting how proud I am of the men and women of MasTec.
Their sacrifices, resilience, creativity and commitment continue to inspire me.
Millions of families throughout the US rely on the power, communications, entertainment and other services we help our customers provide.
Now some second quarter highlights.
Revenue for the quarter was $1.963 billion.
Adjusted EBITDA was $230 million, adjusted earnings per share was $1.30.
And backlog at quarter end was $9.2 billion, a sequential increase of nearly $1.4 billion.
In summary, we had another excellent quarter and are on track for another great year.
The highlight of our quarter was the continued acceleration of customer demand and opportunities as evidenced by our growing backlog.
We truly believe we are at the beginning of what we think will be transformational changes across our segments.
We see several different catalysts that could have a significant impact on our growth.
Within our communications segment, catalysts include; a ramp-up of 5G-related activity and spend; continued focus on expanding fiber networks both in rural communities and in major cities to support broadband services as well as wireless backhaul; an increased focus on smart city initiatives with increased availability of capital from both the public and private sector.
In our electrical transmission and distribution segment, catalysts include; grid modernization including significant investments for improved grid reliability and system hardening to better prepare for storms and fires, the growing need for new lines to tap into renewable rich geographies, and the focus on grid architecture related to growing electrical vehicle charging demand.
In our clean energy and infrastructure segment, catalysts include; growing focus on sustainability and climate initiatives, including zero carbon emission goals, significant investments in renewable power generation including wind and solar, a focus on other clean energy generating fuels including biomass, geothermal and hydrogen, opportunities around carbon capture and the potential benefits, and finally the role of battery storage and its improving economics.
We believe we are very well-positioned to benefit from the growing and accelerating trends in our business segments.
Changes in both the communication and power markets are accelerating.
And so many of these changes directly impact the services we provide.
The opportunities to be innovative and involved in this evolution in very early stages represents how far we've come as a business and the value that our customers know we can provide.
For example, we continue to make significant investments in increasing our capabilities to meet customer demand.
Our team member count increased year-over-year from 18,000 to 26,500 team members at quarter end and was up sequentially by nearly 6,000 team members.
Over the last few quarters, we talked about our strategic longer-term goals and our future business mix.
Considering the challenges in the oil and gas industries, we led our path to achieving annual revenue target of $10 billion, with double-digit margins.
One of our key highlights of 2020 was our ability to significantly grow non-Oil and Gas revenues and EBITDA.
Our full year guidance that we provided today reflects continued diversification, as we expect our non-Oil and Gas business to grow over 20% in revenue and over 30% in EBITDA in 2021, with significant acceleration in the second half of 2021.
While this is good progress, we know we can do better.
While our Communications segment is performing as expected financially, our Transmission and Clean Energy segment have underperformed their margins.
This underperformance in both segments has been limited to a small number of projects.
More importantly, we are nearing completion on these projects.
And excluding these projects, the rest of the book of business is performing well.
We expect sequential margin improvement in both segments in the third quarter, with further improvements in the fourth quarter.
We expect to exit the year in both segments, with strong momentum, improved margins and significant opportunities for further growth in 2022.
Now, I'd like to cover some industry specifics.
Our Communications revenue for the quarter was $630 million and margins improved 290 basis points sequentially.
Highlights for the quarter included our growth with T-Mobile, whose revenues again increased fourfold over last year's second quarter and was MasTec's seventh largest customer for the quarter.
Comcast revenue was also very strong in the quarter, increasing over 30% from last year's second quarter.
That growth was offset with expected declines in both our Verizon and AT&T business, which were both down over 25%.
Both AT&T and Verizon were very vocal about the importance of the 5G spectrum auctions in their business.
We expect revenues for these two customers, especially AT&T to accelerate in the second half of the year, with significant growth opportunities heading into 2022.
Over the last few quarters, we've talked about the opportunities related to the Rural Digital Opportunity Fund or RDOF, which will provide $20 billion of funding over the next 10 years to build and connect gigabit broadband speeds in underserved rural areas and the 5G Fund for Rural America, which will provide up to $9 billion in funding over the next decade to bring 5G wireless broadband connectivity to rural America.
Today, we are pleased to report the largest quarterly sequential segment backlog increase in the company's history.
Communications segment backlog, increased sequentially by $489 million, and was driven by bookings across all segment end markets, including wireless, fiber deployments and fulfillment work.
We are in early stages of what we expect to be a very robust and growing telecom infrastructure market and feel we are very well positioned.
Moving to our Electrical Transmission segment.
Revenue was $232 million versus $128 million in last year's second quarter.
The increase was mostly due to the INTREN acquisition, which contributed two months' worth of revenue.
INTREN performed well in the quarter and we're excited about their growing opportunities.
Customer reaction to the acquisition has been very good and we're seeing a growing number of opportunities for them for 2022 and beyond.
We believe the changes in Electrical Distribution & Transmission needs, led by grid modernizations and hardening, reliability and renewable integration, coupled with the transition toward increased electrical vehicle usage will have an enormous impact on the last mile distribution of electricity.
Moving to our Oil and Gas pipeline segment.
Revenue was $621 million and margins remained strong.
Our guidance assumed project activity will be pushed into 2022, because of regulatory delays.
As a reminder, last year, we forecasted a long-term recurring revenue target of $1.5 billion to $2 billion a year, assuming a continued depressed oil and gas market.
As commodity prices have increased and maintained at strong levels, we have seen an increase in customer requests, as we are working with a number of customers, repricing previous projects and are optimistic that we will see an uptick in opportunities heading into 2022.
We continue to see strong demand for integrity services, gas distribution and line replacement activity.
We've also seen a number of developments around pipelines for both carbon capture and hydrogen.
We are focused on continuing to diversify our revenues in this segment.
Moving to our Clean Energy and Infrastructure segment.
Revenue was $482 million for the second quarter.
While we're focused on margin improvement as I discussed earlier, opportunities continue to expand.
Segment backlog at quarter end was at record levels, with a sequential increase of $320 million and a year-to-date increase of $680 million.
With the new administration and a clear focus on sustainability and clean energy, we have seen a significant increase in planned clean energy investments from our customers, as they improve their carbon footprint.
As a leading clean energy contractor and partner, MasTec is uniquely positioned to benefit from these investments.
We believe our diversification is our strength in this market as we're capable of meeting any of our customers' demands.
We are actively working on renewable projects including wind, solar, and biomass; baseload gas generation projects including dual-sourced hydrogen capable projects, as well as our growing presence in the infrastructure market.
To recap, we've had a solid first half of 2021 and are very excited about the opportunities in the markets we serve.
Finally, I'd like to highlight the potential opportunities of an infrastructure build.
With a significant presence in the telecommunications market which include 5G build-out capabilities, our involvement in maintaining and building the electrical grid coupled with our exposure to the clean energy market including wind, solar, biofuels, hydrogen, and storage and our recent expansion into heavy infrastructure including road and heavy civil, we feel we are uniquely positioned to benefit from potential infrastructure spend.
We are confident we can hit our growth targets with solely private investments in infrastructure, but do recognize the potential acceleration in our markets with significant government spend.
I'm honored and privileged to lead such a great group.
The men and women of MasTec are committed to the values of safety, environmental stewardship, integrity, honesty, and in providing our customers a great quality project at the best value.
These traits have been recognized by our customers and it's because of our people's great work that we've been able to deliver these outstanding financial results in a challenging environment and position ourselves for continued growth and success.
Today, I'll cover second quarter financial results and our updated annual 2021 guidance expectations.
As Marc, indicated at the beginning of the call, our discussion of financial results and guidance will include non-GAAP adjusted earnings and adjusted EBITDA.
In summary, we had strong second quarter results with revenue of approximately $1.96 billion, a 25% increase over last year; adjusted EBITDA of approximately $230 million; and adjusted EBITDA margin rate at 11.7% of revenue.
This represented a 39% increase in adjusted EBITDA dollars and a 120 basis point increase in adjusted EBITDA margin rate over last year's second quarter.
Second quarter backlog of $9.2 billion represented an all-time record high for MasTec.
Importantly, our non-oil and gas segment backlog sequentially increased $1.6 billion with record second quarter backlog in Communications, Clean Energy and infrastructure, and Electrical Transmission.
We believe this backlog growth supports our expectation that end market trends are significantly shifting and gathering momentum in these segments affording MasTec significant future opportunity.
Our continued focus on working capital management during 2021 has allowed us to easily fund organic working capital needs, while investing approximately $600 million in strategic acquisitions.
As of the end of our second quarter, we maintained a strong balance sheet and capital structure with liquidity approximating $1.2 billion and comfortable leverage metrics.
Now, I will cover some more detail regarding our second quarter segment results and guidance expectations for the balance of 2021.
Second quarter Communications segment operations performed generally in line with our expectations with revenue of $630 million inclusive of expected temporary lower levels of wireless project activity prior to the upcoming construction ramp-up for C-band spectrum awards.
Second quarter Communications segment adjusted EBITDA margin rate was 11.5% of revenue a 290-basis-point improvement sequentially.
Our annual 2021 Communications segment expectation is that revenue will approximate $2.6 billion to $2.7 billion with annual 2021 adjusted EBITDA margin rate improving 90 to 110 basis points over 2020 levels.
Regarding some color on expectations during the second half of 2021, we expect third quarter year-over-year revenue growth in the mid to high single-digit range with fourth quarter year-over-year revenue growth accelerating in the mid to high 20% range.
We also expect that third quarter adjusted EBITDA margin rate will show a slight sequential improvement with more substantial acceleration during the fourth quarter as segment revenue growth accelerates.
Second quarter Clean Energy and Infrastructure segment or Clean Energy, revenue was $482 million.
Adjusted EBITDA was approximately $16 million or 3.2% of revenue.
Second quarter revenue and operating results were negatively impacted by project start-up delays and project inefficiencies.
As we have mentioned before, we have expanded our operations and headcount in this segment very quickly in order to meet increasing demand.
And with that expansion, we've experienced some growing pain and efficiencies.
During the second quarter, we estimate the combination of start-up delays and project inefficiencies inclusive of weather, negatively impacted second quarter segment operating margins by 350 basis points to 400 basis points.
As we look forward, we expect improved performance during the second half of 2021 with second half revenue approximating $1.2 billion, slightly over a 40% increase, compared to first half 2021 levels with adjusted EBITDA margins in the range of 7% to 8% of revenue.
And this is due to the leverage benefit of higher forecasted second half 2021 revenue levels.
And the benefit of exiting two underperforming projects which are approximately 75% complete as of the end of the second quarter.
We are very excited, that Clean Energy's second quarter backlog reached a new all-time record of $1.7 billion.
And believe that this segment is well positioned, for significant long-term revenue growth and adjusted EBITDA margin rate improvement.
Our annual 2021 Clean Energy segment expectation is that revenue range between $2 billion to $2.1 billion with annual 2021 adjusted EBITDA margin rate improvement in the 20 basis point to 70 basis point range over the prior year.
Regarding our second half 2021 Clean Energy adjusted EBITDA margin rate expectations, we expect sequential improvement in the third quarter, as we continue to experience some impact of the two previously mentioned underperforming projects which will generate revenue at no margin.
Additionally, we anticipate that our highest-margin performance will occur during the fourth quarter due to project mix with a diminished and minimal impact of these two underperforming projects as well as a heavier concentration of project completions expected during the fourth quarter.
Second quarter Oil and Gas segment revenue was $621 million and adjusted EBITDA was $138 million, generally in line with our expectation.
We currently expect annual 2021 Oil and Gas segment revenue will range between $2.4 billion to $2.5 billion with the continued expectation, that annual 2021 adjusted EBITDA margin rate for this segment will be in the high-teens range.
This expectation includes the continued assumption that selected large project activity will move into 2022, due to permitting approval delays.
This delay is expected to manifest itself during the fourth quarter and thus, we expect strong year-over-year revenue growth in the third quarter with a lesser level of fourth quarter project activity, as delayed project activity shifts into 2022.
Second quarter Electrical Transmission segment revenue was $233 million and adjusted EBITDA margin rate was 4% of revenue.
Second quarter backlog was $1.3 billion, an approximate $800 million sequential increase.
We completed the acquisition of INTREN, which focuses primarily on electrical distribution mid-quarter and this added approximately $100 million of revenue to this segment during the quarter, as well as most of the segment's sequential backlog growth.
Given the size and expanded offerings of INTREN's acquired operations, we are evaluating a segment name change to better reflect our operations.
And we expect to advice on our determination, when we report third quarter results.
In summary, INTREN's operations performed well, and as expected, during the partial quarter period, while our legacy Electrical Transmission operations were impacted by weather-related project inefficiencies and increased closeout costs on two projects which are over 90% complete, as of the end of the second quarter.
These two projects negatively impacted second quarter Electrical Transmission segment operating results by approximately $8.5 million and 370 basis points.
Looking forward to the balance of 2021, we expect annual 2021 revenue for the Electrical Transmission segment to approximate $950 million to $1 billion and annual 2021 adjusted EBITDA margin rate to approximate 6.5% of revenue.
Relative to the remainder of 2021 expectations, inclusive of INTREN, we anticipate that second half 2021 revenue levels will range in the low $600 million range a year-over-year increase of approximately $350 million.
Second half 2021 adjusted EBITDA margin rate for this segment is expected to approximate 8% of revenue, due to the combination of improved legacy operations as we exit two underperforming projects and the benefit of higher-margin INTREN MSA operations.
We continue with the belief that, multiple macro end market trends including renewable power generation, increased distribution needs to support electric vehicle expansion, and required grid investments for storm and fire hardening are continuing to develop and should provide our expanded segment operations substantial future growth opportunities.
Now I will discuss a summary of our top 10 largest customers for the second quarter period, as a percentage of revenue.
Enbridge and AT&T were both 12% of revenue.
AT&T revenue derived from wireless and wireline fiber services totaled approximately 9% and install-to-the-home services, was approximately 3%.
On a combined basis these three separate service offerings, totaled approximately 12% of our total revenue.
As previously indicated this revenue level included expected lower first half 2021 wireless services revenue as project activity has temporarily slowed, while AT&T prepares to initiate C-band spectrum construction.
Also as a reminder, it's important to note that these offerings while falling under one AT&T corporate umbrella are managed and budgeted independently within the organization, giving us diversification within that corporate universe.
Lastly with AT&T's recent divestiture of its DIRECTV operations, we will no longer report DIRECTV install-to-the-home operations as a part of AT&T revenues starting next quarter.
NextEra was 8% of revenue comprising services across multiple segments including Clean Energy, Communications and Electrical Transmission.
Equitrans Midstream and Comcast were each 5% of revenue.
T-Mobile, Duke Energy and Energy Transfer were each 3% of revenue and Midstream and Elite were each 2%.
Individual construction projects comprised 68% of our second quarter revenue with master service agreements comprising 32%.
With the combination of an expected resurgence in wireless MSA work coupled with the INTREN acquisition whose revenue is virtually all MSA-driven, future MSA revenue is expected to increase as a percentage of our total revenue, highlighting an increased level of MasTec revenue expected to be derived on a recurring basis.
Lastly, as we've indicated for years, backlog can be lumpy as large projects burn off each quarter and new large contract awards only come into backlog at a single point in time.
At June 30, 2021, we had a record total backlog of approximately $9.2 billion, up about $1 billion from second quarter last year and up $1.3 billion sequentially from last quarter.
Importantly this backlog reflects record segment backlog levels across our non-oil and gas segments namely communications, clean energy and electrical transmission.
We believe this demonstrates the strength of demand in our non-oil and gas segments, validating our expectation that accelerating end market trends in these segments will offer substantial growth opportunities for MasTec.
Now, I will discuss our cash flow, liquidity, working capital usage, and capital investments.
During the second quarter, we easily funded working capital associated with over $120 million in organic revenue growth, as well as approximately $500 million in acquisition activity.
We ended the quarter with $1.2 billion in liquidity and net debt defined as total debt less cash and cash equivalents at $1.3 billion, which equates to a very comfortable 1.4 times leverage metric.
Our year-to-date 2021 cash provided by operating activities was $345 million, $118 million lower than in the first half of 2020.
This performance is impressive as our first half 2021 cash flow includes working capital funding requirements associated with approximately $750 million in higher revenue levels when compared to last year and thus this performance was possible due to our strong working capital management.
We ended the second quarter of 2021 with DSOs at 80 compared to 86 days at year-end 2020 and 90 days for the second quarter last year.
And this level is slightly below our target DSO range in the mid to high 80s.
In summary, we are proud of the strength, resilience and consistency of MasTec's cash flow profile.
As we look forward to the balance of 2021, we expect continued strong cash flow generation despite the working capital associated with our 2021 revenue growth and expect that annual 2021 free cash flow will once again exceed adjusted net income.
Assuming no second half 2021 acquisition,activity net debt at year-end is expected to approximate $1.1 billion leaving us with ample liquidity and expected book leverage slightly over one time adjusted EBITDA.
In summary, our long-term capital structure is extremely solid with low interest rates, no significant near-term maturities and ample liquidity.
This combination gives us full flexibility to take advantage of any potential growth opportunities to maximize shareholder value.
Moving to our 2021 annual guidance view.
We project annual 2021 revenue of $8.1 billion with adjusted EBITDA of $930 million, or 11.5% of revenue and adjusted diluted earnings of $5.45 per share.
Our current view represents a slight decrease in the annual 2021 revenue expectation, primarily due to some project activity slippage to 2022 in communications and clean energy, while reaffirming the annual adjusted EBITDA view of $930 million, and increasing our adjusted diluted earnings per share by $0.05 to $5.45 per share.
The increase in adjusted diluted earnings per share is primarily due to lower expected interest and income tax expenses.
As we have previously provided some color regarding our segment expectations, I will now briefly cover some other guidance expectations.
We anticipate net cash capex spending in 2021 at approximately $120 million with an additional $160 million to $180 million to be incurred under finance leases.
And this expectation is inclusive of expected capital additions for first half 2021 acquisitions.
As we have previously indicated, as our end market operations shift with non-oil and Gas segments becoming a larger portion of our overall revenue.
Our capital spending profile should reduce as the Oil and Gas segment has historically required the largest level of capital investment.
We expect annual 2021 interest expense levels to approximate $56 million with this level including approximately $600 million in acquisitions funding activity during the first half of 2021.
For modeling purposes, our estimate for 2021 share count continues at 74 million shares.
We expect annual 2021 depreciation expense to approximate 4.2% of revenue inclusive of first half 2021 acquisition activity.
As we have previously indicated, this expectation includes an increased level of 2021 Oil and Gas segment depreciation expense when compared to 2020, as we're utilizing conservative, depreciation life and salvage value estimates on previous capital additions to protect against potential market uncertainties.
Given these trends, we anticipate that next year annual 2022 depreciation expense as a percentage of revenue will decrease when compared to 2021 levels and approximate 3.5% of revenue.
We expect annual 2021 corporate segment adjusted EBITDA to be a net cost of approximately 1% of overall revenue.
And lastly, we expect that annual 2021 adjusted income tax rate will range between 24% to 25% with the expectation that the third quarter tax rate may be slightly lower than the annual rate.
Our third quarter revenue expectation is $2.3 billion with adjusted EBITDA of $267 million or 11.6% of revenue and earnings guidance at $1.71 per adjusted diluted share.
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sees fy adjusted non-gaap earnings per share $5.45.
sees q3 adjusted earnings per share $1.71.
sees q3 revenue about $2.3 billion.
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Both are now available on the Investors section of our website americanassetstrust.com.
First and foremost, I would like to wish all of our stakeholders and their loved ones continued health and safety during these truly unprecedented times.
We remain optimistic that a vaccine will be forthcoming over the next six to nine months and trust me, I'm going to be one of the first in line.
But nevertheless, we are prepared to endure a prolonged pandemic with our solid balance sheet world-class properties and tenants, and incredibly dedicated and competent employees.
Fortunately now, the second and third quarters are behind us and I can tell you that our operations and financial results were nowhere near as catastrophic as my worst case projections that we modeled in April 2020.
As most of you know, for many years -- for many years many outsiders believed our asset diversification was perceived negatively relative to any of our best-in-class peers.
However, we now know that our ownership of a combination of irreplaceable office, multifamily, retail and mixed-use properties as opposed to a single asset class provided us with much needed stability and protection from the risks associated with the changes in economic conditions of a particular market, industry or even economy, such as those changes created by COVID-19.
Would we have declared a larger dividend?
Yes, probably and I would have benefited more than anywhere, but as fiduciary store stockholders and its staunch defenders of our balance sheet, we felt it's most prudent to remain conservative on our dividend until there is more visibility into a vaccine and an economic recovery.
In any case, a year or so from now, once there is a vaccine, we expect to look back and hope that this will be nothing but a bad memory.
One of our primary focuses over the past quarter has been collections in our retail segment.
We are pleased to have made meaningful progress on that front where we began the pandemic initially collecting approximately 40% of retail rents in April to collecting approximately 80% retail rents in the third, quarter a number that we expect to get better.
No doubt this was in large part due to the tireless work of our in-house collection team comprised of our property managers, lease administrators, legal staff and direct engagement by our executives with retailers.
And though we remain sensitive and at times accommodating to the financial challenges of certain impact to tenants, we have certainly taken a more aggressive position with better capitalized tenants knowing the high quality of our underlying real estate and the clear rights we have embedded in our leases.
We expect those tenants to adhere to their contractual obligations and we continue to refuse to agree to deals that are not in the best interest of our company and our shareholders.
As such, we expect our third quarter collections to improve further as we continue our efforts, and in fact we know more significant checks and wires are currently in transit from tenants on account of third quarter collections.
Our most notable collection challenges in the retail segment remain with our movie theaters, gyms and apparel stores as well as many of our retailers at Waikiki Beach Walk which until mid-October, had no incoming tourism to sustain meaningful revenue for our tenants.
It is likely going to take several more months or quarters for us to have better visibility -- recovery by these more challenged tenants.
That said, our focus continues to prioritize long-term strategic growth over the short term.
So, we've entered into lease modifications that have provided certain tenants relief during the pandemic by way of deferrals or other monetary concessions where necessary, provided we obtain something in return whether by lease extensions, waiver, a certain tenant-friendly lease rights or incremental percentage rent.
Otherwise, we intend to pursue all means to enforce our rights under leases, including litigation as necessary, particularly for those unilaterally withholding rents when we believe they have the funds to pay.
Additionally, we are pleased to report that 100% of our properties continue to remain open and accessible by our tenants in each of our markets and anecdotally the majority of our employees are voluntarily working in person at our properties or at our corporate offices each week while taking absolutely all prudent safety precautions, despite having the flexibility to work from home.
We continue to firmly believe that post pandemic, being together in person will promote much better productivity, collaboration and innovation and we expect and I've heard similar sentiment from the majority of our office tenants.
Finally, on the election front, we are closely following two propositions on the California ballot that take direct aim at commercial real estate.
Of course, we are firmly against Prop 15 which would eliminate Prop 13 Taxpayer Protection.
If it passes, we would not expect it to create an immediate, meaningful impact to our company but rather would place a significant pass through financial burden on our tenants at a time when they are already struggling, not to mention the likely negative impact of those property taxes on future rent growth.
And also, we are against Prop 21 which we believe is a flawed measure that would implement a significant amendment to existing rent control laws on the multifamily side, limiting landlords' rights and likely making the housing crisis in California even worse.
We are contributing, our resources to impose those propositions.
While the challenges we face today are complex, whether relating to the pandemic, racial, [Indecipherable] technology or legislative matters to name a few, we do believe that we are well positioned to navigate through and manage these challenges with, as Ernest mentioned our best-in-class assets, our 200 talented and dedicated employees and the strength of our balance sheet.
Last night we reported third quarter 2020 FFO of $0.44 per share and net income attributable to common stockholders of $0.08 per share for the third quarter.
Let me begin with my perspective that I am optimistic with the overall performance of this portfolio, even in light of the pandemic we are all going through.
We too are feeling the bumps along the road like everyone else in our sectors.
What makes me optimistic about our portfolio and its future are the following.
Number one, our collections of monthly recurring billings continue to improve in Q3 over Q2 with total collections of approximately 89% in Q3 versus 80% in Q2.
Number two, we believe we have ample liquidity to weather the storm that we are going through.
We prepared for the worst-case scenario by modeling a $50 million quarterly burn rate at the beginning of this pandemic, not knowing what we were going into and in Q2, our actual burn rate was approximately $6 million.
In Q3, we ended up with a cash surplus of approximately $9 million and this is after the operating capital expenditures and the dividend.
We started Q3 with approximately $146 million of cash on the balance sheet and ended Q3 with approximately $155 million of cash on the balance sheet, primarily as a result of increased cash NOI, quarter-over-quarter due to our successful collection efforts outlined earlier by Adam.
Number three, we have additional liquidity of $250 million available on our line of credit, combined with an entire portfolio of unencumbered properties with the exception of our only mortgage which is on City Center Bellevue.
Number four, we believe we have embedded growth in cash flow in our office portfolio with approximately $30 million plus of growth in the office cash NOI between now and the end of 2022 as Steve will discuss later.
And lastly, once we get a vaccine, we believe our high quality West Coast portfolio will rebound.
We believe our Embassy Suites which is currently at approximately a break-even cash NOI will rebound based on its location and tourism.
On October 15, Hawaii allowed tourists to come back to the island as they can demonstrate that they have had a negative COVID tests within the last 72 hours.
On the first day, there were approximately 10,000 tourists that landed in Hawaii, we expect that tourism inflow to continue to increase each week and to start benefiting our Hawaiian properties over the coming quarters.
Let's take a moment to look at the results of the third quarter for each property segment.
Our office property segment continues to perform well, as expected during these uncertain times.
Office properties excluding One Beach Street in San Francisco, which is under redevelopment were at 96% occupancy at the end of the third quarter, an increase of approximately 2% from the prior year.
More importantly, same-store cash NOI increased 13% in Q3 over the prior year, primarily from increases in base rent at La Jolla Commons, Torrey Reserve campus, City Center Bellevue and the Lloyd District portfolio.
Our retail properties continue to be significantly impacted by the pandemic, although the occupancy at our retail properties remain stable for the third quarter at 95% occupancy which was a decrease of approximately 3% from the prior year our retail collections have been challenging during the pandemic, as reflected in our negative same store cash NOI.
Our multifamily properties experienced a challenging quarter, as same-store cash NOI decreased approximately 5.4% due primarily from the increase in average occupancy -- or I'm sorry, due primarily from the decrease in average occupancy at Hassalo in Portland, offset by favorable master lease signed with a private university in San Diego area at the beginning of the quarter.
On a segment basis, occupancy was at 87.5% at the end of the third quarter, a decrease of approximately 3% from the prior year.
We expect our occupancy to return to normal, stabilized levels at Hassalo as we have recently adjusted pricing and concessions.
With these adjustments, in the last 10 days we have already seen leasing traffic increase from a weekly average of four to six tour's per week, to 10 to 12 tours per week.
We have captured a total of 11 new leases in just the last week.
Our mixed use property consisting of the Embassy Suites Hotel and the Waikiki Beach Walk Retail is located on the Island of Oahu.
The State of Hawaii remained in a self-quarantine throughout most of the third quarter, significantly impacted the operating results for the third quarter of 2020.
The Embassy Suites' average occupancy for the third quarter of 2020 was 66% compared with the average occupancy in the second quarter of 2020 of 17%.
The average daily rate for the third quarter of 2020 was $209, which is approximately 40% of the prior year's ADR. Waikiki Beach Walk Retail suffered considerably with virtually no tourists on the island until recently.
We are working daily with our tenants at Waikiki Beach Walk to formalize a recovery plan that benefits both our tenants and the company utilizing all resources necessary, including state and city grant programs and lobbying efforts.
We had COVID-19 adjustments amounting to 2% of what was billed in Q3 to our tenants and the balance of approximately 9% is the amount outstanding of what was billed in Q3.
This is compared to the second quarter collections of 81%, COVID-19 adjustments of 5% and Q2 amounts that were billed and still outstanding of 14%.
This is compared to a bad debt expense accounts receivable of approximately 14% of the outstanding uncollected amounts at the end of Q2 and bad debt expense of straight-line rent receivables of approximately 7% at the end of Q2.
It's easy to get confused on all these percentages.
However, from a big picture perspective, at the end of the third quarter, our total allowance for doubtful accounts, which reflects the cumulative bad debt expense charges recorded totals approximately 39% of our gross accounts receivable and approximately 3% of our straight-line rent receivables.
Let's talk about liquidity; as we look at our balance sheet and liquidity at the end of the third quarter, we had approximately $405 million in liquidity, comprised of $155 million of cash and cash equivalents and $250 million of availability on our line of credit, and only one of our properties is encumbered by mortgage.
Our leverage, which we measure in terms of net debt to EBITDA was 6.7 times on a quarterly, annualized basis.
On a trailing 12 month basis, our EBITDA would be approximately 6.0 times.
Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 3.6 times on a quarterly annualized basis and 3.9 times on a trailing 12 month basis.
As it relates to guidance, as previously disclosed, we withdrew our 2020 guidance on April 3 due to the uncertainty that the pandemic would have on our existing guidance, particularly in our hotel and retail sectors.
Until we have a clear view of the economic impact of the pandemic or more certainty as to when a vaccine becomes available, we will refrain from issuing further guidance.
As Bob said earlier, at the end of the third quarter, net of One Beach, which is under redevelopment our office portfolio stood at over 96% leased with just under 6% expiring through the end of 2021.
Given the quality of our assets and the strength of the markets in which they are located with technology and life science as key market drivers, we continue to execute new and renewal leases at favorable rental rates delivering continued NOI growth in our office segment.
The weighted average base rent increase for our nine renewals completed during the quarter was 6.7% and it's also as Bob pointed out earlier, with leases already signed, we have locked in approximately $30 million of NOI growth in our office segment priced at approximately [Indecipherable] in 2020, $14 million in $2021 and $10 million in 2022.
We anticipate significant additional NOI growth in 2022 and 2023 through the redevelopment of leasing of 102,000 square feet at One Beach Street in San Francisco and 33,000 rentable square feet at 710 Oregon Square in the Lloyd submarket in Portland.
In addition, we have the ability to organically grow our office portfolio by up to an additional 768,000 square feet or 22% on sites we already own by building Tower 3 at La Jolla Commons, a 213,000 square foot tower that's currently into the city for permits and Blocks 90 and 103 at Oregon Square with two configuration options, one at 392,000 square feet and the other at 555,000 square feet, which we recently received the entitlements on from the Portland Design Review Commission.
We continue evaluating market conditions, prospective tenant interest and hopefully decreasing construction costs on these development opportunities.
In summary, we have a stable office portfolio, little near term rollover, significant build in NOI growth and additional upside through repositioning and redevelopment within our existing portfolio plus substantial new development on sites we already are on.
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compname reports q2 ffo per share $0.51.
q2 ffo per share $0.51.
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Our call today will include remarks from our CEO, Roger Hochschild; and John Greene, our Chief Financial Officer.
After we conclude our formal comments, there will be time for question-and-answer session.
During the Q&A session, you will be permitted to ask one question, followed by one follow-up question, after your follow-up question, please return to the queue.
We had a very good quarter that highlighted the strength of our digital business model and solid execution on our strategic priorities against the backdrop of continued economic improvement.
This quarter was characterized by three important events.
First, our card receivables grew sequentially in May and June, causing our period-end receivables to be up quarter-over-quarter.
This outcome, combined with the strength in consumer spending and our account acquisition, increased our confidence for moderate receivables growth this year and stronger growth in 2022.
Second, we benefited from a gain in our Payment Services segment.
This gain is an outgrowth of a long [Technical Issues] commercial relationship and underscores our payments ability to forge innovative and lasting partnerships.
Lastly, we achieved a historic low in delinquencies, which resulted from consumers' strong liquidity position, our conservative stance on underwriting, and the proactive measures we took into the downturn to protect our credit quality.
This outcome also supported our reserve release this quarter.
Turning to the quarter's results.
We earned $1.7 billion after tax or $5.55 per share.
These results include a $729 million one-time gain.
But even excluding this gain, our results were very strong at $3.73 per share.
The drivers of the quarter's strong results reflect the combination of our solid execution and supportive macro conditions.
Total sales were, up 48% from a year ago, and 24% from the second quarter of 2019.
Retail sales remained very strong, and there was significant improvement in T&E categories, which were hardest hit by the pandemic.
Even travel returned to growth in June, compared to [Technical Issues] levels.
And sales volumes are accelerating.
The 24% growth I cited is an increase from 15% in the first quarter relative to the same period in 2019.
We also see an attractive environment for account acquisition even in the face of heightened competition.
We have removed nearly all of our pandemic credit tightening and have increased our marketing investment to align with these actions.
These decisions supported new account growth of 26% over 2019 levels with strong growth among prime consumers as our differentiated brand and integrated networks support our strong value proposition, which centers on transparent and useful rewards, outstanding customer service and no annual fees.
While the current operating environment is broadly constructive, there are also some challenges.
As we have highlighted before, the counterpoint of sustained strong credit performance is high payment rates, which in the second quarter were over 500 basis points above 2019 levels.
We may be seeing evidence that payment rates are plateauing, and while we expect some moderation later this year, we believe payment rates will remain above historical levels for some time.
Even so, we expect to strengthen our sales figures and the contribution from new accounts to drive loan growth through the back half of this year and accelerate in 2022.
As we have said in the past, we will invest when we see attractive opportunities and the actions we took this quarter with increased marketing expenses in investments and technology and analytics were an example of that approach.
These investments are consistent with our commitment to long-term positive operating leverage and an improving efficiency ratio as they drive loan growth and enable a more efficient operating platform.
In our Payments business, we benefited from a gain on our equity investment in Marqeta.
This gain was the result of a relationship that began a decade ago, and we continue to see opportunities [Technical Issues] and innovative partnerships.
I'm very excited about our investment in CECL that was [Technical Issues] week, as we look to expand our partnership with a leading buy now, pay later provider.
We also continue to grow our global acceptance presence and announced new partnerships in Bahrain and Portugal, adding to the two network alliances that we announced earlier this year.
Our debit business continued to build on its recent strength.
PULSE volume increased 19% year-over-year and was up 33% from 2019 levels.
In addition to the influence of economic recovery, this performance reflects the greater relevance of debit to many consumers through the pandemic period.
Volume at Diners has also recovered to some extent and was, up 41% from the prior year's lows.
However, volume is still below pre-pandemic levels and may remain so for a period of time.
The strong fundamental performance of our digital banking model drove significant capital generation, which this quarter was also aided by our equity gain.
We accelerated our share repurchases to $553 million of common stock, a level near the maximum permitted under the Federal Reserve's four quarter rolling net income test.
We remain committed to returning capital to our shareholders.
And going forward, our approach will be governed by the stress capital buffer framework.
On our call last quarter, we indicated that we hope to revisit our capital return for the second half of this year.
And I'm very pleased that our Board of Directors authorized the new $2.4 billion share repurchase program that expires next March.
We also increased our quarterly dividend from $0.44 to $0.50 per share.
With the current strength of the US economy, I'm increasingly optimistic about our growth opportunities this year and beyond.
Our value proposition continues to resonate with consumers.
Our Payment segment is expanding its partnerships and acceptance and our capital generative model positions us for strong returns over the long-term.
I'll now ask John to discuss key aspects of our financial results in more detail.
I'll begin with our summary financial results on Slide four.
As Roger noted, our results this quarter highlighted the strength of our digital model, solid execution on our priorities and continued improvement in the macroeconomic environment.
Revenue, net of interest expense, increased 34% from the prior year.
Excluding one-time items, revenue was up 9%.
Net interest income was up 5% as we continue to benefit from lower funding costs and reduced interest charge-offs, reflecting strong credit performance.
This was partially offset by a 4% decline in average receivables from the prior year levels.
Excluding one-time items, non-interest income increased 29%, driven by the higher -- by higher net debt count and interchange revenue, due to strong sales volume.
The provision for credit losses decreased $2 billion from the prior year, mainly due to a $321 million reserve release in the current quarter, compared to a $1.3 billion reserve build in the prior year, an improvement in the economic [Technical Issues] and ongoing credit strength were the primary drivers of the release.
Net charge-offs decreased 41% or $311 million from the prior year.
Operating expenses were, up 13%, primarily reflecting additional investments in marketing, which was up 36% and employee compensation, which was up 10%, a software write-off and a non-recurring impairment at Diners Club also contributed to the increase.
Moving to loan growth on Slide five.
Ending loans increased 2% sequentially and were down just 1% from the prior year.
This was driven by card loans, which increased 2% from the prior quarter and were down 2% year-over-year.
Lower year-over-year card receivables reflect two primary factors.
First, the payment rate remains high as households continue to have a strong cash flow position, due to several rounds of government stimulus.
Second, promotional balances were approximately 250 basis points lower than the prior year quarter.
While card receivables declined year-over-year, we considered a sequential increase to be an important data point reflecting continued momentum in account acquisition and very strong sales volume.
The high payment rate remains a headwind to receivable growth, although we expect to see modest decreases in late 2021.
Looking at our other lending products.
Organic student loans increased 4% from the prior year.
We are well positioned as we enter the peak origination season.
Personal loans were down 6%, driven by credit tightening last year and high payment rates.
We are encouraged by continued strong credit performance in the portfolio and have expanded credit for new originations.
Moving to Slide six.
Net interest margin was 10.68%, up 87 basis points from the prior year and down 7 basis points sequentially.
Compared to the prior quarter, the net interest margin decrease was mainly driven by a nearly 200 basis points reduction in the card revolve rate.
Loan yields decreased 17 basis points from the prior quarter, mainly due to the lower revolve rate.
This decline reflects the impact of increased payments, as well as seasonal trends.
Yield on personal loans declined 7 basis points sequentially, due to lower pricing.
Student loan yield was up 4 basis points.
Margin benefited from lower funding costs, primarily driven by maturities at higher rate CDs.
We cut our online savings rate to 40 basis points in the first quarter and did not make any pricing adjustments during the second quarter.
Average consumer deposits were, up 6% year-over-year and declined 1% from the prior quarter.
The entire sequential decline was from consumer CDs, which were down 9%, while savings and money market deposits increased 2% from the prior quarter.
Consumer deposits are now 66% of total funding, up from 65% in the prior period.
Looking at Slide 7.
Excluding the equity investment gains, total non-interest income was up $123 million or 29% year-over-year.
Net discount and interchange revenue increased $102 million or 43% as revenue from strong sales volume was partially offset by higher rewards costs.
Loan fee income increased $20 million or 24%, mainly driven by higher cash advance fees with demand increasing as the economy reopens.
Looking at Slide eight.
Total operating expenses were, up $145 million or 13% from the prior year.
Employee compensation increased $46 million, primarily due to a higher bonus accrual in the current [Technical Issues] versus 2020 when we reduced the accrual.
Excluding this item, employee compensation was down from the prior year as we've managed headcount across the organization.
Marketing expense increased $46 million from the prior year as we accelerated our growth investments.
We still see significant opportunities for growth and we plan to accelerate our marketing spend through [Technical Issues] to drive account acquisition and brand awareness.
Information processing was up due to a $32 million software write-off, the increase in other expense reflects a $92 million charge and the remainder of the Diners intangible asset.
Partially offsetting this was lower fraud expense, reflecting some of the benefits from our investments in data analytics.
Moving to Slide nine.
We had another quarter of improved credit performance.
Total net charge-offs were 2.1%, down 132 basis points year-over-year and 36 basis points sequentially.
The [Technical Issues] net charge-off rate was 2.45%, 145 basis points lower than the prior year quarter and down 35 basis points sequentially.
The net charge-off dollars were down $276 million versus last year's second quarter and $62 million sequentially.
The card 30-plus delinquency rate was 1.43%, down 74 basis points from the prior year and 42 basis points lower sequentially.
Credit in our private student loans and personal loans also remained very strong through the quarter.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $321 million from the reserves, due to three key factors: continued improvement in the macroeconomic environment; sustained strong credit performance with improving delinquency trends and lower losses; these were partially offset by a 2% sequential increase in loans.
Our current economic assumptions include an unemployment rate of approximately 5.5% by year-end and GDP growth of 7%.
Embedded within these assumptions are the expanded child care tax credits and the benefit from the infrastructure physical package beginning in late 2021.
Looking at Slide 11.
Our common equity Tier 1 ratio increased 80 basis points sequentially to 15.7%, a level well above our internal target of 10.5%.
As Roger noted, we are committed to returning capital.
The recent Board approval increasing our buyback and dividend payouts reflect that.
On funding, we continue to make progress toward our goal of having deposits [Technical Issues] 70% to 80% of our mix.
Moving to Slide 12.
Our perspective on 2021 continue to evolve as we see additional opportunities to drive profitable growth.
We have increasing confidence in our outlook for modest loan growth in 2021 as strong sales and our new account growth should offset the higher payment rates.
We expect NIM will remain in a relatively narrow range, compared to the first quarter levels of 75%, with some quarterly variability similar to what we experienced this quarter.
We anticipate a slight benefit from higher coupon deposit maturities and an optimized funding mix with yields affected by variability in the revolve rate.
Our commitment to disciplined expense management has not changed, and we remain focused on generating positive operating leverage and an improving efficiency ratio.
For this year, we now expect non-marketing expenses to be up slightly over the prior year, reflecting the higher compensation accruals and recovery fees.
The increase in the use expense categories is closely tied to the economic recovery.
For example, the high level of consumer liquidity is supporting elevated recoveries.
These recoveries have some costs associated with them, but are more than offset by lower credit losses.
Regarding marketing expenses, we expect this will step up more significantly in the second half of 2021 as we further deploy resources into account acquisition and brand marketing.
With the continued improvement in credit performance, our current expectation is that credit losses will be down this year, compared to 2020.
Naturally, a material change in the economic environment could shift the timing and magnitude of losses.
Lastly, as evidenced by our dividend increase and new share repurchase authorization, we remain committed to returning capital to shareholders.
In summary, we had another very strong quarter.
We are well positioned for a positive top line trajectory given our sales trends and new account growth.
Credit remains extraordinarily strong, and the economic outlook continues to improve.
We maintained our discipline on operating expenses, while investing [Technical Issues] returning organic growth opportunities.
And finally, we continue to deliver high returns, allowing for enhanced buybacks and dividends.
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discover financial services q2 earnings per share $5.55.
q2 earnings per share $5.55.
board approves repurchase of up to $2.4 billion of common stock.
increases the quarterly common stock dividend 14% from $0.44 to $0.50 per share.
compname says total loans ended quarter at $87.7 billion, down 1% year-over-year.
compname says credit card loans ended the quarter at $68.9 billion, down 2% year-over-year.
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Today, we will discuss the financial performance of KAR Global for the quarter ended December 31st 2020.
Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures.
Today, I plan to cover three topics, I want to review 2020, provide you with an update on the integration of TradeRev and BacklotCars and review our guidance for 2021.
Let me start with acknowledging the challenges that we faced in the most unusual year.
Obviously, COVID-19 impacted all businesses in 2020, including KAR.
We remain committed to providing the safest possible working environment for our employees and our customers.
With the challenges COVID-19 created in our workforce, we also saw challenges that directly impacted our marketplaces for wholesale used cars.
We continue to operate our auctions on our digital platforms, Simulcast, Simulcast+, OPENLANE, TradeRev and DealerBlock, but demand was very low in April as uncertainty was prevalent throughout the automotive ecosystem.
We continue to offer vehicles only through our digital marketplaces from mid-March through the remainder of 2020.
A key challenge that we faced in the second quarter was the need to accelerate the development of our digital marketplaces.
This increased level of online bidding began literally over a two-week period and our technology teams had to make sure our systems were always available and there were no service disruptions caused by the increased use of our networks.
I'm extremely proud of the collective effort of all KAR employees to make this happen.
In the past, many investors have asked me what keeps me awake at night, and technology and digital disruption have always been at the top of the list.
Well, while the challenges of 2020 took technology and digital disruption to a new level, we responded quickly, and today we have the best collection of digital assets in the entire industry.
We were able to accelerate the transition of our legacy physical auction business to a digital operating model in the matter of weeks instead of the three years to five years that we anticipated at the beginning of 2020.
Another challenge that we faced in 2020 was handling our workforce.
In late March, we closed all of our auctions and sent our employees home with pay to evaluate the impact of COVID-19 was having on the safety of our employees and our customers.
We furloughed 11,000 of our 15,000 employees globally.
In April, our weekly revenue had fallen to as low as 10% of the prior year revenue, the low point for KAR Global performance.
By May, we began to see some recovery in demand.
Our supply at the time was strong as inventory had been building up at our sites.
It became obvious that our business process had changed and many of these changes were going to be permanent.
We leaned heavily into technology for our auctions and supporting our back-office functions.
Changes in the business operations and especially, all of our support functions led us to permanently eliminate 5,000 positions, reducing our annual payroll costs by over $150 million.
By fall, we had our headcount and cost structure aligned with the business and our digital auction process.
We saw the impact of the permanent changes in our cost structure in our third quarter results and expect this to contribute to an improved financial performance going forward.
And then we saw a resurgence of COVID-19 with the impacts that went beyond what we had experienced in the spring.
We saw the supply of used vehicles tighten and our inventory levels continue to decline as retail demand remains strong, resulting in strong conversion rates and high wholesale prices.
Lower transaction volumes led to reduce performance in the fourth quarter despite all the reductions that we'd made to our cost structure.
In any organization, people are the most valuable asset.
In this environment, the strain and the uncertainty, our people are feeling is the most challenging aspect of running the business today, and it looks like it will be a while longer before we see relief from the strain of COVID-19.
Now, let me share some of our accomplishments in 2020.
First, we have successfully migrated all of our auction platforms to digital marketplaces.
This has been a strategic direction for KAR for over two years, and we were able to accelerate the pace of change during 2020.
We are committed to operating a digital marketplace business supported by services and logistics capabilities that make the wholesale process easy and efficient.
Our collection of digital assets that we have strategically focused on building and acquiring over the last five years put us in the unique position to move forward with a digital business model.
It is true that many of our competitors are running cars through the lane despite the increased COVID numbers over the past several months.
But we have not returned to the old way of doing business and don't believe there is any evidence that running cars across the block improves the financial outcomes for our customers.
We are committed to providing our auction services digitally going forward.
In 2020, we introduced Simulcast+ to the marketplace.
Simulcast+ is a fully automated auction that can easily sell cars from multiple locations using technology instead of people to manage and run the auction event.
Simulcast+ has proven to expand the geography represented by buyers and this improves liquidity for the sellers.
We are also not tied to a sale day event when using Simulcast+.
We can operate Simulcast+ any day of the week from one or multiple locations.
These can be ADESA or customer locations.
And the Simulcast+ platform gives us additional digital capabilities that allow our sellers to manage the auction event in real time without leaving their office.
We have provided a number of demos to investors this year.
And if you have seen one of those virtual tours, you saw that we have a significant amount of information available to both buyers and sellers that lead to strong pricing and conversion on the Simulcast+ platforms.
We see a number of benefits for both buyers and sellers.
We've seen increased liquidity.
We're able to reach a greater number of buyers that are interested in the car being offered.
We've seen lower costs to execute the transactions for all involved, and it is easier to integrate data and analytics in the process, excuse me, that is available to all parties.
Better information leads to better price attainment on the vehicle and realistic expectations by the sellers as to what is the current value of the vehicle.
Another success in 2020 was the improved growth and profitability for our TradeRev platform.
Our combination of dealer consignment sales teams of ADESA and TradeRev has been a success.
We reduced the use of incentives and focused on service levels.
We simplified our auction process in order to provide a better experience for our customers.
We generated positive earnings for several months in 2020 and have proven this business model can be profitable growth going forward.
And we acquired BacklotCars in order to accelerate our growth in the dealer-to-dealer segment in the U.S. market.
And finally, let me talk about the permanent reductions in our cost structure.
First, the changes we made in moving to a digital business model allowed us to make permanent reductions in our labor costs, both direct labor and SG&A.
Our SG&A was down year-over-year in Q4 by $25 million.
This decrease was achieved despite adding $5 million of SG&A in the fourth quarter related to BacklotCars.
Even though our costs, we're able to -- even though we were able to reduce our costs, our fourth quarter performance fell below our expectations as we saw the supply of wholesale vehicles decline throughout the entire industry.
Our volumes in Q4 reflect the slowing of the economy in response to the increased COVID cases.
I do not believe the lower volumes reflect the seasonal impacts or the permanent disruption of our marketplaces.
I believe the factors that negatively impacted our supply in Q4 are transitory.
Now, let me give you a real-time update on TradeRev and BacklotCars.
First, we are migrating all U.S. dealer-to-dealer transactions that previously took place on TradeRev to the BacklotCars platform.
We ran a pilot migration in three U.S. markets in January to refine our migration playbook.
We were pleased with the results of the migration and the acceptance of BacklotCars platform by our TradeRev customers in these markets.
Beginning February 1st, we initiated the migration of all U.S. TradeRev customers to the BacklotCars platform.
We expect the migration activities to be completed in March.
By moving our U.S. customers from the TradeRev application to the BacklotCars, we will be moving from a timed auction format to a 24/7 bid-ask marketplace.
Our analysis of the performance on the two platforms supported this move.
We believe running a single dealer-to-dealer digital marketplace will maximize liquidity.
Utilizing the inspection process developed by BacklotCars should lower our inspection cost per vehicle and provide greater consistency in the inspection reports for cars sold on BacklotCars platform.
And most important, we believe the price realization on the BacklotCars platform in the U.S. outperforms the competition in the U.S. market.
The early results on the migration activities has been very positive.
Initially, there was a small reduction in volumes as former TradeRev customers began using BacklotCars platform.
The learning curve for our customers seems to be about five days to seven days and in the second week, we began seeing our combined volumes increase in the markets that we are in the first wave of migrations.
We believe the BacklotCars is the fastest growing dealer-to-dealer platform in the U.S. market.
Our goal is simple.
We want BacklotCars to be the number one digital dealer-to-dealer marketplace in the U.S. Just to be clear, we will continue to operate TradeRev in Canada.
To sum it all up, after 90 days of owning BacklotCars, we are pleased with the performance and the fit with KAR.
We have focused -- we have a focused and energetic team leading our efforts to be the leader in the digital dealer-to-dealer transactions in the U.S.
Our customers have been receptive to change in the early days of integration activities and bringing the strength of the KAR organization to the outstanding team at BacklotCars is a winning combination that should accelerate the already fantastic pace of growth in the digital dealer-to-dealer space.
The last agenda on my -- the last item on my agenda and an important topic for today is an update on our outlook for 2021.
We are reinstating annual guidance for 2021.
While we continue to be in the middle of the COVID crisis in all of our markets, we believe we are better positioned to analyze the impacts on our business and assess the likely outcomes on various scenarios.
We are not providing a range, but we are providing the minimum level of performance we expect this year.
We still have significant uncertainty around the economy, employment, levels of new car production, the timing of repossession activities and many other factors that are still a ways from returning to normal.
Obviously, our guidance indicates we expect to continue to be below pre-COVID level of transactions and this is representative of our industry outlook.
I would like to provide some insight without specific numbers into how we see 2021 coming together.
First, we expect lower supply of wholesale used vehicles to persist through the first half of the year.
As a result, our outlook for the first and second quarter is conservative.
We do not believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020.
We have seen good progress in providing vaccinations in the first months of 2021 and expect continued progress on this front in all of the geographic markets we serve.
We also see stimulus in the U.S., Canada, and European -- and Europe as a positive for our customers in the used car retail market if passed by legislators.
We also believe that our financial performance may exceed 2019 levels before we achieve 2019 volume levels given the improvements that we have made in our cost structure.
Let me speak to the parts of the market that we believe will drive a return to normal.
First, our digital dealer-to-dealer platforms, BacklotCars in the U.S. and TradeRev in Canada are expected to grow substantially over 2020 levels.
We expect to continue -- to continue gaining market share in this channel throughout the year.
We are committed to expanding the use of Simulcast+ in 2021.
We are targeting an increased number of events using this technology platform.
There is tremendous value to using the Simulcast+ platform for multi-location sales events, targeted marketing for similar vehicles that allow us to create events that have high buyer interest and expand the geographic reach of the typical physical auction.
And our growth internationally, especially at ADESA Europe, formerly, CarsOnTheWeb is very strong and we expect this to continue throughout all of 2021.
We have not given a range of guidance, it is difficult to set an upper end of the range with the uncertainty on when operations will return to normal levels.
We still have more questions and answers on what our markets will look like, especially in the first half of the year.
But we have had -- have an opportunity to outperform above the adjusted EBITDA and operating adjusted net income per share provided in our guidance once volumes start improving.
As a team, we will focus on controlling our costs, increasing our market share, we expect our market share to be driven primarily by digital dealer-to-dealer platforms, BacklotCars and TradeRev, and we will be disciplined around capital deployment.
We think our balance sheet, excuse me, is an asset in the current economic environment.
And as we look to deploy capital, we expect uses of capital to have a strong connection to our strategic priorities around the digital transformation of the wholesale used car industry.
We are a digital marketplace business that utilizes data and analytics and value-added services through a network of locations throughout North America.
We are leading the digital transformation of our industry.
We have reduced our cost structure permanently and we expect increased profitability going forward.
We have combined two leading digital dealer-to-dealer wholesale auction platforms and have the goal of being the leading provider in this segment of the market in the United States and Canada.
And finally, we believe our balance sheet is well positioned to support the growth of our business.
We will deploy capital going forward on the initiatives that support our strategy.
And before I get into my remarks, I'd like to correct the statement Jim made during the call.
He said that we do not believe the second half of 2021 will improve upon the first half, he misspoke, it is, we do believe the second half of 2021 will improve upon the first half of 2021 and the second half of 2020.
So now I'll get into my remarks.
Let me start with an overview of our financial performance in 2020.
To say the least, it was a challenging year and our results quarter-to-quarter were like riding a roller coaster.
We experienced both ups and downs in performance this year.
In review, we started the first quarter strong and performed very well until the middle of March.
Uncertainties created by COVID-19 caused us to shut down our operations for the last two weeks of March.
We lost approximately $35 million in those two weeks as revenue was minimal and all employees were paid for two weeks despite all locations being closed.
We lost money in the month of April.
We had negative adjusted EBITDA of approximately $25 million for the month.
We then saw a relatively fast rebound during May as weekly volumes rebounded to over 90% of the prior year, followed by June, where volumes and our financial performance exceeded the prior year.
Volumes and financial performance remained strong in July, as we saw strong used car demand, low new car inventories, used car values were increasing and we were selling inventory that had been on our properties through the pandemic.
While volume started to decline in August, we finished the third quarter with volumes over 90% of 2019 levels for the quarter and adjusted EBITDA that was 8% above 2019 levels.
We had gross profit of over 50% of net revenue and adjusted EBITDA margin that was 23.5% of total revenue.
We feel this performance demonstrates the performance characteristics of our business model going forward when volumes are at or near 2019 levels.
Unfortunately, the fourth quarter saw volumes dropped to 75% of the prior year, excluding acquisitions.
And our financial performance deteriorated due to the low revenue levels.
Gross profit declined to 40% -- 46% of net revenue.
Even though we have improved our cost structure and reduced direct labor, there is a fixed component to our direct cost and the volume levels experienced in the fourth quarter did not generate sufficient revenue to maintain our gross margins.
In terms of SG&A, we're able to control cost and hold the SG&A below the prior year by $25 million.
This was accomplished despite recording approximately $16 million in incentive pay in the fourth quarter compared to $7 million in the prior year.
This increase in incentive pay reflects the proposal by management to adjust the threshold for payment to 50% from approximately 95% of target for 2020.
We felt the sacrifices and contributions of our employees should be recognized with the opportunity for a performance-based incentive payout.
The threshold set at the beginning of the year did not reflect the challenges we faced in 2020.
The Compensation Committee of the Board of Directors approved the adjustments of threshold.
The total payout for employees with annual incentive programs was approximately 70% of target for the year.
We also recorded an adjustment to contingent purchase price related to the acquisitions of CarsOnTheWeb and Dent-ology, that was a net increase in expense of $4.7 million.
This represents an increase in the expected contingent purchase consideration for CarsOnTheWeb as performance has exceeded the expectations set at the time of the transaction, offset by a reduction in contingent purchase consideration related to Dent-ology, where payments are expected to be less than estimated at the time of the acquisition.
Our effective tax rates for the fourth quarter and full-year were unusual in 2020.
The contingent purchase consideration and the write-off of goodwill totaling $25.5 million for our U.K. operations that we recorded earlier in the year are not tax deductible and increased our effective tax rate.
As we look forward, we expect our effective tax rate to be approximately 30%, unless, the U.S. federal income tax rate is increased from current levels.
I know the big question in everyone's mind is what does KAR's performance look like post-pandemic?
We believe our performance in June and through the third quarter gave us insight on what we can do going forward.
We believe when volumes get back to 90% or more of 2019 levels, our business can generate gross profit of approximately 50% of net revenue with adjusted EBITDA margins in the mid 20% range.
Our focus on operating a digital marketplace business and maintaining processes that leverage technology for a more efficient cost structure will allow us to perform at this level.
Now we need the markets to get back to what we would call normal, so we can prove to you the changes we have made will generate these results.
We are providing auction fees, service revenue, purchased vehicle revenue and finance-related revenue.
This will give a clear picture of the major components of revenue in our businesses.
In terms of key metrics provided in MD&A, we're now disclosing volumes for on-premise and off-premise vehicles sold.
We are reporting auction fee per vehicle sold as a key performance metric.
We will no longer be utilizing physical revenue per vehicle sold as a key metric.
While the number is easy to calculate, a significant portion of services revenue is generated from off-premise activity and not related to the on-premise vehicles sold.
We are also computing the gross profit dollars per vehicle sold and including that in MD&A.
This is a key indicator of performance and trends in this metric will be important going forward as volumes increase.
This metric will capture both the impact of auction revenue and services revenue on our performance.
We have also simplified our segment reporting to be consistent with the simplification of the KAR businesses post spin of Insurance Auto Auctions.
All holding company costs are reflected in the ADESA business segment other than costs specifically related to AFC.
This simplified segment reporting better reflects the KAR organization structure and how the businesses are being managed.
We want to maintain a cost structure that reflects the revenue and performance of the business.
Aligning our costs directly with the reportable segments simplifies our reporting and matches the cost structure of KAR with the revenue produced by our businesses.
Let me close with some comments on guidance.
However, one item that creates confusion is the computation of weighted average diluted shares.
Generally Accepted Accounting Principles require us to compute per share numbers using either the two-class method or the if-converted method when determining the impact of the Series A convertible preferred stock.
For clarity, we use both calculations and for GAAP, are required to use the number that produces the lower earnings per share.
For GAAP purposes, we reduced net income by the preferred dividend and exclude the preferred shares from the calculation of fully diluted shares outstanding when we used the two-class method.
In computing operated adjusted net income per share, we are utilizing the if-converted method.
In this method, we do not adjust for the preferred dividend, but do include the conversion of the preferred shares into common shares in the calculation.
To the extent, preferred dividends are paid in kind, we include the accrued dividends in the conversion calculation.
In summary, the only difference between the two weighted average diluted shares numbers is the conversion of the convertible preferred stock to common shares using the conversion price of $17.75 per share.
We did buy back $10.2 million of common stock in the fourth quarter at an average price of $17.50 per share.
We acquired the shares in the open market within the parameters we established during our open window during the quarter.
One last item that I will provide in the call, because it will be included in the 10-K that will be filed later today or tomorrow, is our expectation for capital expenditures for 2021.
We expect capital expenditures to be approximately $125 million, an increase from actual capital expenditures of $101 million in 2020.
The increase in capital expenditures expected in 2021 reflects continued investment in technology to support our strategy around digital transformation, as well as a return to normal capital spending to support our physical locations.
Our 2020 capital expenditures were reduced from our expected levels for 2020 to conserve capital as our business was adversely impacted by the pandemic.
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q3 adjusted earnings per share $1.97.
q3 gaap earnings per share $1.75.
q3 revenue rose 29 percent to $200 million.
quarter end backlog was a record $299 million.
qtrly bookings increased 71% to a record $245 million.
sees fy 2021 revenue $778 million to $783 million.
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We appreciate you joining us today.
We are pleased to report terrific financial performance driven by the consistent execution of our strategic priorities, and the ongoing recovery in the global markets.
In summary, the quarter was highlighted by, continued strong sales trends, which we believe led to market share gains, gross margin gains, then improved operational efficiencies that drove margin expansion, and record quarterly earnings, and the effective deployment of capital for growth and productivity investments, bolt-on acquisitions, the dividend and share repurchases.
Taking a look at our second quarter financial results, total sales were $4.8 billion, up 25% from last year and improved sequentially from plus 9% in the first quarter.
For your additional perspective our second quarter sales were 12% higher than in Q2 2019.
Gross margin was also strong representing our 15th consecutive quarterly increase, and we further improved our productivity with the ongoing execution of our expense initiatives.
As a result, segment profit increased 35% and our segment margin improved 65 basis points to 9.2% which represents our strongest margin in two decades.
Adjusted net income was $253 million and adjusted diluted earnings per share were $1.74, up 32%.
Total sales for Global Automotive were a record $3.2 billion, a 28% increase from 2020, and up 15% from the second quarter of 2019, and marks the first quarter in our 93-year history with auto sales exceeding the $3 billion mark.
On a comp basis sales were up 21% and on a two-year stack comp sales were up 8.5%.
Our comp sales in the second quarter were driven by double-digit year-over-year comp sales in each of our automotive operations.
Automotive segment profit margin improved to 9.1%, up 30 basis points from 2020 and an increase of 90 basis points from 2019.
This expansion was supported by strong operating results across all of our operations.
The automotive recovery reflects our focus on key growth initiatives, as well as several market tailwinds and these include the broad economic recovery and strengthening consumer demand, favorable weather trends, inflation and our ability to pass along price increases to our customers.
Finally, solid industry fundamentals, which have been further accelerated by a surge in used car market and improving miles driven.
While these market tailwinds are encouraging, we also see continued headwinds, which we continue to closely monitor.
These would include the spread of the delta coronavirus variant and its potential impact on the global economy, global supply chain disruptions, ongoing labor shortages in our operations, and the impact of inflation on our cost such as wages and freight.
Turning next to our regional highlights, our GPC teammates in Europe built on their excellent start to the year achieving the strongest sales growth among our operations with comp sales up 34%.
Each concrete posted substantial sales growth while our U.K. team continues to outperform.
The positive momentum in Europe reflects improving market conditions and favorable weather trends, as well as our focus on key sales initiatives, inventory availability and excellent customer service.
In particular, we have seen exceptional results from our key accounts partners and the ongoing expansion and roll out of the NAPA brand.
In our Asia-Pac business, sales were in line with the mid-to-high teen comps we have had in this market now for four consecutive quarters, commercial sales outperformed retail, although both customer segments posted strong growth.
The Repco and NAPA brands performed well and collectively are capturing market share.
The NAPA network continues to build and we have now more than 50 NAPA locations operating across Australia and New Zealand, in addition to our 400 plus Repco stores.
In North America, comp sales increased 20% in the U.S. and were up 12% in Canada, where lockdowns in key markets such as Quebec and Ontario have been headwinds for several quarters now.
Sales in the U.S. were driven by strong growth in both the commercial and retail segments, with DIFM sales outperforming DIY for the first time since before the pandemic began to take hold in Q1 of 2020.
The strengthening commercial sales environment is significant for us, as it accounts for 80% of our total U.S. Automotive revenue.
The strong recovery in the commercial sector contributed to record average daily sales volume in our U.S. Automotive business in June.
Our sales drivers by product category include brake, tools and equipment and under car, which all outperformed.
In addition, both retail and commercial ticket and traffic counts were strong for the second consecutive quarter, so another really positive trend.
By Customer segment, retail sales remained strong throughout the quarter with low double-digit sales growth on top of a healthy sales increase in the second quarter of last year.
While the DIY market is pulling back from the highs of 2020, we are optimistic our ongoing investments will create sustainable retail growth.
For commercial sales each of our Customer segments posted double-digit growth, which we attribute to the broad automotive recovery and investments in our sales team, our sales programs and our supply chain among other initiatives.
This quarter our strongest growth was with our major account partners and NAPA AutoCare centers.
We were also pleased with the growth in sales to our fleet and government accounts.
This was the first quarter of positive year-over-year sales growth for this group, since before the pandemic, as they lag the overall automotive recovery in the U.S.
We view this improvement as a meaningful indicator for further growth in the quarters ahead.
As the automotive recovery continues, we expect our commercial sales opportunities to outpace retail, consistent with the long-term growth outlook of the aftermarket industry.
We are confident in our growth strategy and our initiatives to deliver customer value and sell more parts for more cars across our global automotive operations.
We also remain focused on enhancing our inventory availability, strengthening our supply chain, and investing in our omni-channel capabilities while expanding our global store footprint to further strengthen our competitive positioning.
But now, let's discuss the global Industrial Parts Group.
Total sales for this group were $1.6 billion, a 20% increase from last year, and up 7% from 2019.
Comp sales rose 16% and reflect the fourth consecutive quarter of improving sales trends.
A strong sales environment combined with the execution of our operational initiatives drove a 9.5% segment margin, which is up a 130 basis point from both 2020 and 2019.
The ongoing market recovery over the last 12 months is in-line with the strengthening industrial economy and the overall increase in activity we have seen across much of our customer base.
The Purchasing Managers Index measured 60.6 in June, reflecting healthy levels of industrial expansion and marrying trends we have seen throughout the majority of this year.
Likewise, industrial production increased by 5.5% in the second quarter representing the fourth consecutive quarter of expansion.
Diving deeper into our Q2 sales, we experienced strong sales trends across each of our industries served and our product categories other than safety supplies, which had extraordinary sales in 2020 due to the pandemic.
Several industry sectors stood out as their sales increased by 30% or more over last year, including equipment and machinery, automotive, aggregate and cement, equipment rental and oil and gas.
In addition, our newly added fulfillment and logistics industry sector experienced tremendous growth.
In the past several years of expanding this segment, we have found our broad offering of products and services fits well with the needs of these customers.
To drive this growth.
We remain focused on several strategic initiatives, which include the build-out of our Industrial omni-channel capabilities with solid growth in digital sales via Motion.com.
Our new inside sales center, which was established in 2019, is generating incremental sales from new Motion customers and we see room for further growth.
The expansion of our services and value-add solutions businesses in areas such as equipment repair, conveyance and automation.
Over the last few years we have made several bolt-on acquisitions to build scale and continue to target additional M&A opportunities to further enhance our capabilities in these key areas.
Enhanced pricing and product category management strategies to maximize profitable growth the further optimization and automation of our supply chain network to improve operational productivity while delivering exceptional customer service.
We are encouraged by Industrial strong financial performance in the second quarter and the positive momentum we see in the overall industrial market.
We believe the Motion team is well positioned to capitalize on this momentum and enhance our market leadership position.
So in summary, each of our businesses did an exceptional job of operating through the quarter and we couldn't be more proud and grateful for their strong Q2 performance.
I'd like to personally congratulate the entire global GPC team for the hard work an impressive result.
The teams continue to build momentum and execute well.
We remain focused on our defined strategic initiatives.
And despite the global uncertainties that continue to impact our operations we're pleased with the strong sales growth, operating leverage and cash flow performance this quarter.
Last quarter, we outlined our plan to create value as we leverage GPC global capabilities to simplify and integrate our operations, we do so to improve the customer experience, to increase the speed and efficiency of execution and to deliver winning performance.
This includes continuous investments to position GPC for near and long-term profitable growth.
The key pillars of our investments include talent, sales effectiveness, digital, supply chain and emerging technologies.
Around the globe the teams executed well against our strategic priorities.
For example, on talent, we announced last month that Naveen Krishna joined the company, as Chief Information and Digital Officer.
Naveen will help lead our strategy and execution for all technology and digital initiatives.
He comes to GPC with more than 25 years of technology experience with companies such as Macy's, Home Depot, Target and FedEx.
Other examples of recent talent investments include category management, field sales and services, indirect sourcing, pricing, diversity equity inclusion, digital, data and inventory leadership to name a few.
Investment in our people is always a priority as we execute our mission to be an employer of choice.
To highlight other examples of our initiative momentum in local execution, Paul and I recently had the opportunity to spend time in person with our European team mates, and they showcased great examples of the strategic initiatives and winning team performance.
For example, we discuss details of the growth plans for a recent bolt-on investment Winparts, an online leader of automotive parts and accessories.
We expect this investment to provide new capabilities and accelerate our European digital vision.
We visited a best-in-class distribution facility in the Netherlands that increased operating productivity by approximately 20% over the past few years with the automation investments and process excellence initiatives.
We received an update on the consolidation of 10 back office shared service centers in France to one national location in France to drive cost and process efficiencies, and we saw first hand the power and differentiation of the NAPA brand in the local market.
Although, these are only a few select examples in Europe in each of our automotive and industrial businesses, we see similar examples of focus, strategic execution that are delivering results.
We also executed well on our acquisition strategy during the quarter.
The M&A environment is active and we remain disciplined to pursue strategic and value creating transactions.
For example, in addition to WInparts, we completed several other bolt-on acquisitions to deliver growth, add capabilities and create value.
The North American and European automotive teams completed various store acquisitions that increase our position in key strategic geographies and extend existing customer relationships.
Our automotive team in Asia-Pac, also executed two bolt-on strategic acquisitions including Rare Spares a market leader in the niche segment of automotive restoration parts and accessories and PARts DB, a leading cloud-based product and supplier data platform that will enhance our e-commerce and data capabilities.
We enter the third quarter with strong momentum, as our automotive and industrial markets recover and we execute our plans.
We continue to analyze and respond to areas that challenge our daily operations such as COVID-19, inflation, global logistics and product and labor availability.
For example, the global and local procurement teams partner closely with all levels of our suppliers to effectively assess product availabilities and delivery trends.
We have processes in place, backed with data and analytics to create visibility into direct and indirect inflation trends.
We utilize GPC scale and relationships including dedicated GPC resources in Asia to address our global logistics needs, and we continue to address labor challenges with competitive pay and benefits, flexible work programs, creative incentives to attract talent, a differentiated culture and compelling career opportunities.
We believe our team is well positioned to remain agile, as we focus on what we can control and navigate these macro global headwinds.
Overall, we're very pleased with our performance through the first half of the year and look forward to sharing our continued progress next quarter.
Total GPC sales were $4.8 billion in the second quarter up 25%.
Our gross margin improved to 35.3%, an increase from 33.8% last year or up a 120 basis points from an adjusted gross margin of 34.1%.
Our improvement in gross margin was primarily driven by the increase in supplier incentives, although, we also continue to benefit from channel and geographical mix shifts positive product mix, strategic category management initiatives including pricing and global sourcing strategies.
In the second quarter, there was significant pricing activity with our suppliers, resulting in product cost inflation.
We were positioned to pass these increases on to our customers and the impact of price inflation was neutral to gross margin.
We estimate a 1.5% impact of inflation in automotive sales for the quarter and a 1% impact in industrial.
Based on the current environment, we expect this to increase further through the second half of the year.
Our total adjusted operating and non-operating expenses are $1.3 billion in the second quarter, up 28% from last year and 28.1% of sales.
The increase in last year reflects the impact of several factors including the prior-year benefit of approximately a $150 million in temporary savings related to the pandemic.
The balance primarily relates to the increase in variable costs on the $1 billion in additional year-over-year sales.
And to a lesser extent, we experience rising cost pressures in areas such as wages, incentive compensations, freights, rents and health insurance, which we are managing.
We also invested in projects associated with our transformation and other strategic initiatives to drive growth and enhance productivity.
So overall, we continue to operate in line with our plans for the year and we remain focused on gaining additional efficiency in the quarters ahead, as you heard from Paul and Will.
On a segment basis, our total segment profit in the second quarter was $441 million, up a strong 35%.
Our segment profit margin was 9.2% compared to 8.6% last year a 65 basis point year-over-year improvement and up a 100 basis points from 2019.
So strong operating results, and a reflection of the work we have done to streamline our operations and optimize our portfolio over the last several years.
We would add that for the full year, we continue to expect our segment profit margin to improve by 20 to 30 basis points from 2020 or 60 to 70 basis points from 2019.
This would represent our strongest margin in five years.
Our tax rate for the second quarter was 27.2% on an adjusted basis up from 24.1% last year.
The increase in rate primarily reflects our higher U.K. tax rate, partially offset by stock compensation excess tax benefits.
Second quarter net income from continuing operations was $196 million with diluted earnings per share of $1.36.
Our adjusted net income was $253 million or $1.74 per share, which compares to $191 million or $1.32 per share in the prior year, a 32% increase.
Turning to our second quarter results by segment.
Our automotive revenue was $3.2 billion, up 28% from last year.
Segment profit was $291 million, up 33%, with profit margin improved to 9.1%, up 30 basis points from 2020 and a 90 basis point increase from 2019.
We attribute the margin gain to the positive market conditions in our automotive business and our team's intense focus on the execution of our growth and operating initiatives.
We're encouraged by the positive momentum we will carry into the balance of the year.
Our Industrial sales were $1.6 billion in the quarter, up 20% from 2020.
Segment profit of $150 million was up 38% from a year ago and profit margin improved to a strong 9.5%, a 130 basis point increase from both 2020 and 2019.
So with the strengthening sales environment and continued operational improvements, this group continues to post excellent operating results and we expect Industrial to perform well through the balance of the year.
Now, let's turn our comments to the balance sheet.
At June 30th, our total accounts receivable is up 4% despite the strong sales increase, this is primarily due to the additional sale of $300 million in receivables in the second half of 2020.
Inventory was up 10%, consistent with our commitment to provide for inventory availability and our accounts payable increased 26%.
Our AP-to-inventory ratio improved to 129% from 112% last year.
We remain pleased with our progress in improving our overall working capital position.
Our total debt is $2.5 billion, down $700 million or 22% from June of 2020 and down $160 million from December 31 of 2020.
We closed the second quarter was $2.5 billion in available liquidity and our total debt-to-adjusted EBITDA has improved to 1.6 times from 2.9 times last year.
Our team has done an excellent job of improving our capital structure over the last year.
We continue to generate strong cash flow with another $400 million in cash from operations in the second quarter and $700 million for the six months.
For the full year, we expect our earnings growth and working capital to drive $1.2 billion to $1.4 billion in cash from operations and free cash flow of $900 million to $1.1 billion.
Our key priorities for cash remain the reinvestment in our businesses through capital expenditures, M&A, the dividends and share repurchases.
We have invested $90 million in capital expenditures thus far in the year and we expect these investments to pick up further in the quarters ahead, as we execute on additional investments to drive organic growth and improve efficiencies and productivity in our operations.
As Will mentioned earlier strategic acquisitions remain an important component of our long-term growth strategy.
We've used approximately $97 million in cash for acquisitions through these six months and we continue to cultivate a strong pipeline of targeted names and expect to make additional strategic and bolt-on acquisitions to complement both our Global Automotive and Industrial segments as we move forward.
Consistent with our long-standing dividend policy, we have also paid a total cash dividend of more than $232 million to our shareholders through the first half of this year.
This reflects a 2021 annual dividend of $3.26 per share and represents our 65th consecutive annual increase in the dividend.
Finally, as part of our share repurchase program, we have been active with share buybacks since 1994.
In the second quarter, we used $184 million to acquire 1.4 million shares.
The company is currently authorized to repurchase up to 13 million additional shares and we expect to remain active in this program in the quarters ahead.
In arriving at our updated guidance, we considered several factors, including our past performance and recent business trends, current growth plans and strategic initiatives, the potential for foreign exchange fluctuations, inflation and the global economic outlook.
We also consider the continued uncertainties due to the market disruptions such as with COVID-19 and its potential impact on our results.
With these factors in mind, we expect total sales for 2021 to be in the range of plus 10% to plus 12%, an increase from our previous guidance of plus 5% to plus 7%.
As usual, this excludes the benefit of any unannounced future acquisitions.
By business, we are guiding to plus 11% to plus 13% total sales growth for the Automotive segment, an increase from the plus 5% to plus 7%, and a total sales increase of plus 6% to plus 8% for the Industrial segment an increase from the plus 4% to plus 6%.
On the earnings side, we are raising our guidance for adjusted diluted earnings per share to a range of $6.20 to $6.35, which is up 18% to 20% from 2020.
This represents an increase from our previous guidance of $5.85 to $6.05.
We enter the third quarter, focused on our initiatives to meet or exceed these targeted results and we look forward to reporting on our financial performance as we go through the year.
We are pleased with our progress in capturing profitable growth, generating strong cash flow and driving shareholder value.
This quarter's 25% total sales growth reflects the benefits of the strengthening global economy and positive sales environment in both our automotive and industrial businesses.
Importantly, this dual recovery allows us to leverage the full scale of one GPC, which we believe creates significant value.
Our team also executed well and produced our 15th consecutive quarter of gross margin expansion, while further improving our productivity via ongoing expense initiatives.
Our global team network and disciplined focus in these areas enabled us to report strong operating results and record quarterly earnings.
Our exceptional balance sheet provides us with the financial flexibility to pursue strategic growth opportunities via investments in organic and acquisitive growth, while also returning capital to shareholders through the dividend and share repurchases.
The GPC team is focused on executing our growth strategy and operational initiatives to further enhance our financial performance in the remainder of 2021 and beyond.
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q1 gaap earnings per share $1.50 from continuing operations.
q1 sales rose 9.1 percent to $4.5 billion.
raises 2021 outlook for revenue growth and diluted eps.
sees 2021 total sales growth 5% to 7%.
sees 2021 earnings per share $5.85 to $6.05.
sees 2021 free cash flow $700 million to $900 million.
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On Slide 4 is our safe harbor statement.
These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts.
The company's future results are influenced by many factors beyond the control of the company.
During today's call, management will make reference to non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin, and adjusted diluted EPS.
West had an extraordinary year of success in the face of the biggest healthcare challenge of our generation.
A record-setting year of sales and margins were driven by base business demand of our components, devices and solutions as well as the accelerating demand for components associated with COVID-19 vaccines and therapeutics.
This was accomplished by our dedicated team members across the globe, working tirelessly to show up each day at our facilities, our labs and remotely at their homes to make a meaningful difference to customers and patients.
The past year has truly brought to life the importance of our mission and values that guides our work each day at West.
We remain steadfast in our purpose to serve society and lead by example for the communities in which we live and work.
Importantly, we continue to manage through these unprecedented times by focusing on two key priorities.
One, keeping our team members safe and two, ensuring uninterrupted supply of high-quality containment and delivery devices required by our customers and the patients we jointly serve.
The criticality of our business today is shown in the character and the perseverance of our team members to deliver on our commitments as a trusted partner for our customers.
The strength of our performance this past quarter and throughout 2020, demonstrates the forward momentum that we have built over time with our market-led strategy, globalization of our manufacturing network and One West team approach to satisfy market demand.
Moving to Slide 6.
These charts show a breakdown of the 2020 sales and the impact of our high-value products that we bring to numerous customers around the world.
As the base business continues to grow, and as we saw a growing demand for components associated with COVID-19, we leveraged our global infrastructure and team's agility to meet the increased demand.
Now, turning to Slide 7.
Proudly, West components are on a majority of the vaccines on the market and in development to combat COVID-19.
The process for selecting the best high-quality packaging components for use with injectable medicines, including vaccines is a complex one, driven by years of science, which West has pioneered.
It became clear to us in early 2020 that would -- we would need to accelerate production capacity for certain high-value products.
As I previously shared, many of our customers are selecting fluoropolymer-coated stoppers from vial configurations made by both West and our partner, Daikyo.
These are the industry standard for packaging sensitive molecules and have an outstanding track record of quality and reliability.
Some of our customers have selected NovaPure, as they have made the decision to use this best-in-industry component to ensure the highest degree of quality and safety.
In addition, we're involved in many therapeutic approvals and our contract manufacturing business is supporting the COVID-19 diagnostic requirements of our customers.
In Q4, we accelerated our capacity expansions and began the installation of additional equipment with a modular approach to expand Flurotec and NovaPure capacity.
This included the installation of several 45-ton hydraulic presses and additional HVP manufacturing processes to produce components for COVID-19 vaccines at several sites.
I'm proud to say that the first presses were installed and validated at the end of 2020, and we're now producing product.
And we're not done yet.
We have more presses that will be installed in the first half of this year.
It should be noted that these investments were already included in the 5-year plan.
We just brought them forward to support the pandemic efforts.
Moving to Slide 8.
While COVID-19 was much of the focus in 2020, there are a few other notable highlights I would like to share.
West was named to the S&P 500 and recently joined the S&P 500 Dividend Aristocrats.
We continue to make significant progress with our environmental, social and governance priorities and have received many accolades in 2020 for these efforts.
We launched several innovative products such as our 20-millimeter Vial2Bag Advanced product.
AccelTRA component line extensions and a Flip-Off seal container closure system compatible with Daikyo Crystal Zenith vials.
Our team of scientific and technical experts continue to educate and share insights in biologics, combination products and container closure integrity, which are priority areas in pharmaceutical packaging and necessity during this pandemic to ensure patient safety.
At the end of the year, West digital technology center successfully implemented a new ERP system, SAP S/4HANA, which during this pandemic is quite an accomplishment.
As we continue to improve our internal systems, S/4HANA brings enhanced analytics to improve responsiveness, operating efficiencies and greater service levels for customers.
Turning to Slide 9.
The opportunity ahead of us centers around three core pillars: execute, innovate and grow.
The first pillar, Execute is about continuing to build from the strength and success of the market led strategy.
Further globalization of our operating model.
And lastly, a shift from analog to a digital environment across West.
We continue to drive the market-led strategy for further defining unique value propositions to address specific customer needs in biologics, generics and pharma.
These are very attractive, robust markets for the future of injectable medicines.
For the benefit of our customers, we have been able to leverage our global manufacturing network by enabling the right capabilities, scale and flexibility to keep up with the increased demand with the ability to leverage existing assets more effectively across our global network, we can respond to the demand of our base business and importantly, the demand for COVID-19, while maintaining our global leadership position.
We will continue to deliver digital tools, such as the Knowledge Center and the West Virtual, along with enhancements to improve plant productivity with automation and advanced manufacturing systems.
The second pillar is Innovate with a focus on R&D efforts with -- from concept to commercialization.
Our newly aligned R&D team is focused on several areas: the first area of new products and platforms, to connect the dots across science and technology for potential value creation.
The second area is technology solutions and new go-to-market enablement, which explores adjacent technologies and disruptors to realize new opportunities.
And the third area is product life cycle management with the execution of development agreements and product extensions.
We are confident that these R&D efforts will have us well positioned to deliver unique innovations and future improvements to existing portfolios for our customers.
The third pillar is Growth, capital deployment and free cash flow.
As mentioned earlier, we have increased capital expenditures on specific equipment focused on Flurotec and NovaPure to enable us to respond to the core business growth and vaccine requirements and as the vaccines are being approved, making sure we can respond and meet the customer demand.
And we continue to look for external technology opportunities to complement our business.
We are working from a position of strength as we believe we have a long horizon of continued organic sales growth and margin expansion.
Our focus within these three pillars: execute, innovate and grow, allows us to be more responsive, leverage our assets more effectively, and support the trends that are happening in the industry today.
Turning to Slide 10 and our performance in the fourth quarter and full year.
Our financial results were strong.
We had approximately 20% organic sales growth in the fourth quarter and 16% for the full year driven again by robust biologics growth, high-value product sales and contract manufacturing.
And our base business delivered significant growth with solid growth in operating profit margin expansion.
This resulted in a strong adjusted earnings per share and free cash flow for the fourth quarter.
So let's review the numbers in more detail.
We'll first look at Q4 2020 revenues and profits where we saw continued strong sales and earnings per share growth led by strong revenue performance, primarily in our biologics and generics market units and contract manufacturing.
I will take you through the margin growth we saw in the quarter as well as some balance sheet takeaways.
And finally, we'll review our 2021 guidance.
First up Q4, our financial results are summarized on Slide 11 and the reconciliation of non-U.S. GAAP measures are described in Slides 20 to 23.
We recorded net sales of $580 million, representing organic sales growth of 19.8%.
COVID-related net revenues are estimated to have been approximately $46 million in the quarter.
These net revenues include our assessment of components associated with vaccines, treatment and diagnosis of COVID-19 patients, offset by lower sales to customers affected by lower volumes due to the pandemic.
Looking at Slide 12.
proprietary product sales grew organically by 25.1% in the quarter.
High-value products, which made up more than 65% of proprietary product sales in the quarter grew double digits and had solid momentum across all market units throughout Q4.
Looking at the performance of the market units, the biologics market unit delivered strong double-digit growth.
We continue to work with many biotech and biopharma customers, who are using West and Daikyo high-value product offerings.
The generics market unit also experienced strong double-digit growth made by sales of Westar and Flurotec components.
Our pharma market unit saw low single-digit growth with sales led by high-value products, including Westar and Flurotec components.
And contract manufacturing had mid single-digit organic sales growth for the fourth quarter, led once again, by sales of diagnostic and healthcare-related injection devices.
We continue to see improvements in gross profit.
We recorded a $211.1 million in gross profit, $57.9 million or 37.8% above Q4 of last year.
And our gross profit margin of 36.4% was a 390-basis-point expansion from the same period last year.
We saw improvements in adjusted operating profit with $119.1 million recorded this quarter compared to $73.1 million in the same period last year or a 62.9% increase.
Our adjusted operating profit margin of 20.5% was a 500-basis-point increase from the same period last year.
Finally, adjusted diluted earnings per share grew 63% for Q4.
Excluding stock tax benefit of $0.09 in Q4, earnings per share grew by approximately 55%.
So let's review the growth drivers in both revenue and profit.
On Slide 13, we show the contributions to sales growth in the quarter.
Volume and mix contributed $87.8 million or 18.7 percentage points of growth, including approximately $46 million of volume-driven by COVID-19-related net demand.
Sales price increases contributed $5.5 million, a 1.2 percentage points of growth, and changes in foreign currency exchange rate increased sales by $16.3 million or an increase of 3.5 percentage points.
Looking at margin performance.
Slide 14 shows our consolidated gross profit margin of 36.4% for Q4 2020, up from 32.5% in Q4 2019.
proprietary Products fourth-quarter gross profit margin of 41.7% was 370 basis points above the margin achieved in the fourth quarter of 2019.
The key drivers for the continued improvement in proprietary Products gross profit margin were favorable mix of products sold driven by growth in high-value products, reduction efficiencies and sales price increases, partially offset by increased overhead costs.
Contract manufacturing fourth-quarter gross profit margin of 17.2% was 80 basis points above the margin achieved in the fourth quarter of 2019.
This is a result of improved efficiencies and plant utilization.
Now, let's look at our balance sheet and review how we've done in terms of generating more cash.
On Slide 15, we have listed some key cash flow metrics.
Operating cash flow was $472.5 million for 2020, an increase of $105.3 million compared to the same period last year, a 28.7% increase.
Our 2020 capital spending was $174.4 million, $48 million higher than the same period last year and in line with guidance.
Working capital of $870.3 million at December 31, 2020, was $153.2 million higher than at December 31, 2019, primarily due to an increase in accounts receivable of $66 million due to increased sales activity and an increase in inventory of $85.6 million to position us to support the increasing needs of our customers.
Our cash balance at December 31 of $615.5 million, was $176.4 million more than our December 2019 balance, primarily due to our positive operating results.
Slide 16 provides a high level summary.
Full year 2021 net sales guidance will be in a range of between $2.5 billion and $2.2 -- $2.525 billion.
This includes estimated net COVID incremental revenues of approximately $260 million.
There is an estimated benefit of $75 million based on current foreign exchange rate.
We expect organic sales growth to be approximately 13% to 14%.
We expect our full year 2021 reported diluted earnings per share guidance to be in a range of $6 to $6.15.
We continue to expand our HVP manufacturing capacity at our existing sites to meet anticipated core growth and COVID vaccine demand.
Accordingly, we have set capex guidance of $230 million to $240 million.
There are some key elements I want to bring your attention to as you review our guidance.
Estimated FX benefit on earnings per share has an impact of approximately $0.23 based on current foreign currency exchange rates and excludes future tax benefits from stock-based compensation.
To summarize the key takeaways for the fourth quarter, strong top-line growth in both proprietary and contract manufacturing, gross profit margin improvement, growth in operating profit margin, growth and adjusted diluted EPS, and growth in operating and free cash flow, delivering in line with our pillars of execute, innovate and grow.
To summarize on Slide 17, we have a critical role to support our customers as we work to resolve this global pandemic.
The participation rate remains very high.
And our products are being used in this battle.
We have strength in the underlying core business and long-term growth.
Our focus on execute, innovate and grow, allows us to be more responsive to the changes in the industry.
Our market-led strategy is delivering the right products and solutions to our customers.
Our global operations network continues to flex and respond to increased demand and capacity requirements.
And our investments to fuel R&D and innovation in digital technology will continue to keep us on the forefront of the industry.
The future is promising, but most importantly, we remain grounded for our mission and values each day at West, because every component has a patient's name on it.
Catherine, we're ready to take questions.
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sees fy sales $2.8 billion to $2.81 billion.
q3 sales rose 28.9 percent to $706.5 million.
raising full-year 2021 adjusted-diluted earnings per share guidance to a new range of $8.40 to $8.50.
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So with that said, let's turn to our fiscal 2021 second-quarter results.
Given the challenging operating environment as a result of COVID-19 and we are very pleased with our results to this point in the 2020-2021 ski season across our 34 North American resorts.
While our results for the second quarter continued to be negatively impacted by COVID-19, total visitation across our North American destination mountain resorts and regional ski areas were down approximately 5% compared to the same period in the prior year.
The strong visitation for the quarter highlights the underlying resiliency of our business, the loyalty of our guests and the strong appeal of skiing in guests leisure travel plan.
As we moved past the peak holiday period, which was constrained by capacity limitations driven by both COVID-19 and below average snow conditions, we saw improved results in January, particularly with lift ticket sales.
While visitation trends improved throughout the quarter, our ancillary lines of business continue to be negatively impacted by COVID-19 related capacity constraints and limitation, particularly in food and beverage and ski school.
We experienced strong results in the quarter from both our local and destination guests with local visitation up slightly compared to the same period in the prior year and destination visitation proving more stable than we expected.
destination Mountain Resorts skier visit, excluding complimentary access.
Despite the travel challenges associated with COVID-19, which compares to 57% in the same period in the prior year.
International visitation, as expected, decreased significantly due to COVID-19 related travel situation.
with destination guests, including international visitors, declining to 15% of Whistler Blackcomb visits, excluding complimentary access, which compares to 48% in the same period in the prior year.
Our season pass unit sales growth of 20% for fiscal year 2021, created a strong baseline demand heading into the season across our local and destination audience and will be one of the most important drivers of our performance and relative stability for the season.
For the fiscal 2021 second quarter, 71% of our visitation came from season pass-holders compared to 59% of visitation in the same period in the prior year.
Our growth in pass-holders this past year also positions us well as we head into the 2021/2022 season.
We remain even more committed to the benefits advanced commitment offers our company and intend to remain aggressive in providing the best value to skiers and riders who purchase in advance of the season and continuing our strategy to move lift ticket purchases into our Pass program.
We are excited to launch our 2021/2022 lineup of Epic Pass products on March 23, 2021.
We maintained disciplined cost control throughout the quarter as we operated the business at reduced capacity.
Resort reported EBITDA margin for the fiscal 2021 second quarter was 40.3% compared to the prior year period of 40.9%, while resort net revenue decreased $240.1 million over the same period.
As Rob mentioned, our results for the second quarter were impacted by COVID-19 and the resulting impacts to our North American mountain resorts.
Net income attributable to Vail Resorts was $147.8 million or $3.62 per diluted share for the second quarter of fiscal 2021, compared to net income attributable to Vail Resorts of $206.4 million or $5.04 per diluted share in the prior year.
Resort reported EBITDA was $276.1 million in the second fiscal quarter, which compares to resort reported EBITDA of $378.3 million in the same period in the prior year.
And the decrease was primarily a result of the negative impacts of COVID-19.
Turning to our season-to-date metrics for the period from the beginning of this ski season through Sunday, March 7, 2021, and for the prior year period through Sunday, March 8, 2020.
The reported ski season metrics are for our North American destination mountain resorts in the most areas and exclude the results of our Australian ski resorts in both periods.
The reported ski season metrics include growth for Season Pass revenue based on estimated fiscal year 2021 North American season pass revenue compared to fiscal year 2020 North American season pass revenue.
Fiscal year 2020 season pass revenue was adjusted to exclude the impact of the deferral in Pass product revenue as a result of pass-holder credits offered to 2019/2020 North American pass-holders.
Fiscal Year 2021 season pass revenue does not include the Pass product revenue recognized in the first quarter of fiscal year 2021 as a result of unutilized pass-holder credits.
This approach results in a year-over-year comparison of season pass revenue, exclusive of the impact of discounts provided to our 2019/2020 pass-holders.
The metrics include all North American destination mountain resorts and regional ski areas and are adjusted to eliminate the impact of foreign currency by applying current period exchange rates to the prior period for Whistler Blackcomb results.
The data mentioned in this release is interim period data and is subject to fiscal quarter end review and adjustments.
We continue to be pleased with the positive momentum we are seeing in demand as we begin the third quarter with visitation continuing to improve throughout the North American ski season.
Season-to-date total skier visits were down 8.2% compared to the prior year season-to-date period.
Season-to-date total lift revenue, including an allocated portion of season pass revenue for each applicable period, was down 8.9% compared to the prior year season-to-date period.
Season-to-date ski school revenues decreased 43.2%.
Dining revenue decreased 56.9%, and resort retail and rental revenue decreased 31.6%, all compared to the prior year season-to-date period.
Our results continued to improve in January and February as we expanded capacity with more open terrain as conditions improved and has certain COVID-19 related restrictions eased.
Additionally, as more reservations became available following the peak holiday period, we've seen a significant improvement in lift ticket purchases.
Our ski school, food and beverage and retail/rental businesses continue to be more significantly impacted than visitation due to the significant capacity and operating restrictions associated with COVID-19.
While our U.S. resorts saw a material improvements in financial performance since the peak holiday period, Whistler Blackcomb's financial performance continues to be severely impacted by the continued closure of Canadian borders to international travel, a trend that will likely continue through the rest of the season.
Now turning to our outlook for fiscal 2021.
As we approach the end of the North American ski season, we are providing guidance for the nine-month period ending April 30, 2021.
We expect net income attributable to Vail Resorts to be between $204 million and $247 million, and Resort Reported EBITDA is expected to be between $560 million and $600 million, assuming current regulations, health and safety precautions and the levels of demand and normal conditions persist through the spring, consistent with current levels.
Given the ongoing uncertainty of COVID-19, we will not be providing full-year guidance for fiscal 2021 at this time as we continue to evaluate the potential economic and operational impacts of COVID-19 on our fiscal 2021 fourth quarter results, particularly for our three resorts in Australia and our primary summer operations in North America, which we currently anticipate fully opening around our typical opening dates with certain capacity constraints associated with COVID-19.
revolver availability under the Vail Holdings Credit Agreement and $179 million of revolver availability under the Whistler credit agreement.
As of January 31, 2021, our net debt was 4.2 times trailing 12 months total reported EBITDA.
As previously announced, the company raised $575 million of 0% convertible notes in December 2020, which provides added flexibility in terms of our ability to pursue high-impact acquisitions as well as reinvest in our resort portfolio.
We remain confident in the strong cash flow generation and stability of our business model, and we will continue to be disciplined stewards of our capital with a focus on high-return capital projects, continuous investment in our people and strategic acquisition opportunities.
While we are not reinstating the dividend this quarter, we remain committed to returning capital to shareholders, and our Board of Directors will continue to closely monitor the economic and public health outlook on a quarterly basis to assess the appropriate time to reinstate the dividend.
Turning to our calendar year 2021 Capital plan, we remain committed to reinvesting in our resorts, creating an experience of a lifetime for our guests and generating strong returns for our shareholders.
We plan to maintain a disciplined approach to capital investments, keeping our core capital at reduced level, given the continued uncertainty due to COVID-19.
We have increased our core capital plan by approximately $5 million based on our updated outlook and now expect to invest approximately $115 million to $120 million, excluding onetime items associated with integration of $5 million and $12 million of reimbursable investments in real estate-related capital.
As previously announced, the calendar year 2021 capital plan includes several signature investments which were previously deferred from calendar year 2020 as a result of COVID-19 and are subject to regulatory approvals.
In Colorado, we are moving forward with the 250-acre lift-served terrain expansion in the signature McCoy park area of Beaver Creek, further differentiating the resort's high-end family focused experience.
We also plan to add a new four-person high-speed lift at Breckenridge to serve the popular Peak 7, replace the Peru lift at Keystone with a 6-person high-speed chairlift, and replace the Peachtree lift at Crested Butte, with a new 3-person fixed-grip lift.
At Okemo, we plan to complete a transformational investment, including upgrading the Quantum lift from a four-person to a six-person high-speed chair lift and relocating the existing four-person Quantum lift to replace the Green Ridge three-person fixed-grip chairlift.
These investments will greatly improve uphill capacity, further enhance the guest experience and complete our $35 million capital plan for Triple Peaks.
We remain highly focused on investments that will further our companywide technology enhancements to support our data driven approach, guest experience and corporate infrastructure.
As part of these efforts, we are continuing to invest in resources and technology to improve our customer service experience including significant staffing increases in our call centers and self-service technology that will provide our guests the ability to better manage their own accounts.
We will also continue to invest in ongoing maintenance capital to support our infrastructure across our resorts, including onetime items associated with integrations of $5 million and $12 million of reimbursable investments in real estate related capital we expect our total capital plan to be approximately $135 million to $140 million.
We have had stronger-than-expected financial results, and our employees have been a primary reason for this success.
I'm deeply grateful for the commitment our teams have demonstrated day in and day out to navigate a truly unusual season.
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33% increase in year-end community count to 259 and 57% increase in diluted earnings per share over prior year.
q4 earnings per share $6.25.
qtrly homes closed 3,526 versus 3,744.
qtrly sales orders of 3,367 homes were 6% higher than prior year.
qtrly total closing revenue $1.5 billion versus $1.41 billion.
expect to continue to benefit from incremental orders volume and closings in 2022 and beyond.
projecting 14,500 to 15,500 home closings for 2022, which we anticipate will generate $6.1 - 6.5 billion in home closing revenue.
with projected effective tax rate of 25%, we expect diluted earnings per share to be in the range of $23.15 - 24.65 for 2022.
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I'm Dan Glaser, President and CEO of Marsh McLennan.
Joining me on the call today is Mark McGivney, our CFO, and the CEOs of our businesses; John Doyle of Marsh; Peter Hearn of Guy Carpenter; Martine Ferland of Mercer and Scott McDonald of Oliver Wyman.
Marsh McLennan had an outstanding start to 2021.
Our first quarter results were excellent.
And we are well positioned for a very good year.
Even though the pandemic is ongoing, our underlying revenue growth of 6% is the highest in over 6 years and accelerated sequentially across every business.
We also grew adjusted earnings per share by 21% and generated significant margin expansion.
Our business has proven resilient throughout the pandemic and with the global economy now beginning to turn the corner, we saw an acceleration in our growth.
With 6% underlying growth to begin the year, we now expect full year 2021 underlying revenue growth to be at the high end of our 3% to 5% guidance range and possibly above.
As we look ahead, the outlook for the U.S. and many of the countries we operate in is encouraging.
However, many parts of the world continue to suffer with high levels of infection, and there is still a significant amount of uncertainty.
GDP in the U.S. was close to flat in the first quarter and strong levels of growth are expected starting in the second quarter due to a rebound in demand as the impact of vaccines takes hold along favorable economic comparisons to a year ago.
Meanwhile, in India, Brazil and many other parts of the world, case counts continue to rise and broad levels of vaccination remain a long way off.
Our proprietary Pandemic Navigator now forecast that the U.S. will achieve the herd immunity threshold by early to mid-summer, and we see a fairly similar timeline in the UK.
These milestones bring hope for reopening and economic growth, although it will vary by country.
We are also mindful that the risks exists and that there still are many unknowns such as variants of the virus, the efficacy of vaccines on the variants, the duration of immunity and vaccine hesitancy, but we are resilient and are confident we will be able to adapt to a wide range of scenarios, just as we have since the beginning of this crisis.
Our colleagues are our single largest competitive advantage.
We have world-class talent that has delivered for clients and one another throughout the crisis.
We continue to invest in hiring.
We are an employer of choice for smart, hard-working talented individuals and are adding to what is already the deepest talent pool in the industry.
We are also pressing ahead with acquisitions.
MMA made a significant acquisition on April 1st, PayneWest.
PayneWest was one of the largest independent agencies in the U.S. with more than 700 employees in 26 locations.
The acquisition adds nicely to our geographic footprint in the middle market space and brings the Northwest hub.
Overall, we are on track for a very good year.
Demand for our advice and solutions is strong.
The economy is recovering.
P&C insurance pricing remains firm, and we are benefiting from industry disruption.
Although the outlook remains uncertain, we are more optimistic than we were when we started the year and our efforts are focused on resurgence rather than recovery.
At the end of the first quarter, Marsh McLennan released our inaugural Environmental Social & Governance report.
Truly great companies must deliver both exceptional financial performance and be good employers and global citizens, and we are working on many fronts to advance the interests of all of our stakeholders.
We believe that starts with transparency.
Our report provides enhanced disclosure in a variety of ESG related areas from how we measure our own carbon footprint to how we use data to manage our workforce.
Our report highlights our commitment to a diverse and inclusive workplace.
In 2020, we launched our Leading the Change initiative to underscore the need to continuously nurture our inclusive culture and serve the fundamental principles of human dignity, equality, community and mutual respect.
We also strengthened our commitment to a better sustainable future through our pledge to be carbon-neutral this year along with the commitment to reduce our carbon emissions by 15% by 2025.
ESG issues are among the most critical challenges facing our clients today.
We are creating solutions for our clients related to complex business issues, such as climate change, diversity and inclusion, affordable healthcare, cyber security and responsible investing.
Marsh and Guy Carpenter are helping clients build resilience to flood risk and the documented increase in natural catastrophe perils witnessed in recent years.
Marsh and Guy Carpenter's experience in the alternative energy space has sparked innovation and been a growth driver.
Marsh designed in place the first of its kind policy for a European utility which set lower upfront premium payments based on the client's achievement of sustainability targets.
Oliver Wyman is actively advising its clients across sectors including banking, energy, industrials and transportation and managing the risks and capturing the opportunities associated with climate change and the transition to a low-carbon economy to a new climate and sustainability practice.
Away from climate risk, Mercer is helping address the gender pay gap, diversity and inclusion in the workplace, the workforce of the future and consulting on new normal strategies in the wake of the pandemic.
Overall, we see significant growth potential in the areas of ESG as well as an opportunity to benefit our clients, colleagues and communities.
Let me spend a moment on current P&C insurance market conditions.
The first quarter marks the 14th consecutive quarter of rate increases in the commercial P&C insurance marketplace.
The Marsh Global Insurance Market Index showed price increases of 18% year-over-year versus 22% in the fourth quarter.
The pace of price increases moderated sequentially in the first quarter after accelerating for 11 straight quarters.
However, the 18% increase is still one of the highest since we started publishing the index in 2012.
Global property insurance was up 15% and global financial and professional lines were up 40% while global casualty rates were up 6% on average and U.S. workers compensation rates were modestly negative.
Keep in mind, our index skews to large account business.
However, U.S. small and middle market insurance pricing continues to rise as well, although the magnitude of price increases is less than for large complex accounts.
Turning to reinsurance, the Guy Carpenter's Global Property Catastrophe Rate on Line index increased just under 5% at the January 1st reinsurance renewals.
For the April 1st renewals, Japanese property catastrophe pricing increased for the third year in a row, but at a more moderate pace versus prior years.
Meanwhile, pricing in terms and conditions in the U.S. on April 1st business were largely a continuation of the January 1st pricing environment.
Capacity is more than adequate and demand remains high.
However, reinsurance capacity remains constrained on certain lines of business, most notably for cyber risk.
Overall price increases continue to persist in both the P&C insurance and reinsurance markets.
Low interest rates, elevated loss activity and continued uncertainty related to the pandemic present challenges for underwriters.
Times of uncertainty underscore the need for our advice and solutions, and we are working hard to help our clients navigate these challenges.
Now let me turn to our first quarter financial performance, which represents an excellent start to 2021.
We generated adjusted earnings per share of $1.99, which is up 21% versus a year ago, driven by a combination of strong growth and the continuation of the suppressed environment for travel and entertainment expenses as we continue to operate largely remotely.
Total revenue increased 9% versus a year ago, and rose 6% on an underlying basis.
Underlying revenue grew 7% in IRS, and 3% in consulting.
Marsh grew 8% in the quarter on an underlying basis, the highest quarterly underlying growth since 2003, and benefited from double-digit new business growth.
Guy Carpenter grew 7% on an underlying basis in the quarter.
Mercer underlying revenue was flat in the quarter, which showed sequential improvement from the fourth quarter.
Oliver Wyman underlying revenue grew by 11% as demand accelerated.
Overall, the first quarter saw adjusted operating income growth of 20%, and our adjusted operating margin expanded 250 basis points year-over-year, reflecting positive operating leverage and favorable expense comparisons.
As we look out for the remainder of 2021, we are well positioned, given the strong demand for our advice and solutions, and our expectation for an improving economic backdrop.
As we mentioned, we now expect 2021 underlying revenue growth to be at the high end of our 3% to 5% range, and possibly above.
We also expect to generate margin expansion and strong growth in adjusted EPS.
As we mentioned last quarter, 2021 represents the 150th anniversary of Marsh McLennan.
As we look back on our storied history, once theme runs through it all.
This company steps up in the moments that matter, at times of war and peace, in eras of transcending innovation,in serving the public good.
In March, we changed our name from Marsh & McLennan Companies to Marsh McLennan.
It was a small, but important change that better reflects the way that our company has come together.
One company with 4 global businesses, united by a shared purpose to make a difference in the moments that matter.
The challenges before us all our vast.
It sower the possibilities, climate resilience, systemic risk, digital disruption, the protection gap, affordable healthcare, the future of work.
As we face this new world together, one thing will never change.
Marsh McLennan will be at our clients' side finding opportunity and navigating uncertainty in the areas of risk, strategy and people.
Our first quarter results were outstanding, and we are well-positioned for a very good 2021, despite the continued uncertainty associated with the pandemic.
Underlying growth accelerated across all of our businesses, and our margin expansion in earnings growth were impressive.
Consolidated revenue increased 9% in the first quarter to $5.1 billion, reflecting underlying growth of 6%.
Operating income and adjusted operating income were both approximately $1.4 billion.
Our adjusted operating margin increased 260 basis points to 29.6%.
GAAP earnings per share was $1.91, and adjusted earnings per share was $1.99, up 21% compared with the first quarter a year ago.
Looking at Risk & Insurance Services.
First quarter revenue was $3.2 billion, up 11% compared with a year ago, or 7% on an underlying basis.
It marks the highest level of underlying growth since 2012.
Adjusted operating income increased 17% to $1.1 billion, and our adjusted operating margin expanded 210 basis points to 36.6%.
At Marsh, revenue in the quarter was $2.3 billion, up 13% compared with a year ago, or 8% on an underlying basis.
This was Marsh's highest level of underlying growth in nearly 2 decades.
Growth in the quarter was broad based, and driven by double-digit new business growth, and solid retention, and was impressive considering Marsh's strong growth in the first quarter of last year.
The U.S. and Canada division delivered another exceptional quarter with underlying revenue growth of 9%.
This is the highest quarterly underlying growth U.S. and Canada has achieved since we began reporting their results.
And they have now averaged 6% underlying growth over the last 12 quarters.
In international, underlying growth was strong at 6%, marking the highest underlying growth since 2013.
EMEA was up 6% with strong results in each region, including in the UK.
Asia Pacific was up 8%, a strong rebound from the fourth quarter, and comes on top with 6% growth in the first quarter of 2020.
And Latin America grew 6% on an underlying basis, continuing to show sequential improvement.
Guy Carpenter's revenue was $895 million, up 8% or 7% on an underlying basis, driven by strong growth in North America, EMEA, Global Specialties and Latin America treaty.
Guy Carpenter has now achieved 5% or higher underlying growth in 12 of the last 14 quarters.
In the Consulting segment, revenue in the quarter was $1.9 billion, up 6% from a year ago, or 3% on an underlying basis.
Adjusted operating income was $370 million, and the adjusted operating margin expanded by 330 basis points to 20.5%.
At Mercer, revenue in the quarter was $1.3 billion, which was flat on an underlying basis.
Mercer's top line performance improved each month in the first quarter, and we expect Mercer to return to underlying growth in the second quarter.
Wealth increased 1% on an underlying basis, reflecting strong growth in investment management, offset by a modest decline in defined benefits.
Our assets under delegated management grew to approximately $380 billion at the end of the first quarter, up 42% year-over-year, or 6% sequentially, benefiting from net new inflows and market gains.
Health underlying revenue was flat in the quarter, but faced a tough comparison to 8% growth in the first quarter of last year.
And Career grew 1% on an underlying basis, reflecting strong sequential improvement.
At Oliver Wyman, revenue in the quarter was $585 million, an increase of 11% on an underlying basis.
First quarter results were a continuation of the momentum we started to see materializing in the fourth quarter.
Adjusted corporate expense was $57 million in the quarter.
Foreign exchange added approximately $0.06 to our adjusted EPS.
Assuming exchange rates remain at current levels, we expect FX to be a slight benefit in the second quarter with limited impact thereafter.
Our other net benefit credit was $71 million in the quarter.
For the full year 2021, we continue to expect our other net benefit credit will increase modestly year-over-year.
Investment income was $11 million in the first quarter on a GAAP basis, or $10 million on an adjusted basis, and mainly reflects gains in our private equity portfolio.
Interest expense in the first quarter was $118 million compared to $127 million in the first quarter of 2020, reflecting lower debt levels in the period.
Based on our current forecast, we expect approximately $114 million of interest expense in the second quarter.
Our effective adjusted tax rate in the first quarter was 24.3% compared to 23.2% in the first quarter of last year.
Our tax rate benefited from favorable discrete items, the largest of which was the accounting for share-based compensation, similar to a year ago.
Excluding discrete items, our effective adjusted tax rate was approximately 25.5%.
When we give forward guidance around our tax rate, we do not project discrete items, which can be positive or negative.
Based on the current environment.
, it is reasonable to assume a tax rate between 25% and 26% for 2021.
Our current outlook for 2021 assumes the global economy returns to growth in the second quarter, with a strong recovery in the U.S. Based on this outlook and our strong first quarter performance, we now expect underlying revenue growth to be at the high end of our 3% to 5% underlying growth guidance, and possibly above.
We currently expect we will deliver margin expansion for the full year.
But as you think through the quarterly cadence, keep in mind, we have tough expense comparison in the second and third quarters.
This view is based on our outlook today and it goes without saying that conditions could turn out materially different than our assumptions, which would affect our projection.
Turning to capital management and our balance sheet.
So far this year, we have completed our JLT-related deleveraging, enhanced our short-term liquidity flexibility and seen S&P, Moody's and Fitch restore our rating outlook to stable.
We ended the quarter with $11.3 billion of total debt, which was consistent with the level at December 31st.
In April, we repaid $500 million of senior notes scheduled to mature in July, taking advantage of a prepayment option.
This repayment brought our debt down to $10.8 billion and completed our planned deleveraging, marking an important milestone for us.
Our next scheduled debt maturity is in January 2022 when $500 million of senior notes will mature.
Earlier this month, we entered into a new 5-year revolving credit agreement.
Under this new facility, we increased the credit available to $2.8 billion from $1.8 billion.
In addition, we increased the size of our commercial paper program and now have capacity to issue $2 billion, up from $1.5 billion previously.
We view these changes as prudent steps that enhance our liquidity profile and provide additional flexibility.
In the first quarter, we resumed share repurchases, reflecting our strong financial position and outlook for cash generation.
We repurchased 1 million shares of our stock for $112 million.
We continue to expect to deploy approximately $3.5 billion of capital in 2021 across dividends, debt reduction, acquisitions and share repurchases.
The ultimate level of share repurchases will depend on how the M&A pipeline develops.
As we've consistently said, we favor attractive acquisitions over share repurchases as we view high quality acquisitions is the better value creator for shareholders and the company over the long term.
Now that our deleveraging is behind us, we are back to our normal focus for capital management.
Our capital management strategy reflects balance and supports our consistent focus on delivering solid performance in the near term while investing for sustained growth over the long term.
For the capital we generate and target to deploy, we prioritize reinvestment in the business, both through organic investments and acquisitions.
However, we also recognize that returning capital to shareholders generate meaningful returns for investors over time, and each year we target raising our dividend and reducing our share count.
Our cash position at the end of the first quarter was $1.1 billion.
Uses of cash in the quarter totaled $392 million and included $237 million for dividends, $112 million for share repurchases and $43 million for acquisitions.
Overall, we had an outstanding first quarter positioning us well to deliver strong growth in both underlying revenue and adjusted earnings in 2021.
Operator, we are ready to begin Q&A.
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q1 adjusted earnings per share $1.99.
q1 gaap earnings per share $1.91.
q1 revenue rose 9 percent to $5.1 billion.
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With me here, I have Scott Barbour, our President and CEO; and Scott Cottrill, our CFO.
A copy of the release has also been included in an 8-K submitted to the SEC.
We delivered another quarter of record financial performance in the fourth quarter of fiscal 2021.
Sales grew 20% year-over-year, driven by 21% residential sales growth and 11% non-residential sales growth as we continued to execute at both ADS and Infiltrator in a favorable demand environment.
The residential market remains strong.
Both ADS and Infiltrator residential market sales grew over 20% in the fourth quarter, driven by favorable dynamics in new home construction, repair/remodel and on-site septic, accelerated by our material conversion strategies at both businesses.
Residential market sales have increased to 39% of our domestic sales as compared to 23% prior to the Infiltrator acquisition.
The market indicators show that homebuilders continue to acquire land for future development and that there is an overall shortage in available homes, which drives the front-end new community development sales of ADS, and the on-site septic system sales of Infiltrator are driven during the home completion stage.
In addition, the repair/remodel business remains robust.
ADS participates in the repair/remodel segment of the residential market through retail, which is about 40% of the legacy business' residential sales.
Infiltrator's repair/remodel business in the residential on-site septic market accounts for roughly one-third of their business.
Growth in our non-residential end market was broad based throughout the United States.
We continue to benefit from growth in horizontal construction, such as warehouses, distribution centers, data centers, as well as the developments that follow the residential buildout.
About two-thirds of our domestic allied product sales are in the non-residential markets, where sales increased 13% further, giving us confidence in the underlying market strength.
Sales in the agriculture market increased 50% this quarter, driven by strong demand as the spring selling season got off to a good start.
The agriculture economy remains favorable and we continue to benefit from the programs we put in place around organizational changes, new product introductions and improving execution.
We experienced strong demand in the Midwest region, particularly in Minnesota, Ohio, Iowa and Michigan.
Further, we are expanding our presence in key strategic areas like Missouri and parts of the Southeast to drive increased market share.
International sales also increased 49%, primarily driven by sales growth in our Canadian business which nearly doubled compared to last year.
Canada is doing well across both the construction and agriculture end markets, with similar trends to the United States.
Additionally, this quarter, we continued to leverage our pipe manufacturing facilities in Mexico to help service the strong demand we experienced in the United States.
Finally, Infiltrator continues to exceed expectations with 23% sales growth in the fourth quarter against a very tough comparison to the prior year and broad-based growth across the Infiltrator product portfolio.
This includes double-digit growth in tanks and leachfield products, with strong growth in Florida, Tennessee, Alabama and Indiana, among other states.
This was led by our material conversion strategy of displacing concrete septic tanks with plastic tanks, and the economic advantages of septic chambers in leachfield systems.
The Infiltrator business is benefiting from strong distribution presence in the Southeast and Midwest, as well as rapidly growing micropolitan areas which typically lack the sewer infrastructure needed to support rapid housing development.
We achieved record fourth quarter adjusted EBITDA during the period.
Adjusted EBITDA margin increased 190 basis points.
The increase in profitability in both businesses was driven by leverage from the strong sales growth, favorable pricing as well as contributions from our operational productivity initiatives which helped to offset inflationary cost.
I'm very proud of our employees and management team at both ADS and Infiltrator for bringing fiscal 2021 to a close with strong financial performance this quarter.
I would like to highlight our fiscal 2021 financial performance compared to the 2018 Investor Day plan, now that we have finished out the year.
We communicated a three-year plan in November 2018 about a year after I got to[Phonetic] ADS and I'm very pleased to have exceeded the targets we laid out.
The ADS legacy business grew sales at 7.7% CAGR, driven by the sales programs we laid out in November 2018.
We continued to execute our proven market share model, converting traditional materials to our plastic pipe products and a strong -- in the stormwater market to drive this outperformance.
Our sales team is going after the significant growth opportunity for large diameter HDPE pipe, which has grown at a double-digit CAGR over the three-year period.
We are focused on key -- on growth in key states, mainly Florida, Texas and California, as well as additional priority states where we have -- where we find attractive market opportunities.
We continue to penetrate the allied product market through our existing portfolio as well as through innovation and acquisitions.
Allied product sales have also grown at a double-digit CAGR over the time period.
Finally, our agriculture and Canada businesses performed above our expectations, both returning to strong growth.
And the plan laid out in November 2018 restated our intention to grow adjusted EBITDA margin to between 18% and 19%.
The legacy ADS business finished fiscal 2021 with a margin of 24.3%, significantly outperforming our plan.
The outperformance was driven by execution, topline growth, favorable material cost, fixed cost leverage, as well as improved efficiency in our supply chain, operations and distribution.
The improvement in profitability as well as execution of our working capital initiatives and the acquisition of Infiltrator drove the improvement in free cash flow conversion to 66% of adjusted EBITDA, significantly better than the 45% in fiscal 2018 and above our target of at least 50%.
Our performance over the last three years, coupled with the acquisition of Infiltrator, changed the growth and financial profile of the Company.
The acquisition of Infiltrator was a great addition to our business.
Through Infiltrator, we increased our exposure to the residential market, diversifying our end-market exposure and gained a very high quality management team, set of engineers and operators who continue to execute the Infiltrator proven business model.
We believe executing on the strategies and plans laid out in 2018 increases the value of our business, as evidenced by the significant increase in our stock price since issuing this plan in 2018.
We will continue to focus on driving topline growth, improving our profitability, and converting profitability to cash at a high rate, in turn creating additional value for our shareholders.
We will continue to pursue these proven strategies and we'll issue our next three-year plan this fall at our next Investor Day.
In summary, we did a great job executing this quarter and fiscal year, and are pleased to continue our track record of generating above-market growth across our key end markets.
In the past, we've shown our growth relative to the market.
However, market statistics are a bit distorted right now due to the pandemic, making it more difficult to measure.
That said, regardless of how you measure the market growth or decline, we handily outperformed the market giving us confidence that our material conversion story is intact or even accelerating.
Our success in growing above market is a function of our unique advantages.
We continue to have success in gaining market and wallet share through our material conversion and water management strategies, we are more vectored to key states where construction activity remains high, and we're making focused bets in others where we see opportunities for growth.
We are benefiting from broader market trends, including rapid growth in micropolitan areas and high -- higher exposure to suburban development.
And since the acquisition of Infiltrator, we are more exposed to the residential construction market, which now represents nearly 40% of sales.
And within the non-residential market, we are also benefiting from our outsized exposure to horizontal construction, which was far more healthy than vertical construction in this past year.
In other words, we're an evolving and a stronger ADS today than any point in our history and we look forward to the future.
As we look to fiscal 2022, we will build on our strong market position, execution and new levels of profitability.
We will stay focused on employee health and safety, and then on -- and on delivering the needs of our customers.
We are well positioned to capitalize on market demand while continuing to generate above-market growth through the execution of our material conversion and water management solution strategies.
We remain focused as always on disciplined execution.
On Slide 7, we present our fourth quarter fiscal 2021 financial performance.
I'll be brief on this slide as Scott covered a lot of the details already, but I do want to highlight a few key points.
Our strong topline revenue growth of 20% was driven by both volume and pricing, with strong growth across our ADS and Infiltrator businesses as well as in each of our segments, markets and product applications.
The demand environment for our products remain attractive and we expect these dynamics to continue as we move forward into calendar 2021.
The 31% growth in consolidated adjusted EBITDA was driven by strong topline growth in addition to favorable pricing, operational efficiency initiatives, as well as our synergy programs.
In addition, due to the strong results for fiscal 2021 and to reward the incredible service and dedication of our employees this past year, we decided to pay a one-time bonus to employees who were not part of our annual incentive compensation plans, resulting in approximately $4 million of additional compensation expense in the quarter.
Our ability to deliver in the face of a uniquely challenging year and a strong demand environment would not have been possible without their hard work and dedication.
Moving to Slide 8, we present our full-year results.
Revenue this year increased 19% to $1.983 billion, coming in above the high end of our guidance range.
This was the result of strong demand we experienced this year, growing double-digits in both the domestic and international businesses.
Our adjusted EBITDA increased $205 million to $567 million, driven by strong volume growth in both pipe and allied products, favorable pricing and material costs, and operational efficiency initiatives that offset inflationary cost pressures.
Infiltrator contributed an additional $88 million, driven by strong volume growth, favorable price/cost performance as well as continued benefits from our synergy programs.
We also had the benefit of owning Infiltrator for the full year as compared to eight months in fiscal 2020.
Finally, our adjusted EBITDA margin increased 700 basis points to 28.6%, a Company record.
Moving to Slide 9.
Our year-to-date free cash flow increased $134 million to $373 million as compared to $239 million in the prior year.
These impressive free cash flow results were driven by our strong sales growth and profitability, as well as execution on our working capital initiatives.
Our working capital decreased to approximately 18% of sales, down from 21% of sales last year.
Further, our trailing 12-month leverage ratio is now 1.1 times.
We ended the quarter in a favorable -- very favorable liquidity position with $195 million of cash and $339 million available under our revolving credit facility, bringing our total liquidity to $534 million.
And finally, on Slide 10, we have our fiscal 2022 guidance.
Based on our performance to date, order activity, backlog and current market trends, we currently expect net sales to be in the range of $2.220 billion to $2.300 billion, representing growth of 12% to 16% over this past year, and adjusted EBITDA to be in the range of $635 million to $665 million, representing growth of 12% to 17% over this past year.
As we look to[Phonetic] fiscal 2022, we are confident in the demand environment across our end markets.
Our residential end-market growth is also expected to remain strong, particularly in those key southern crescent states we are focused on, including Florida and Texas.
In addition, our agricultural market remains robust with strength in crop pricing, driving investments in land productivity through better field drainage.
And finally, the international outlook is turning more favorable driven by our business in Canada, which is our largest international market.
Lastly, the exports business is expected to rebound as COVID-19 restrictions continue to ease.
This strong demand outlook gives us confidence in our revenue guidance.
We have also executed several price increases since our third quarter call across all of our end markets at both ADS and Infiltrator.
To date, our pricing actions are flowing through and we will continue to closely monitor the situation to ensure we stay ahead of inflationary cost pressures.
On the cost side, we are seeing inflationary pressure in materials, labor and transportation, as well as some issues with labor availability.
Within transportation, the third-party market availability is tight and there is inflationary cost pressure on diesel, wages and common carrier rates.
In this type of inflationary cost environment, we are also able to control our transportation cost better than most due to our large internal fleet, and we are working to leverage such to offset the rising cost we are seeing through payload efficiency, route planning and other programs to more efficiently serve our customers.
While we expect EBITDA margins to be flat to slightly up this year, it is important to highlight that we expect the most pressure on our price/cost spread to occur during the first half of our fiscal year.
Bottom line, we believe our long-term growth and margin expansion ability remains intact, despite the near-term inflationary cost environment we will be dealing with this year.
Given our strong balance sheet and leverage position, strategic capital deployment remains one of our top priorities.
We will continue to execute a balanced and disciplined capital deployment strategy, focusing on organic investments as our highest-return, lowest-risk option.
In fiscal 2022, we plan to spend between $130 million and $150 million on capital expenditures to support growth, recycling, innovation, productivity, and safety initiatives at both ADS and Infiltrator, basically doubling our commitment to capex year-over-year.
In addition to organic investments, we continue to actively explore M&A opportunities that are aligned with our strategic vision.
We are extremely excited about the M&A opportunities we are pursuing and see this as a key component of our capital deployment strategy in both the near term and longer term.
In addition to investing in the business through deploying capital organically and through M&A, we, today, announced a 22% increase in our quarterly dividend as well as a $250 million increase in our share repurchase program.
We previously had $42 million available under this program, and the increase announced today brings the total authorization to $292 million.
Operator, please open the line.
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for fiscal 2021 net sales are expected to be in range of $1.915 billion to $1.950 billion.
for fiscal 2021 adjusted ebitda is expected to be in range of $550 million to $565 million.
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Today we reported earnings of $211 million, an increase of 87% over the second quarter.
Our customers continue to act prudently, conserving cash and adjusting their operations, driving a reduction in loans and taking deposits to a new record.
Lower loan balances along with strong credit metrics and an improving yet uncertain economic path resulted in the allowance for credit losses remaining near 2% and a provision of $5 million.
As far as revenue, the impact from lower interest rates waned, card fees remained robust and other fee income categories began to recover.
Expenses are well controlled and included a $4 million increase in charitable contributions.
ROE returned to double-digits at nearly 11% and our book value per share grew to $53.78, the seventh consecutive quarterly increase.
We remain focused on continuing to enhance shareholder value.
Based on recent conversations I've had with employees and customers, sentiment appears to be modestly better, reflecting cautious optimism and a sense of hope for the future based on our country's overall economic resiliency.
We've begun to see some signs of improving conditions.
However, it is very difficult to predict the pace of the recovery.
This is reflected in our loan portfolio, where overall, we are starting to see some positive trends.
Balances begin to grow mid-quarter and increased modestly month-over-month in September.
Also, our pipeline has begun to rebuild, although it remains well below pre-COVID levels.
On a full quarter average basis, loans decreased $1.5 billion in the third quarter.
The largest contributor was a $910 million drop in average National Dealer loans in conjunction with significant decline in dealer inventory levels in the second quarter, which have yet to recover.
This is due to supply backlogs following the manufacturing shutdown combined with the rebound in sales activity.
We anticipate loans will rebound next year as auto inventory returns to normal levels.
Deposits continue to show strong broad-based growth with average balances increasing $4.5 billion, including $3.2 billion and non-interest-bearing deposits.
Government stimulus programs have provided tremendous liquidity.
In addition, as we've seen in other times of economic uncertainty, our relationship-based customers are maintaining a building cash in safety or their Comerica accounts.
The resulting increase in liquidity drove our total average assets to a record $84.3 billion.
As expected, net interest income declined $13 million as lower interest rates had a $15 million impact.
In this ultra-low rate environment, we continue to carefully manage loan and deposit pricing to attract and maintain customer relationships.
Comerica has a strong credit culture with conservative credit underwriting which has served us well in times of economic stress.
During the current period of unprecedented disruption, our portfolio has performed well, and we believe this will continue to be a differentiator for us in the industry.
Criticized loans remained stable and non-performing assets are well below historic norms.
Also, net charge-offs decreased only 26 basis points.
However, given the difficulty in predicting the path of economic recovery, our credit reserve remains at over $1 billion.
We are staying close to our customers in addressing their needs.
At the current level, we believe our reserves are appropriate and that we are well positioned.
Non-interest income increased as customer activity began to rebound, including continued strong contribution from our card platform.
Of note, following robust activity in the second quarter, derivative income declined $10 million.
We have continued to maintain our expense discipline.
Excluding the impact of deferred comp and an increase in charitable contributions, expenses declined.
Our capital remained strong with an estimated CET1 of 10.3%.
We remain focused on deploying our capital to support growth, while maintaining our very attractive competitive dividend.
Turning to Slide 4.
Average loans decreased $1.5 billion, which compares favorably to results for the industry as indicated by the H8 data for large banks.
As Curt mentioned, National Dealer declined $910 million due to low inventory levels impacting floor plan loans.
As far as corporate banking, you may recall that large companies drew on lines earlier this year to build liquidity buffers in a time of great uncertainty.
This resulted in an increase of nearly $800 million in second quarter average balances.
Corporate banking line utilization has returned to pre-pandemic levels with average balances down nearly $500 million in the third quarter.
General middle market loans declined about $400 million, while deposits increased nearly $2 billion.
Customers have been prudently cutting cost as well as reducing working capital and capex requirements to improve their cash flow in this challenging environment.
For the portfolio as a whole, line utilization decreased to 47% at period end.
On the other hand, with full quarter effect of PPP, loans grew in business banking and the small business segment captured in retail banking.
Also, our Mortgage Banker business, which serves mortgage companies, was at an all time high, increasing over $300 million due to very robust refi and home sale activity.
Loan yields were 3.13%, a decrease of 13 basis points from the second quarter.
Lower rates were the major driver.
One month LIBOR, the rate we are most sensitive to, declined 19 basis points.
This was partly offset by pricing actions we are taking, particularly adding LIBOR floors when possible as loans renew.
A mix shift in balances, including the full quarter impact of lower yielding PPP loans, also had a negative impact on yields.
Deposits increased 7% or $4.5 billion to a new record of $68.8 billion, as shown on Slide 5.
The larger driver continues to be non-interest-bearing deposits and growth has been broad-based with increases in nearly every business line.
As Curt mentioned, customers are conserving and maintaining excess cash balances.
Period end deposits increased over $700 million.
The largest contributor was technology and life sciences as robust fundraising added liquidity and customers reduced cash burn.
With strong deposit growth, our loan-to-deposit ratio decreased to 76%.
The average cost of interest-bearing deposits was 17 basis points, a decrease of nine basis points from the second quarter.
Our prudent management of relationship pricing in this low rate environment, our large proportion of non-interest-bearing deposits as well as the floating rate nature of our wholesale funding drove our total funding cost only 14 basis points for the quarter.
As you can see on Slide 6, we've put some of our excess liquidity to work by increasing the size of the portfolio.
We added $1.75 billion in treasuries and $500 million in mortgage-backed securities.
In addition, we continue to reinvest prepays, which remained elevated at around $1 billion for the quarter.
Yields on recent purchases have been around 140 basis points.
The additional securities combined with lower rates on the replacement of prepays resulted in the yield on the portfolio declining to 2.13%.
Of note, we have not seen a significant impact on the portfolio's duration or the unamortized premium, which remains relatively small.
Turning to Slide 7.
Net interest income declined $13 million to $458 million and the net interest margin was 2.33%, a decline of 17 basis points relative to the second quarter.
The major factors were lower rates, which had a negative impact of $15 million or seven basis points in the margin, and the increase in excess liquidity reduced the margin by nine basis points.
Taking a look at the details.
Interest income on loans declined $26 million and reduced the margin 13 basis points.
Lower interest rates on loans alone had an impact of $21 million and 11 basis points in the margin.
Lower balances had a $14 million impact, and the mix shift in portfolio, including the full quarter of lower yielding PPP loans had a four basis point impact on the margin.
Partly offsetting this were higher loan fees in the margin, primarily PPP-related as well as one additional day in the quarter.
As discussed on the previous slide, we had lower yields and higher balances in our securities portfolio, which together had a $2 million and two basis point negative impact.
Higher deposits of the Fed added $1 million, but had a negative impact of nine basis points on the margin.
Deposit cost declined by $5 million and added three basis points to the margin, primarily a result of a prudent management of deposit pricing, as I previously mentioned.
Finally, with a reduction in balances and lower rates, wholesale funding cost declined by $9 million, adding four basis points to the margin.
We received the full quarter benefit of debt repayments we made in the second quarter, and we prepaid $750 million in FHLB advances in July and August.
As a reminder, given the nature of our portfolio, our loans reprice very quickly.
So the bulk of the impact from lower rates has now been absorbed.
Also, we continue to closely monitor the competitive environment and our liquidity position as we manage deposit pricing.
Overall, credit quality was strong, as shown on Slide 8.
Net charge-offs were $33 million or 26 basis points, including recoveries of $20 million.
Criticized loans remained relatively stable with an increase of only $27 million and comprised 6.5% of the total portfolio.
Non-performing loans remained low at 62 basis points, and the bulk of the $54 million increase in the third quarter was attributed to energy loans.
In summary, we are leveraging our experience and expertise working closely with our customers and carefully reviewing their current and projected financial performance.
We have adjusted risk ratings as appropriate.
We started this cycle from a position of strength with very low non-performing and criticized loans, and migration so far has been manageable.
Turning to Slide 9.
The economy began to improve to the quarter.
However, the path to full recovery remains uncertain due to the unprecedented impacts of the COVID-19 pandemic.
For this reason, our CECL modeling in late third -- in the third quarter did not significantly change and included the recession that we have been experiencing, followed by a slow recovery.
More severe assumptions were used to inform the qualitative adjustments made for certain segments.
This combined with the reduction in loan balances, resulted in a slight decrease in our allowance for credit losses, which remains above $1 billion.
Our credit reserve ratio was 2.14%, excluding PPP loans.
Our credit reserve coverage for NPLs was strong at 3.2 times.
Again, we are well positioned with a relatively high credit reserve and low non-performing assets, as illustrated.
We believe our disciplined underwriting and diverse portfolio are assisting us in managing through this pandemic recession.
Energy loans are outlined on Slide 10.
They decreased $251 million to $1.8 billion at quarter end and represent 3.5% of our total loans.
E&P loans make up nearly 80% of the energy portfolio.
And energy services, which is considered the riskiest segment, was only $46 million.
The allocation of reserves to energy loans remained above 10%.
While non-accrual loans increased, criticized loans decreased $102 million and net charge-offs decreased to $9 million.
Charge-offs are net of $14 million in recoveries, which are unlikely to repeat in the near-term.
Fall redeterminations are just beginning, and we expect a small increase in the borrowing bases as higher energy prices were offset by lower production inventory.
With more than 40 years of serving this industry, we have deep expertise and remain focused on working with our energy customers as they navigate the cycle.
Slide 11 provides detail on segments that we believe pose higher risk in the current environment.
Note, we continue to review the portfolio refining our assessment.
As a result, we have removed casinos and sports franchises from this group as we no longer see elevated risk.
That aside, period end loans in the social distancing segment decreased $145 million or 5%.
As expected, criticized loans increased $102 million, yet remained manageable at 10% of the segment and non-accruals remained very low.
We believe we are well reserved as we have applied a more severe economic forecast to the segment.
We have deep expertise and a long history of working in the cyclical automotive sector.
Production has been ramping back up and auto sales have rebounded.
Similar to the social distancing segment, while loans decreased about $250 million, the criticized portion increased, yet non-accruals decreased and remained low.
Our leverage loans tend to be with middle market relationship-based customers with sponsors, management teams and industries we know well, and we avoid the covenant-light deals.
Balances increased to $85 million and criticized and non-accrual loans were slightly higher.
As far as payment deferrals, they provided a cushion as customers adjusted to the environment.
Now that they've acclimated, initial deferrals have expired, a new request of a nominal.
Total deferrals at September 30 dropped only 70 basis points of total loans.
Non-interest income increased $5 million, as outlined on Slide 12.
Improved economic conditions had a positive impact on deposit service charges and card fees.
Deposit service charges were up $5 million with increased cash management activity.
Also, card fees remained very strong and increased $3 million due to higher consumer volumes and merchant activity spurred by the economic stimulus as well as changes in customer behavior related to COVID.
Commercial lending fees grew with increased syndication activity and unutilized line fees.
As expected, customer derivative income declined following very robust activity in the second quarter, which related to the rapid decline in interest rates and volatile energy prices that have since stabilized.
Derivative income also included a $6 million unfavorable credit valuation adjustment compared to an unfavorable adjustment of $3 million in the second quarter.
Securities trading income decreased $2 million, but remained at an elevated level and reflects fair market adjustments for investments we hold related to our technology and life sciences business.
Similarly, investment banking fees declined, yet continue to be relatively strong.
Deferred comp asset returns were $8 million, a $6 million increase from last quarter, which is offsetting non-interest expenses.
Also, bank-owned life insurance increased with the receipt of the annual dividend.
Turning to expenses on Slide 13.
Salaries and benefits increased $8 million.
This included the increase in deferred comp of $6 million that I just mentioned as well as seasonally higher staff insurance.
A catch up on maintenance projects, which we expect to continue in the fourth quarter as well as seasonal taxes resulted in an increase in occupancy costs.
As previously announced, we increased our charitable contributions to assist businesses and communities impacted by the pandemic.
Since early March, Comerica, together with Comerica Charitable Foundation, has distributed over $9 million to over 150 non-profit and other community service organizations.
Outside processing decreased $4 million, primarily related to lower PPP loan initiation volumes.
In addition, operational losses and legal-related costs declined $3 million.
Our expense discipline is well ingrained in our company and is assisting us in navigating this low rate environment as we invest for the future.
Our capital levels remained strong, increasing to an estimated CET1 of 10.26%, as shown on Slide 14.
We were focused on maintaining our attractive dividend and deploying our capital to drive growth, while we maintain strong capital levels with the CET1 target of 10%.
In addition, the dividend is supported by strong holding company cash.
Slide 15 provides for our outlook for the fourth quarter relative to the third quarter.
We are assuming a continued gradual improvement in GDP and unemployment.
Also, while we do expect to see some modest forgiveness in PPP loans by the end of the year, there is a great deal of uncertainty.
Therefore, we exclude any impact from forgiveness on loans, net interest income and expenses from this outlook.
Starting with loans, we expect National Dealer balances to increase as auto inventory levels begin to rebuild.
Mortgage Banker is expected to decline somewhat from its record high with seasonally lower purchase and refi volumes.
In addition, we believe the recent stabilization of balances that we've seen in certain business lines, such as the middle market, large corporate and energy, should continue.
However, on a quarter-over-quarter basis, average balances in these businesses are expected to be lower.
We expect average deposits to remain strong and stable as customers continue to carefully manage their liquidity.
This expectation includes -- excludes the benefit from any further government stimulus programs.
Overall, net interest income is expected to be relatively stable.
As we've already absorbed the bulk of the effect from the decline in rates, we estimate the net effect of lower rates alone will be $5 million or less.
The impact from reduced loan balances, lower interest rates on loans and lower yields on securities is expected to be mostly offset by additional rate floors on loans, a decrease in deposit rates to an average of 14 basis points, as well as the full quarter benefit of third quarter actions to increase our securities portfolio and reduced wholesale borrowings.
Again, this outlook excludes any benefit from PPP loan forgiveness.
Credit quality is expected to be solid with net charge-offs increasing from the low third quarter level, which did include strong recoveries.
Although the pace of the economic recovery remains uncertain, with our credit reserve at about 2% of loans in the third quarter, we believe we are well positioned to manage through it.
We expect non-interest income to decline as we do not expect the third quarter levels of deferred comp, securities trading income or BOLI to repeat.
We believe several customer-driven fee categories should grow with improving economic conditions.
But this is expected to be offset by card volume decreasing as recent elevated activity receipts.
As far as expenses, we expect a rise in technology costs as we catch up on initiatives that were delayed due to COVID.
We are committed to investing in our futures that we are well positioned coming out of the pandemic.
In addition, we expect an increase related to seasonal staff insurance.
Mostly offsetting these increases, charitable giving should revert to a normal level, and we do not expect the level of deferred comp to repeat.
We continue to focus on controlling expenses as we closely manage discretionary spending.
Finally, our capital levels are healthy, and we remain focused on managing our capital with the goal of providing an attractive return to our shareholders.
I will close with Slide 16.
Over our 170-year history, Comerica has successfully managed through many challenging times.
Using our experience and expertise to help our customers and communities navigate stressful situations and achieve long-term success is at the heart of Comerica's relationship banking strategy.
The unwavering dedication of our team to assist our customers as well as support each other and our communities continues to be a source of pride.
Our long-standing corporate mission is to attain balanced growth and profitability by providing a higher level of banking.
Fundamental to our success in accomplishing this mission is our key strengths, which are outlined here.
We have long-tenured employees who have deep expertise in the industries they serve.
We have a strong presence in the major metropolitan areas of Texas, California and Michigan, and these markets provide significant growth opportunities along with customer diversity.
There are abundant collaboration opportunities among our three divisions; Commercial Banking, Retail Banking and Wealth Management.
Our robust leading-edge cash management suite continues to evolve to meet the ever-changing needs of our customers.
We have a strong credit culture.
Our consistent conservative underwriting approach and prudent customer selection resulted in superior credit performance through the last recession.
It also -- it is also assisting us in weathering the current environment, as evidenced by our strong credit metrics this quarter.
We are committed to maintaining our expense discipline while investing for the future.
Finally, our capital position is strong.
And our first priority is to use it to support growth, while providing an attractive return to our shareholders.
Now we'd be happy to take questions.
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third quarter 2020 net income of $211 million, $1.44 per share.
qtrly net interest income decreased $13 million to $458 million versus q2.
qtrly provision for credit losses decreased $133 million to $5 million versus q2.
sees q4 net interest income relatively stable versus q3.
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We undertake no obligation to publicly update or revise these statements.
Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our first quarter results.
It has been a little over a year since the pandemic started.
Over that time, we acted swiftly to address the challenges we face, so we could quickly turn our focus to best positioning ourselves toward recovery and beyond.
I'm really proud of how we've set up the company for the future.
And most importantly, I'm grateful to our team members who have continued to lead with hospitality and to all of our stakeholders for their ongoing support.
In the first quarter, systemwide RevPAR decreased 38% year-over-year and 53% versus 2019.
Rising COVID cases and tightening travel restrictions, particularly across Europe and Asia Pacific, weighed on demand through January and most of February.
However, March marked a turning point.
As we lapped the start of the U.S. lockdowns, RevPAR turned positive up more than 23% year-over-year.
Systemwide occupancy reached 55% by the end of the month driven by strong leisure demand.
As expected, recovery in group and corporate transient continued to lag, but both segments showed sequential improvement versus the fourth quarter.
Overall, this positive momentum has continued into the second quarter.
While recovery varies by region and country, we can see the light at the end of the tunnel.
In the U.S., more than 50% of adults have received at least one dose of a COVID-19 vaccine.
As a result, we're seeing a significant lift in forward bookings and occupancy, which is now around 60% as well as lengthening booking windows.
This mirrors trends in other countries around the world.
For instance, China is running in the low 70s occupancy.
We do expect this momentum to continue.
Vaccine distribution, coupled with relaxed travel restrictions and increasing consumer confidence should drive further RevPAR improvements in the coming months and quarters.
In fact, we are on pace to see record leisure demand in the U.S. over the summer months with April bookings for the summer exceeding 2019 peak levels by nearly 10%.
We also expect continued corporate office reopenings to drive a meaningful pickup in business transient demand toward the back half of the year.
Based on what we've seen in China and pockets of the U.S., once restrictions are lifted and offices reopen, business travel returns.
In the first quarter, business transient revenue was roughly 75% of 2019 levels in states that were further along in their reopening process.
Additionally, recent forecast for nonresidential fixed investment are up more than three percentage points from prior projections to 7.8%, indicating even greater optimism around business spending.
On the group side, forward booking activity continues to improve month-over-month.
Group bookings made in the first quarter for the back half of the year were roughly flat with 2019 booking activity, suggesting customers are increasingly optimistic about safety measures and loosening pandemic restrictions.
Near-term group bookings continue to be driven largely by social events and smaller group meetings, but we are seeing a slow shift back to a more normal mix of business with corporate group leads up more than 70% for future periods.
Associations and trade shows have also started opening up housing and registration sites for events later this year, further signs of moving forward with in-person group meetings.
As we look out to next year, our group position is roughly 85% of peak 2019 levels with rate increases versus 2019.
Group bookings were up in the mid-teens for 2023 versus 2019.
In fact, last week, I was in Mexico to chair the World Travel and Tourism Council's Global Summit where more than 800 participants from all over the world attended in person and thousands more attended virtually.
The conference demonstrated that it is possible to meet in a safe way and that hybrid events can be incredibly effective at expanding participation and enhancing collaboration.
It was great to be in the same room with other hospitality and government leaders talking about the bright future that lies ahead for our industry.
The event made me even more optimistic for our recovery and confident that we are beginning to see a new era of travel emerge.
During the quarter, we added 105 hotels totaling more than 16,500 rooms to our system and achieved net unit growth of 5.8%.
We celebrated the openings of our 100th Curio and our 50th Tapestry hotel demonstrating the strength of our conversion-friendly brands.
Overall conversions accounted for approximately 24% of additions in the quarter.
We also continued to enhance our resort footprint during the quarter with the openings of the 1,500-room Virgin Hotel Las Vegas, the Hilton Abu Dhabi Yas Island, the all-inclusive Yucatan Resort Playa del Carmen and six spectacular properties along the California Coast.
Customers have even more opportunities to stay with us as travel resumes.
Building on our already impressive portfolio in the world's most desirable locations, during the quarter, we signed agreements to bring our Waldorf Astoria and Canopy brands to the Seychelles.
The properties are scheduled to open in 2023, joining the Mango House Seychelles, LXR Hotel and Resorts set to open later this summer.
In the quarter, we signed nearly 22,000 rooms modestly ahead of our expectations.
This included our first Signia hotel.
Additionally, through our strategic partnership with Country Garden to introduce the Home2 Suites brand to China, we added more than 5,000 rooms to our pipeline.
We're excited for the opportunities this partnership provides with one of our fastest-growing brands.
Home2 recently celebrated its tenth anniversary, marking the milestone with nearly 1,000 rooms, hotels open and in the pipeline.
On Entrepreneur Magazine's Annual Franchise 500 List, which featured 11 of our 18 brands, Home2 was the number two hotel brand ranking only behind Hampton.
Overall, we are very happy with our development progress and excited for additional growth opportunities with more than half of our 399,000-room pipeline under construction, We're confident in our ability to grow net units in the mid-single-digit range for the next several years and continue to expect growth in the 4.5% to 5% range in 2021.
And in an environment where safety and cleanliness are top priorities for travelers, we continue to create more opportunities for our guests to enjoy a contactless experience from pre-arrival to post-checkout.
Our digital key feature, which enables guests to bypass the front desk and go straight to the rooms is now available in the vast majority of our hotels worldwide.
Additionally, we've joined forces with Lyft to mobilize Honors members to contribute to the Lyft Vaccine Access Initiative, which funds rides for those in need of reliable transportation to their vaccine appointment.
We're excited to continue the momentum of our partnership with Lyft by supporting this important cause.
During the quarter, we also launched two new co-branded credit cards in Japan, building on our 25-year partnership with American Express and marking the first time our co-branded cards have been made available to customers outside the United States.
These cards are designed with both frequent and occasional travelers in mind and offer customers the opportunity to earn Hilton Honors bonus points on everyday spending as well as at our properties worldwide.
As a result of our strong partnerships, industry-leading brands, and unmatched value proposition, our loyalty program continues attracting new members.
We ended the first quarter with more than 115 million Honors members, up roughly 8% year-over-year with membership increasing across every major region despite lower demand due to the pandemic.
As I reflect on the quarter and the past year, I'm very proud of the determination, creativity and hospitality that our Hilton team members have demonstrated.
This earned us recognition by Fortune and Great Place to Work as the number one Best Big Company to Work For and number three Best Company to Work For in the United States.
Overall, I'm pleased with our first quarter results and feel very good about the momentum for the remainder of the year.
I'm optimistic for the future of travel and for Hilton as we emerge stronger and better positioned continuing to drive value for our guests, our owners, our communities and, of course, our shareholders.
During the quarter, systemwide RevPAR declined 38.4% versus the prior year on a comparable and currency-neutral basis as rising COVID cases and reinstated travel restrictions and lockdowns disrupted the demand environment, especially across Europe and Asia Pacific.
However, occupancy improved sequentially throughout the quarter, increasing more than 20 points.
Adjusted EBITDA was $198 million in the first quarter, down 45% year-over-year.
Results reflected the continued impact of the pandemic on global travel demand, including temporary suspensions at some of our hotels during the quarter.
Management and franchise fees decreased 34%, less than RevPAR decrease as franchise fee declines were somewhat mitigated by better-than-expected license fees and development fees.
Additionally, results were helped by continued cost control at both the corporate and property levels.
Our ownership portfolio posted a loss for the quarter due to the challenged demand environment.
Reinstated lockdowns and travel restrictions in Europe and Japan, coupled with temporary hotel closures and fixed operating costs, including fixed rent payments at some of our leased properties, weighed on our performance.
Continued cost control mitigated segment losses.
For the quarter, diluted earnings per share adjusted for special items was $0.02.
Turning to our regional performance.
First quarter comparable U.S. RevPAR declined nearly 37% year-over-year and 50% versus 2019.
Demand improved sequentially throughout the quarter with March occupancy 62% higher than January and ending at 55%, the highest level since the pandemic began.
Leisure travel continued to lead the recovery, particularly on weekends with warm weather destinations benefiting the most.
In the Americas outside the U.S., first quarter RevPAR declined 55% year-over-year and 63% versus 2019.
Performance recovered in March, but lagged the broader system due to the region's greater dependence on international travel, which remain constrained by tightened travel restrictions.
In Europe, RevPAR fell 76% year-over-year and 82% versus 2019.
Declines were driven by increasing COVID cases and reinstated lockdowns across both the United Kingdom and Continental Europe.
Delays in vaccination distribution also disrupted recovery.
In the Middle East and Africa region, RevPAR was down 32% year-over-year and 46% versus 2019.
Performance in the region benefited from strong domestic demand and easing restrictions.
In the Asia Pacific region, first quarter RevPAR fell 7% year-over-year and 49% versus 2019 as rising infections, lockdowns and border closures weighed on performance early in the quarter.
RevPAR in China increased 64% year-over-year with occupancy levels increasing from roughly 35% to roughly 65% during the quarter.
Both leisure and business transient demand rebounded quickly as restrictions eased with March occupancy in China exceeding 2019 levels.
As Chris mentioned, in the first quarter, we grew net units 5.8% driven primarily by the Americas and Asia Pacific.
Tightening restrictions and lockdowns across Europe delayed openings in the region.
However, we expect an uptick in development activity as countries continue to reopen.
For the full year, we continue to expect net unit growth of 4.5% to 5%.
Signings in the quarter decreased year-over-year due to pre-pandemic comparisons, but exceeded our expectations due to greater-than-expected signings in China, particularly for our Home2 Suites brand.
For the year, we expect signings to increase mid-single digits versus 2020.
Turning to the balance sheet.
During the quarter, we took steps to further enhance our liquidity position and preserve financial flexibility.
We repaid $500 million of the outstanding balance under our $1.75 billion revolving credit facility and opportunistically executed a favorable debt refinancing transaction to extend our maturities at lower rates.
As we look ahead, we remain confident in our balance sheet and liquidity positions as we continue to focus on recovery.
We would now like to open the line for any questions you may have.
Chad, can we have our first question?
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q3 sales fell 6 percent to $1.4 billion.
q3 earnings per share $1.09.
reiterating fy 2021 outlook for top and bottom line.
q3 adjusted earnings per share $1.21.
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Also in attendance today is Bob Hevert.
Bob was recently appointed Senior Vice President, Chief Financial Officer and Treasurer, effective July 31, as we will discuss in further detail momentarily.
The accompanying supplemental information more fully describes these non-GAAP measures and includes a reconciliation to the nearest GAAP measures.
The company believes these non-GAAP measures are useful in evaluating its performance.
Bob brings over 30 years of industry experience in regulatory matters and corporate finance and has testified in over 300 proceedings as an expert witness.
In fact, Bob has testified on behalf of Unitil in each of the states where we operate, including most recently as the cost of equity witness in our recent rate case in Maine.
Bob was previously with ScottMadden as Partner and Practice Area Leader of Rates, Regulation and Planning.
We believe that Bob's proven track record of success and his broad industry experience will be of great value to the company and its shareholders.
At this point, I'd like to give Bob the opportunity to just say a few words.
I have worked with Unitil on a variety of matters for many years.
And during that time, I became familiar with the company's employees, its culture, and its commitment to excellence, all of which I am sure have proven to be a benefit to both customers and shareholders.
I'm very excited to join the Unitil team, and I look forward to helping advance the company's long-term strategies.
Well, we're happy to have you on board, Bob.
As Todd mentioned earlier, Bob's appointment will become effective on July 31 or tomorrow, at which point, Larry Brock will step down as CFO.
Larry will continue on with company as Senior Vice President, working closely with Bob.
With that, I'll now move on to slide five, where today, we announced net income of $3.1 million or $0.21 per share for the second quarter of 2020, a decrease of $0.9 million or $0.06 per share compared to 2019.
The company estimates that the ongoing COVID-19 pandemic unfavorably impacted net income by approximately $0.4 million or $0.03 per share.
During the first half of 2020, net income totaled $18.3 million or $1.23 per share.
As a reminder, in the first quarter of 2019, the company recognized a onetime net gain of $9.8 million or $0.66 in earnings per share on the company's divestiture of its nonregulated business subsidiary, Usource.
Adjusting for the divestiture gain, net income was down by $2.4 million or $0.16 per share compared to 2019, reflecting warmer winter weather in 2020.
The year-to-date decrease in earnings is primarily due to the warmer-than-normal winter weather in Q1, which unfavorably affected net income by approximately $3.1 million or $0.20 per share.
Turning to slide six.
Similar to last quarter, I'd like to recap the company's COVID-19 pandemic response.
Our highest priority continues to be the safety of our customers and of our employees.
In response to the COVID-19 emergency, we implemented our crisis response plan in order to execute preventive and proactive measures during this unprecedented time, and we've also enacted a phased opening plan.
The company is currently operating in its limited reopening phase under which most office employees are continuing to work from home when possible.
In addition, we continue to require social distancing as well as masks, hygiene, travel limitations and other measures to protect our employees and prevent the spread of the COVID virus.
Operationally, the company has continued to provide safe and reliable service through the COVID-19 emergency.
Employees entering customers' homes are being routinely tested to ensure the safety of both our customers and our employees.
We quickly adapted to social distancing and other recommended guidelines while ensuring operational continuity, and our workforce has seamlessly transitioned to work-from-home standards where appropriate.
Our employees have risen to this extraordinary challenge while continuing to provide exceptional customer service, and the company as a whole remains prepared to adapt in order to serve our customers and communities.
On slide seven, we provide an update of how our states are being impacted by the COVID-19 pandemic.
Unfortunately, many parts of the country have experienced an acceleration in the rate of new COVID-19 cases and consequently, reopening plans are being rolled back in some places.
However, in New England, we remain cautiously optimistic that testing, tracing, masks, social distancing and other measures have successfully slowed the spread of COVID-19 as the new case counts across our territories appear to have leveled off.
The percentage of positive COVID-19 tests in our service areas also have stabilized at rates considerably lower than the national average.
As the number of new COVID-19 cases have slowed, emergency orders have been moderately relaxed as part of a phased reopening plan in the states where we operate.
As outlined on this slide, many businesses, including retail, restaurants and personal services, began reopening during Q2.
I would also note that most of the major development projects that we have discussed in the past continue to proceed in our service areas, which should contribute to our expanding customer base.
On slide eight, we've again summarized our 5-year investment plan.
We have not revised our investment plans as a result of the COVID-19 pandemic.
And in fact, through the first half of 2020, our capital spending is more than $10 million higher in comparison to the same period in 2019.
On slide nine, as I previously stated, I simply wanted to reaffirm that we do not anticipate any change to our current dividend policy as a result of the pandemic.
I'll begin the sales and margin discussion on slide 10.
In the second quarter of 2020, our gas gross margin was $22.9 million, a decrease of $0.4 million from 2019.
We estimate that the COVID-19 emergency unfavorably impacted gas margin by $0.8 million due to lower commercial and industrial usage.
In addition, the warmer early summer weather impacted gas margin unfavorably by $0.2 million in the quarter.
These decreases were partially offset by $0.6 million due to higher distribution rates and customer growth in 2020 compared to 2019.
Natural gas therm sales decreased 9% in the second quarter of 2020 compared to the same period in 2019.
The decline in gas sales units primarily reflects lower C&I usage due to the ongoing COVID-19 emergency as well as the warm early summer weather.
In total, the company estimates that weather-normalized gas therm sales, excluding decoupled sales, were down 5.6% in the quarter.
Commercial and industrial sales were down 10.7% and residential usage was down 2.1% in the quarter compared to prior year.
On a weather-normalized basis, excluding decoupled sales, the company estimates that C&I sales were down 7.4% and residential sales would have been up 3.2% in the quarter.
Moving to slide 11.
For the first six months of 2020, our gas gross margin was $65.3 million, a decrease of $1.5 million from 2019.
The decrease was primarily driven by the historically warm winter weather in the first quarter of 2020 that I discussed during our last quarter's earnings call.
The company estimates that year-to-date sales margin was lower by $2.7 million due to warmer weather, partially offset by customer growth.
We also estimate that the COVID-19 emergency unfavorably impacted margin by $0.8 million due to lower C&I usage.
These volume variances were partially offset by higher natural gas distribution rates of $2.0 million in 2020.
Through the first six months of 2020, natural gas therm sales decreased 7.5% compared to 2019.
We attribute the decline in gas sales to the historically warm winter weather in the first quarter of 2020 and the ongoing COVID-19 emergency.
The company estimates that weather-normalized gas therm sales, excluding decoupled sales, were down 1.2% year-over-year.
Finally, I would note that we are currently serving 1,731 or 2.1% more gas customers than at the same time in 2019, illustrating our growing customer base.
Next, on slide 12, we discuss electric margin.
In the second quarter of 2020, our electric gross margin was $22.4 million, which is flat to 2019.
Electric sales margins were higher by $0.4 million in the period due to higher electric distribution rates, customer growth and warmer early summer weather.
The ongoing COVID-19 emergency negatively impacted electric margin by a net $0.4 million due to lower C&I usage of $0.6 million, partially offset by higher residential usage of $0.2 million.
Total electric kilowatt hour sales decreased 2% in the second quarter of 2020 compared to the same period in 2019.
The decline in electric sales units primarily reflects lower C&I usage due to the ongoing COVID-19 emergency and warmer early summer weather, partially offset by increased sales to residential customers due to the COVID-19 pandemic stay-at-home orders and the increased use of air conditioning during the warmer early summer period.
In total, the company estimates that normal electric kilowatt hour sales, excluding decoupled sales, were down 4.9%.
Commercial and industrial sales were down 11% and residential usage was up 12.8% in the quarter.
On a weather-normalized basis, excluding decoupled sales, the company estimates that C&I sales were down 12.2% and residential sales would have been up 6.4% in the quarter.
Moving to slide 13.
For the first six months of 2020, our electric gross margin was $45.5 million, which is again flat to 2019.
In the period, electric sales margins were higher than 2019 by $0.8 million due to higher electric distribution rates, customer growth and warmer early summer weather.
However, these positive differences were offset by the impacts of warmer winter weather in the first quarter of $0.4 million, and as I mentioned last slide, the ongoing COVID-19 emergency also negatively impacted margin by $0.4 million.
Through the first six months of 2020, electric kilowatt hour sales decreased 0.5% compared to 2019.
We attribute the decline in electric sales principally to the lower average usage by C&I customers as a result of the ongoing COVID-19 emergency and warmer winter weather, which adversely impacted the usage of electricity for heating purposes.
This was partially offset by increased sales to residential customers due to warmer early summer temperatures and the fact that people spent more time at home than usual during the COVID-19 stay-at-home orders.
The company estimates that weather normal electric kilowatt sales, excluding decoupled sales, were down 1.1% in the period.
The number of electric customers being served has increased by 755 or 0.7% compared to the prior year.
Next, on slide 14, we'll discuss the financial impact on Unitil of the COVID-19 emergency.
We are closely monitoring the COVID-19 emergency and its impacts on the financial health of the company.
As Tom mentioned earlier, we have estimated that as a result of the COVID-19 emergency, earnings per share were negatively impacted by $0.03 in the second quarter of 2020.
As we just discussed, the combined impact on gas electric sales margin from the COVID-19 emergency was $1.2 million in the second quarter of 2020.
However, this was somewhat offset by net lower O&M expenses of approximately $0.6 million that the company identified to be related to the COVID-19 emergency.
The lower O&M related to the COVID-19 was due to lower employee benefit costs, primarily lower health insurance claims incurred in the second quarter of $1.0 million, partially offset by net $0.4 million higher other pandemic-related costs related to the purchasing of PPE supplies, facility cleaning, higher bad debt provisions and other expenses.
Overall, O&M was down by $1.3 million in the second quarter of 2020 compared to 2019, and the remaining decrease is primarily due to lower utility operating costs in the period.
The company is also working closely with our regulators and local utility working groups to develop reporting mechanisms to respond to requests from our regulators about the financial impacts of the COVID-19 emergency.
Due to the ongoing moratorium on service disconnections, the company expects to incur higher levels of customer arrears, which could translate to higher bad debt expense.
We'll be tracking the activity, and we are exploring potential options to recover expenses related to the emergency through the regulatory process.
I'd like to point out that supply related bad debt, which is historically approximately 45% of all write-off activity, is tracked and recovered in reconciling mechanisms and does not impact the company's earnings.
Also, as I mentioned last call, the company has no intention to alter staffing levels as a result of the COVID-19 emergency.
In order to help stakeholders gauge the potential impact of COVID-19 on sales margin, the company has provided sensitivities between usage and margin for the third and fourth quarters of 2020.
Turning to the balance sheet.
In the second quarter, the company successfully priced $95 million of long-term debt through the private placement market.
The debt was priced at competitive investment-grade rates, and we anticipate the transaction to close in quarter 3.
The capital will be used to refinance existing and maturing debt, fund our investment programs and for other general corporate purposes.
With the company's existing credit facility, which has a borrowing limit of $120 million, and the proceeds recently of the recently priced debt, the company has ample liquidity to execute our growth plans.
Moving on to slide 15.
We provide an earnings bridge analysis comparing 2020 results to 2019 for the 6-month period ended June 30.
I'd like to note that this layout is slightly different from the Form 10-Q as we isolate the impact of the 2019 Usource divestiture and related revenues and expenses.
As discussed, 2020 year-to-date gross margin is lower than 2019 by $1.5 million, largely due to the warmer winter weather.
Core operation and maintenance expenses decreased $1.5 million compared to the same period in 2019.
This decrease is primarily driven by lower employee benefit costs of $1.1 million as well as lower maintenance and storm expenses of $1.0 million, partially offset by higher bad debt expense and higher professional fees of a net $0.6 million.
Depreciation and amortization was higher by $0.8 million, reflecting higher levels of utility plant in service.
Taxes other than income taxes increased by $1.1 million, reflecting higher levels of net plant in service as well as a nonrecurring tax abatement realized in 2019 of $0.6 million.
Interest expense was flat, reflecting interest on higher interest on long-term debt, offset by lower interest on short-term borrowings.
Other expense increased $0.3 million due to higher retirement benefit costs.
Next, we've isolated the full Usource impact of $10.3 million, which was realized in 2019.
This includes the after-tax gain on the divestiture of $9.8 million, in addition to $0.5 million, which is the net of revenues and expenses realized through Usource operations in 2019.
Lastly, income taxes decreased $0.3 million, reflecting lower pre-tax earnings in the period.
So this bridge analysis shows the net changes to reconcile our 2019 net income of $30.5 million to our 2020 earnings of $18.3 million for the first six months of the year.
On slide 16, we'll begin our discussion of rate case activity in 2020.
As we announced last quarter, our base rate cases in Maine and Massachusetts have concluded.
We received an order from the Maine PUC, approving an increase to base revenue of $3.6 million.
In Massachusetts, the gas settlement approved has a total distribution revenue increase of $4.6 million, which will be phased in over two years.
We began collecting the majority of this revenue award on March 1, 2020, while $0.9 million of the award will be included in rates starting March 1, 2021.
The gas settlement was lower as a result of $1.8 million lower expenses related to the pass back of excess deferred income taxes, lower depreciation and a removal of retirement costs from base distribution rates.
The Massachusetts electric settlement allows for a distribution increase of $0.9 million to become effective November of 2020.
The electric settlement was lower by $1.1 million as a result of lower expenses related to the pass back of excess deferred income taxes and the removal of retirement costs from base distribution rates.
The electric settlement also allows for the implementation of a new major storm reserve fund, which will help mitigate expense volatility related to future storms.
The company was planning to file the UES rate case during 2020 with the test year 2019, but we expect to defer the filing until the first half of 2021.
And I'd point out that both UES and Northern New Hampshire are required by the New Hampshire PUC to propose revenue decoupling in their next rate case to be filed 2021 or later.
Over on slide 17, we have provided a summary of significant distribution rate changes in 2020.
In 2020, we have been awarded over $7 million of rate relief.
As I mentioned last slide, the Fitchburg rate case awards would have been a combined $2.9 million higher if not for lower depreciation and amortization expenses and the removal of retirement costs from base rates.
On Slide 17, the negative amounts for the Fitchburg capital trackers reflect the transfer of collections from the tracker mechanisms and into base distribution rates.
Also, we have precedent for long-term rate plans or cost trackers across all of our utility subsidiaries.
Finally, on Slide 18, we provide the last 12 months' actual return on equity in each of our regulatory jurisdictions.
Unitil, on a consolidated basis, earned a total return on equity of 8.4% in the last 12 months.
The company estimates that after weather normalizing the warm winter weather in the first quarter of 2020, the consolidated return on equity would have been 9.3%.
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compname reports q2 earnings per share $0.21.
q2 earnings per share $0.21.
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Different from the first quarter this year, second quarter ended up being quite unbeatable.
As many of you have asked quite a few times now, will Frontline try and exploit the weakness in this market to grow further?
And I guess, we have answered that now during Q2.
We are in some way a three-legged shipping platform with VLCCs, Suezmax and LR2s.
Our VLCC leg has been a bit shorter than the others.
Now we're amending that somewhat.
Parts of the challenges in the market this quarter has been the continuous flare-ups of COVID infections in various locations around the world.
Vaccination has come far in the Western parts.
But other parts of the globe are not so fortunate.
We remain vigilant toward our seafarers' well-being and are happy to share that our efforts to arrange vaccines for them is going well.
In addition, I'd like to mention we are very grateful certain port states are being extremely generous, offering vaccines to seafarers literally for free.
So let's move on and have a look at the highlights on Slide 3.
Q2 '21 performance reflects the challenges the market faced this quarter.
It is, however, a further proof that our business model, efficient operations, modern fleet, and a very hardworking chartering team manages to outperform the key benchmarks.
To put this in perspective, an average weighted earnings index I checked recently for oil tankers came in just over $6,000 per day in Q2 '21, the lowest print in more than 20 years.
In order to outperform this, the owners, and in particular, the owners' charters, must fight for every cent and know their position well to be able to play their hands best possible.
Regrettably, this is not always the case as far as we can observe.
Anyway, at Frontline, we do the hard work and managed to achieve $15,000 per day on our VLCC fleet; $11,000 per day on our Suezmax fleet; and $10,600 per day on our LR2/Aframax fleet in the second quarter of this year.
So far in Q3, we have booked 70% of our VLCC days at $14,000 per day; 64% of our Suezmax days at $9,800 per day; and 63% of our LR2/Aframax days at $11,800 per day.
All numbers in this table are on a load-to-discharge basis.
Before Inger takes you through the financial highlights, let me quickly comment on the acquisitions in the quarter.
During Q2, we acquired, through resale, six latest-generation ECO-type VLCCs currently under construction at Hyundai in Korea.
In addition, we acquired two modern ECO-type VLCCs built in 2019 at the same shipyard.
We have for a period of time followed the VLCC asset market closely to look for opportunities.
As we didn't expect an imminent recovery in tanker markets, delivery was a key bargaining chip.
The rallying steel prices and high activity around us for non-tanker assets pushing potentially delivery slots way forward added to our conviction in making these investments.
I'll now let Inger take you through the financial highlights.
Following the acquisition of the VLCCs, as Lars mentioned, we have progressed on the loan financing.
And in August this year, we obtained financing commitments, subject to final documentation, for three senior secured term loan facilities.
They are in a total amount of just $247 million.
And they will partially finance the acquisition on the two VLCCs built in 2019 and three of the six VLCC newbuilding contracts.
All facilities will finance 65% of the market value.
They will carry an interest rate of LIBOR plus a margin of 170 basis points.
And they will have an amortization profile of 20 years, starting from delivery date from the yard.
We intend to establish long-term financing for the remaining four resale VLCCs newbuilding contracts closer to delivery of the vessels.
Then I think we should move to Slide 4 and look at the income statement.
Frontline achieved total operating revenues, net of voyage expenses, of $80 million and adjusted EBITDA of $28 million in this quarter.
And we report a net loss of $26.6 million or $0.13 per share and an adjusted net loss of $23.2 million or $0.12 per share.
The adjustments this quarter consist of a $4.7 million loss on derivatives; a $0.8 million gain on marketable securities; and a $1.3 million amortization of acquired time charters; and lastly, a $0.8 million share of losses of associated companies.
The adjusted net loss in the second quarter decreased $32 million compared with the first quarter.
And the decrease was driven by a decrease in our time charter equivalent earnings due to the lower TCE rates, as Lars mentioned; an increase in ship operating expenses of $9.3 million, mainly as a result of higher dry-docking costs; offset by a gain on marketable securities sold in the quarter of $4 million.
Let us then look at balance sheet on Slide 5.
The total balance sheet numbers have increased with $64 million in this quarter.
The balance sheet movements in the quarter are primarily related to taking delivery of the LR2 tanker from Future and the acquisition of 6 VLCC newbuilding contracts in addition to ordinary debt repayments and depreciation.
As of June 30, Frontline has $257 million in cash and cash equivalents, including undrawn amounts under our senior unsecured loan facilities, marketable securities, and minimum cash requirements.
Then let us take a closer look at cash breakeven rates on Slide 6.
We estimate risk cash cost per daily rate for the remainder of 2021 of approximately $21,800 per day for the VLCCs; $7,500 per day for the Suezmax tankers; and $15,400 per day for the LR2 tankers.
And the fleet average estimate is about $18,000 per day.
These rates are the all-in daily rates that our vessels must earn to cover the budgeted operating costs and dry dock, estimated interest expenses, TCE and bareboat hire, installments on loans and G&A expenses.
The highly attractive terms on the updated financing commitments on four of the acquired VLCCs, which I mentioned earlier, decreases the daily cash breakeven rates with approximately $1,400 per vessel per day compared to existing financing terms of similar vessels.
In the quarter, we recorded opex expenses of $7,600 per day for VLCCs; $8,500 per day for Suezmax; and $9,000 per day for LR2.
We dry-docked three Suezmax tankers in this quarter and four LR2 tankers.
And we expect to dry-dock one VLCC and two LR2 tankers in the third quarter and none in the fourth quarter.
The graph on the right-hand side of this slide shows that if we assume $30,000 on top of the daily fleet average cash cost per daily rate of $18,000, Frontline will generate a cash flow per share after the service cost of $3.51 per year.
And the cash generation potential will increase after acquisition of the eight VLCCs.
With this, I leave the word to Lars again.
So let's look at Slide 7 and recap the second quarter tanker market.
So global oil consumption averaged 96.7 million barrels per day in Q2 '21.
That's up 2.1 million barrels per day from Q1 '21.
Production averaged 94.9 million barrels per day.
Hence, the world continued to draw about 1.8 million barrels from inventories.
Just to put that in perspective, when you go from inventories, you're not really using that much transportation.
And as a rule of thumb on tanker utilization, you need about 30 VLCC equivalents in order to transport 1 million barrel of oil per day.
So this kind of draw represents a loss of 30 to 35 VLCC equivalents in demand.
The tanker rate gradually slipped throughout the quarter and volatility faded.
OPEC+ did increase supply by more than 1 million barrels per day during Q2 '21.
The key OPEC producers also went into higher-demand periods, typically in the Middle East, where summer hits and you start to basically burn oil or fuel for electricity generation.
U.S. and Brazil added another 900,000 barrels per day.
Most of the Brazilian additions came out as exports.
Demand rose sharply in North America and Greater Europe while Asia, that led the recovery, saw a far more muted development in the second quarter of the year.
As illustrated in the two charts below, where we basically isolated North America, Europe, and Eurasia, we see that during Q2, demand there rose sharply while the rest of the world, and in particular Asia, and as I mentioned that led the recovery toward 2021, has performed kind of -- performed less first half this year.
So let's move over to Slide 8 and look at the tanker order books.
New ordering has naturally been muted during the second quarter of '21.
We've observed that the delivery window for ordering a significant number of VLCCs or Suezmaxes is now firmly into 2024.
This is obviously due to all the ordering activity for asset classes kind of outside of the tanker space.
The overall tanker order book for VLCCs, Suezmax, and LR2 has shrunk 10% year to date.
The overall order book for tankers above 10,000 deadweight tons stands at 8% of the existing fleet.
And this is, in fact, comparable to levels seen in Q1 1997.
In absolute deadweight terms, we are at a 20 years low.
I'd also like to put this in some perspective.
Twenty years ago, the global oil consumption was around or at 76 million barrels per day.
A normalized market now is closer to 100 million, if not above.
So it means that the oil market is 30% larger now than in early 2000 and the order book is just about the same size.
The VLCC order book is now at 81 units, give or take.
At the same time, 124 VLCCs will be above or past 20 years in the same period.
For Suezmax, we are at 41 units and 123 passing 20 years on the same metrics.
Let's move to Slide 9 and look at oil in transit.
This is a very important indicator to us.
We monitor this basically on a monthly basis to see where we are.
Oil in transit is basically oil being transported, so in essence, excluding whatever is on storage.
And as you can see on -- I've kind of circled in 2020 in a red rectangle here.
And as you can see, 2020 was a very noisy year for oil transportation.
We started off the year with the Saudi-Russian price war, which distorted Q1 and Q2, and we had a massive production increase and transportation increase.
Then the COVID-19 pandemic hit, and we had -- and we saw a demand shock that suddenly kind of took away a lot of production and also then transportation needs.
And Q3 and Q4, the transportation needs diminished almost back to 2017 levels.
Floating storage did save tank utilization at the time.
First half of '21, the tanker markets have -- well, basically, volume has increased and transportation has grown.
But we've been facing increased fleet supply by vessels released from storage and delivery of newbuilds, together with seeing deep inventory draws.
Now -- where we are now, this is obviously, July and August for Q3, we're back to Q4 2019 levels.
OECD commercial inventories are now down to 2019 levels.
And I believe or we believe that's a fair proxy for global inventories.
There is also another thing to note, when inventories are no longer drawn, transported oil will come into play.
As an example of this, EIA are currently estimating us to build 1 million barrels of oil per day for September.
But then come October, we're supposed to draw half a million barrels per day from inventories.
That gives you a delta of 1.5 million barrels, which then needs to be transported.
That's equivalent to the demand for 45 to 48 VLCC equivalents.
And I think this gives you kind of a notion of how quickly this can turn.
Now let's move to Slide 10.
And I call it the VLCC fleet paradox.
This is almost the same for Suezmaxes.
But I decided to point out this for the VLCCs.
We may all speculate in what the older generation of VLCCs are doing.
But it is undisputable that a 20-year-old vessel will struggle as a very limited number of charters accept them.
And this is purely on age.
With the challenging trading environment we've had during first half this year, earnings achieved on non-ECO, high-consuming vessels have been zero or negative.
And mind you, 51 vessels are above 20 years as we speak.
Year to date, eight VLCCs are reported sold for recycling.
The average recycling price in Asia has risen 70% in the same period and is now close to $25.5 million for a VLCC.
Well, one of the typical exits for an older vessel in the tanker world is crude oil storage.
Well, crude oil curves turn into backwardation in Q4 last year and are not at all supporting floating storage.
So far this year, we've seen three VLCC spot fixtures reported on a vessel that's either 20 years or older than that.
And this is out of the 660 VLCC fixtures we recorded.
So again, I want to highlight this because it is important and it's very important looking at the previous slide, where we are in the cycle on oil being transported.
If it is so that the effective tonnage actually hasn't grown over the last couple of years, then we're closer to balance than we might think we are.
So let me sum up on Slide 11.
Demand and supply of oil continues to rise.
But we have to admit the Delta-type infections cloud the outlook, in particular in Asia.
We see asset prices remain firm, steel prices continue to rise.
And the activity is very good on the yards but for non-tanker assets.
At the same time, the tanker fleet continues to age, the overall order book shrinks and the potential delivery window moves further out, should demand for tankers pick up.
OPEC+ plan to add about 400,000 -- no.
400,000 barrels per day each month until the end of the year.
This means in total 2 million barrels per day of increased supply.
And go back to the math for -- we then would need 60 to 65 VLCC equivalents by the end of the year.
Oil in transit continues to rise.
And the big question mark is obviously, when do we reach the inflection points?
I would like to draw your attention to the chart at -- below or at the bottom of the slide.
I showed you this last quarter as well.
And as the orange dot indicates, this is where we were in March this year.
So we're -- basically, we're gradually digging ourselves in from negative year-on-year growth in global oil trade into positive territory.
And since last, Frontline has increased its position significantly.
We have secured attractive financing and are ready to capitalize as we sail on toward the expected recovery.
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frontline q2 net loss of $26.6 million.
q2 net loss -26.6 million usd.
q2 diluted loss per share 0.13 usd.
net loss of $26.6 million, or $0.13 per basic and diluted share for q2 of 2021.
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First, I want to wish all a Happy New Year and that you all remain safe and healthy.
If there was ever a year where we fulfill our purpose to our customers, our people, and our communities, it was 2020.
We were more than ready.
Our job as managers is to lead through good and bad times.
When we look back at 2020, we are so proud of our people who have been so dedicated, so resilient, and who have persevered through all the challenges of 2020 while maintaining our high levels of service to our customers, giving back to the communities we serve, and delivering excellent results for our investors.
We're extremely pleased with our results.
For our customers, despite everything, we swiftly processed their service requests, applications for loan deferrals, and the rapid influx of stimulus checks.
For commercial customers, we implemented an easy to use 100% digital service for applying, processing, disbursing, and forgiving PPP loans.
Both retail and commercial customers took full advantage of the digital technology we have been providing.
As we say at OFG, [Foreign Speech].
Our people adapted quickly to working remotely.
We stepped up spending for COVID-related items such as testing, healthcare, and worksite safety.
We made significant investments to ensure our teams had robust remote work capabilities.
We also worked to do our part for our communities.
At the beginning of 2020, we supported the earthquake-affected towns in the southern part of Puerto Rico.
After that, it was COVID-related donations and securing more than $100,000 in grants for non-profits in Puerto Rico and the U.S. Virgin Islands.
In addition, we converted our internship, scholarship, and financial seminar program to virtual formats to maintain a sense of continuity during these challenging times.
We will continue in 2021 to help our customers, people, and communities to adapt to the challenging and changing COVID conditions.
Please turn to Page 4.
As you can see in this slide, we continued to see higher percentage adoption in all banking technologies.
I am particularly pleased with the 50,000 online appointments made through our digital platforms and our online bill and loan payment solution.
All of this made life easier for our customers during the pandemic.
It also helped further our strategic and operational goals.
In all likelihood, digital migration should build on the progress we achieved in 2020.
Please turn to Page 5 to review our fourth quarter results.
We reported earnings per share of $0.42.
It is important to note that this included three major items; $6.4 million in merger and restructuring charges [Indecipherable] Scotiabank systems conversion and integration; $3.7 million in merger and restructuring charges for branch consolidation in 2021; and $1.5 million in COVID-related spending.
All of these amounts are pre-tax.
Also keep in mind, our tax rate was 22%, that's higher than the third quarter because of the greater proportion of higher tax income, but it is also lower than our estimated tax rate in 2021, which we currently anticipate being in the 30% to 32% range.
Total core revenues were a record $133 million.
Net interest income was $99 million, similar to the third quarter.
Banking and wealth management revenues were a record $34 million.
Wealth management included $4 million in annual insurance commissions, approximately $3 million of that was from additional insurance business that came with the Scotia acquisition.
Mortgage banking included $2 million in revenues from secondary market sales of mortgages that were held back from the third quarter due to our systems conversion.
Non-interest expenses were $89 million.
Excluding the merger restructuring charge and COVID-related costs, non-interest expenses amounted to $77 million.
This reflects significant cost savings, which Maritza will discuss in a few minutes.
Regarding the balance sheet, total assets were under $10 billion as we had anticipated.
Loan production continued to be solid at $485 million and capital continued to build with the CET1 ratio increasing to 13.08%.
Looking at our numbers, we continued to see signs of recovery with solid loan production, regular payment activity, stable credit trends, and a sequential quarterly increase in banking service fees, which reflect improved day-to-day economic activity.
Now, here's Maritza to go over the financials in more detail.
Please turn to Page 6 for our financial highlights.
Let me start with tangible book value per share, one of our key areas of focus.
At close to $17, it increased more than $1 year-over-year and by $0.46 from the third quarter.
The efficiency ratio increased [Phonetic] sequentially to 67%.
When you adjust for mergers and COVID expenses, it improved about 400 basis points to 58%.
Return on average assets and tangible common equity was close to 1% and 10% respectively on a reported basis.
Excluding the merger charge and the COVID expenses, these two metrics would have been more in line with our general performance objectives.
Please turn to Page 7 for our operational highlights.
As Jose mentioned, loan generation was a solid $485 million.
That included commercial lending of $224 million, auto lending of $138 million, and mortgage lending of $98 million.
Average loan balances declined slightly from prior quarter due to paydowns and loan yields stood at 6.55%.
Average core deposits increased, but end of period balances declined $170 million on a linked quarter basis.
This was primarily due to our decision not to renew certain additional higher cost deposits.
As a result, the cost of core deposits continued to fall to 53 basis points.
Average cash balances increased $162 million during the quarter.
The result was a 6-basis point sequential decline in net interest margin to 4.24%.
Please turn to Page 8 to review credit quality.
The net charge-off rate increased to 2.67%.
That reflects our decision to charge-off to acquire Scotiabank loans that were substantially and previously reserved at the time of the acquisition.
Provision was $14.2 million.
This includes $4.7 million to cover the two chargers [Phonetic] of commercial loans acquired from the Scotiabank that I just mentioned.
Fourth quarter 2020 loan deferrals fell to 1.4% of total loans from 2% in prior quarter and 3% in the second quarter of 2020.
The non-performing loan rates for non-PCD loans remained fairly steady at 2.35%, while non-performing loan rates for PCD loans decreased from 4.26% to 2.11%.
Turning to capital, stockholders' equity increased 2% sequentially and 4% year-over-year.
The tangible common equity ratio increased to 9%, ahead of both the prior quarter and the year-ago period when we made the acquisition of Scotiabank.
Please turn to Page 8.
After holding off for most of the first half of 2020 due to the pandemic, we completed the Scotiabank cost savings program in the fourth quarter.
With the completion of the system conversion, we realized $32 million in annualized savings, exceeding our original estimate of $35 million by about 9%.
Looking ahead, we expect to benefit from our -- we expect to benefit from about two-thirds of these savings in 2021 as we plan to step up investment in the continuing transformation of our business model.
Long term, we are committed to reducing expenses and increasing operating leverage.
Our objective is to return to an efficiency ratio in the mid-50% range.
Now, here is Jose, for his outlook for 2021.
Please turn to Page 10.
We believe our history, culture -- please turn to Page 10.
We believe our history, culture, team, and approach to business as well as our most recent results demonstrate our ability to respond quickly and adapt to changing economic conditions.
During the fourth quarter, we continued to build good momentum in our core businesses and develop a strong pipeline of new loans.
We have a strong balance sheet.
We're well positioned financially and strategically.
Our agenda for 2021 is clear; advance our strategic plan to further grow and improve performance in all operating areas.
For that, we need to further increase loan generation and grow fee income.
And as I mentioned, we plan to continue to invest for the future to further simplify operations, increase operating leverage, and enhance our ability to serve customers.
Our outlook is more optimistic than last quarter.
We still face challenges from COVID, high unemployment levels, and largely ineffective government operations to name just a few, but we believe the economy is starting to move in the right direction and the future looks brighter.
With the new administration in Washington, Puerto Rico is on the cusp of receiving significant amounts of approved [Technical Issues] reconstruction and stimulus funds for several years to come.
Key areas that should benefit from the influx of federal funds might be production and distribution of resilient and diversified electricity, improved infrastructure, telecommunication, and government efficiency.
We are also very hopeful with regards to the multiple vaccines that have been proven effective against COVID.
I am not talking about their effect on the economy here and around the world, although that's very important, but the effect they will have on human lives and the people in Puerto Rico, the U.S. Virgin Islands, and elsewhere.
A lot of families, small businesses, and their employees have suffered because of the pandemic.
If the vaccines are as successful as expected, we'll see the end of COVID in a relatively short period of time.
We at OFG are more than ready to help our customers rise up and fulfill their lives again, while we all play a major role in the recovery of Puerto Rico and the U.S. Virgin Islands.
Operator, let's start the Q&A.
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compname reports 4q20 & 2020 results.
q4 earnings per share $0.42.
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We will also discuss non-GAAP financial measures regarding our performance.
Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period.
When we refer to the base revenues, were referring to our total revenues less our COVID diagnostic testing revenues, which include COVID-related revenues from Veritor, BD MAX and swabs.
When we refer to base margins, we are adjusting for estimated COVID diagnostic testing profitability and the related profit we have reinvested back into our business.
When we refer to any given period referring to fiscal period, it must be noted as a calendar period.
Finally, when we refer to NewCo during todays call, were referring to the planned spinout of our Diabetes Care business into an independently public traded company following the effective trade date of the spin, which was announced on the second quarter earnings call.
RemainCo refers to BD post separation.
As a reminder, this transaction is subject to market, regulatory and other conditions, including final approval by BDs Board of Directors and the effectiveness of a Form 10 registration statement that will be filed with the SEC.
On todays call, I will provide highlights of the quarter and discuss the continued strong progress we have made on our BD 2025 strategy.
On behalf of the Board of Directors, the leadership team and the company, I want to express my gratitude to Chris for his leadership and service to BD.
Im confident the CFO transition ahead will be seamless, and his leadership and experience will make him an excellent director for NewCos Board.
Now lets jump into our results.
We were very pleased with our third quarter performance, powered by strong growth and momentum in our base business across all three segments.
Revenues totaled $4.9 billion, and our adjusted earnings per share was $2.74, both ahead of our expectations.
Total revenues were up 26.9% on a reported basis and up 22% on a currency-neutral basis.
Results included COVID diagnostic testing revenues of $300 million, which contributed 4.8% to growth.
Excluding COVID testing revenues, our base business revenues were up 17.6%, better than we expected across most business units.
The strong growth reflected the anniversary of the initial COVID wave and the temporary halting of elective procedures and its impact on medical device utilization in the year ago quarter.
But Q3s result also reflects the continued momentum driven by the successful execution of our BD 2025 strategy.
Excluding COVID diagnostic revenues, base business revenues in Q3 fiscal 21 increased 3.9% relative to our pre-pandemic third quarter fiscal 2019 on a currency-neutral basis, which includes the impact of the Alaris ship hold.
If you exclude the U.S. infusion systems business, our total revenues would have increased 6.6% relative to our prepandemic third quarter fiscal 2019.
Our Pharmaceutical Systems and Urology and Critical Care franchises continue to be standout performers, where revenues are up 17% and 11%, respectively, over 2019 levels.
Bioscience revenues were up 9%.
Surgery and Peripheral Intervention revenues are both up 8%.
Elsewhere, we see opportunities for improvement ahead in fiscal 22 and beyond.
For example, our MDS revenues are up about 2% versus 2019 levels, reflecting the continued impact of COVID as well as the impact of China volume-based purchasing.
As hospital utilization improves, we should see further improvements here.
Also, as I mentioned, Medication Management Solutions revenues are impacted by the Alaris ship hold, and we expect our revenues to improve once we receive our 510(k) clearance for our BD Alaris system.
While Im pleased with how we are accelerating our revenue performance and profile, Im equally pleased with the process were making in improving our working capital and cash flows.
Cash flow performance has been a key focus for us since I became CEO, and that is evident in our working capital metrics.
Year-to-date, cash flows from operations totaled $3.7 billion, an increase of 80% from the prior year period.
This improvement in our cash flows allowed us to advance our more balanced capital allocation strategy this quarter, which included the repurchase of $1 billion in BD stock at an average price of approximately $242.
This marks the first time we have repurchased shares since 2017 and the largest amount we have repurchased since 2012.
Even with this repurchase activity, we ended the third quarter with nearly $3.2 billion in cash and an adjusted net leverage ratio of 2.4 times.
Overall, Im really pleased with our performance in the quarter, particularly with the continued positive momentum in our base business.
This gives us the confidence to raise our base revenue assumption.
We now expect our base business to grow approximately 7.5% to 8% on an FX-neutral basis.
This is higher than our previous expectation of mid-single-digit growth.
We continue to expect COVID diagnostic testing revenues of $1.8 billion to $1.9 billion, with more revenues coming from international markets than we previously anticipated.
We now expect currency-neutral revenue growth overall of approximately 14%.
Our positive base business momentum and a lower tax rate allows us to raise our adjusted earnings per share guidance by $0.10 while continuing to reinvest in our business and overcome lower COVID testing profits, including a provision for excess and obsolete COVID testing inventory.
We now expect our full year adjusted earnings per share range to be $12.85 to $12.95.
Chris will provide you further details on our financial outlook later in the call.
Next, I want to provide an update on our BD Alaris pump remediation, which remains my number one priority.
Last week, we announced to our customers a positive step in our remediation efforts.
Working with the FDA, we are now initiating remediation of existing Alaris system devices in the field by updating the software to version 12.1.
2 following submission of the 510(k), which includes this software version.
This new software version is intended to remediate the issues identified in the February 4, 2020, recall notice and provide programming, operational and cybersecurity updates to affected devices.
However, the software update has not been reviewed or cleared by the FDA.
To address the question on Alaris clearance timing, we remain confident in our submission and the process we are undertaking, including working closely with the FDA.
As Chris will later discuss, we believe it is responsible to not definitively predict the FDA clearance in our FY 22 outlook.
We believe this is a prudent approach given the inherent difficulty in predicting FDA clearance time lines.
Next, I want to update you on our BD 2025 strategy of grow, simplify and empower.
First, Id like to focus on our growth pillar.
We continue to strengthen our market leadership positions in our durable core business while purposely investing in new innovations that help accelerate and shape irreversible trends that we see transforming global health now and in the decade ahead.
Ive spoken about these three innovation and growth focuses before.
And weve been purposely shifting more of our R&D and tuck-in M&A investments into these spaces, which are growing over 6%.
Through this, we aim to lift our weighted average market growth rate and performance over time.
And this year, weve launched several innovative products and solutions across the continuum of care, across our business units and across the globe.
And after completing our strategic portfolio review last month, I can share with you that our pipeline is very deep and wide across our businesses.
Its been further enhanced by our acquisitions over the past 18 months.
And youll hear much more about our innovation pipeline at our Investor Day on November 12.
But let me highlight a few of our organic innovations that were advancing in the near term.
In our Life Sciences business, Im pleased that we will start shipping our BD MAX and BD Veritor combination flu COVID assays this month, in time for the upcoming respiratory season.
Our BD Veritor combination test can detect and distinguish between COVID, flu A and flu B in a single rapid test with a digital readout.
We see the combination test becoming the standard of care moving forward, advancing our strategy to enable better outcomes in nonacute settings.
Another innovation area Id like to highlight is our Biosciences business.
Biosciences has been a strong performer this year, and we expect the unit to deliver high single-digit growth for the full year.
In June, we launched our new e-commerce site, bdbiosciences.com, which is an entirely new and innovative digital marketplace designed to provide a best-in-class online purchasing experience for our flow cytometry customers.
Early feedback has been outstanding, and were already seeing excellent traction and early adoption.
We also have an exciting wave of new product introductions this summer, with the launch of our FACSymphony A5 SE, which is our first BD spectral analyzer, and provides an even higher cellular parameter analysis.
Weve launched our FACSymphony A1 as well, which offers high-end technology and a cost-effective bench top design.
In addition to these launches, we have a healthy innovation pipeline of modular, scalable new instruments and next-generation dyes that will allow our customers to fully leverage our complete and integrated solution suite of instruments, reagents, informatics, single-cell multiomics and scientific support services.
Our products and solutions are being used to uncover new insights on the immune system and develop treatments for many related chronic diseases.
You can hear more about our Life Sciences strategy from Dave Hickey, our Executive Vice President of BD Life Sciences; and Puneet Sarin, our Worldwide President of BD Biosciences, at the upcoming UBS Genomics 2.0 and MedTech Innovation Summit on Wednesday, August 11.
Next, lets turn to our inorganic innovations that weve added to our portfolio.
As you know, we continue to be focused on tuck-in M&A as a means of adding innovative products and solutions that leverage our core market leadership positions and advance us into higher-growth adjacencies.
Year-to-date, weve completed seven tuck-in acquisitions.
While at the same -- at the time of the acquisitions, these individual deals were not meaningful from a revenue perspective.
As we integrate these transactions into our portfolio, we expect them to strengthen our growth profile.
Our three most recent transactions, Velano Vascular, Tepha, Inc. and ZebraSci are good examples of our M&A strategy.
Let me begin with Velano Vascular, which is being added to our MDS business.
Velano has an innovative needle-free technology that enables high-quality blood draws from existing peripheral IV catheter lines, eliminating the need for multiple needle sticks.
This technology will help customers transform the patient experience through the vision of a 1-stick hospital stay.
Velanos PIVO device will be integrated into our sales teams bag of broader catheter solutions initially in the U.S.
This is a great example of how were expanding and strengthening our base business.
The second transaction is Tepha, Inc., a leading manufacturer of a proprietary resorbable biopolymer technology.
Over the past several years, through our long-standing relationship, weve been commercializing this platform via our Phasix resorbable hernia mesh platform.
The acquisition benefits are twofold.
First, it provides us with a vertical integration strategy for our current Phasix platform.
But more importantly, it provides us with exciting new opportunities to expand our horizon into new high-growth areas of tissue repair, reconstruction and regeneration.
Lastly, we acquired ZebraSci, a pharmaceutical services company.
This acquisition provides the opportunity to expand our Pharmaceutical Systems business beyond injectable device design and manufacturing to include best-in-class testing for drug device combination products.
ZebraSci allows us to further engage and collaborate with biopharmaceutical companies and particularly smaller companies, where a large amount of the pipeline is, to support the transition of their molecules into prefilled combination devices.
Next, I want to update you on our Simplify initiatives, which are advancing well.
Through Project Recode, we are optimizing our portfolio, optimizing our plant network and simplifying our business processes.
Project Recode remains on track to achieve $300 million of cumulative savings by the end of FY 24.
We are also continuing the rollout of our BD production system, which is a standardized BD approach to driving the next level of lean processes and continuous improvements across our plants.
The BD production system is already helping to drive improvements in quality and reductions in our inventory days.
We also continue to advance Inspire Quality, our quality, regulatory and risk mitigation program.
The last pillar of our BD 2025 strategy is empower, which represents the changes in our culture and capabilities that were driving to empower our strategy.
In Q3, we completed our Voice of Associates survey with over 86% participation.
And what stood out was that our associates said were making strong progress with improvements in 95% of the metrics since our last survey in 2018.
And most notable were improvements in our focus areas of growth mindset, strong teams, quality and excitement about the future of BD.
Were also advancing our 2030 sustainability strategy, which addresses a range of challenges in our industry while helping to make a difference on relevant issues that affect society and the planet.
Our strategy will ensure we remain focused on shared value creation, meaning how we address unmet societal needs through business models and initiatives that also contribute to the commercial success of BD.
Next, I want to provide a brief update on the progress of our proposed diabetes spin-off, which remains on track for the first half of calendar 2022.
We are making steady progress with our separation activities.
We recently announced that two directors from BDs Board will be appointed as future directors of the Diabetes NewCo.
Retired Lieutenant General David Melcher will serve as the Non-Executive Chairman of the Board.
And Dr. Claire Pomeroy will serve as a director.
Their appointments will be effective upon the completion of the spin, at which point they will transition from the BD Board to the Board of NewCo.
Lieutenant General Melcher brings extensive experience in spin-offs, having served as the CEO of Exelis following its spin-off from ITT.
And under his leadership, Exelis spun off its mission systems business as a separate public company.
Dr. Pomeroy brings broad experience in healthcare delivery, administration, medical research and public health.
Im confident their combined experience, along with future planned board members, will help to set NewCo well on its path to becoming a successful independent publicly traded company focused on growth.
While continuing to evaluate additional Board members, we are also continuing to build a new Diabetes Care leadership team through a combination of current BD leaders and new hires, including Dev Kurdikar, who will be NewCos CEO; Jake Elguicze, who will be CFO, and most recently, Jeff Mann.
Jeff Mann joined our Diabetes Care organization and will be General Counsel and Head of Corporate Development for NewCo.
Jeff brings more than two decades of experience in M&A and transactions, securities law and corporate governance.
Most recently, he served as General Counsel and Secretary of Cantel Medical group.
We are also progressing with the Form 10, which will have the carve-out financials, and we expect it to be publicly available around the end of the calendar year.
Before turning it over to Chris, I will leave you with some key thoughts.
First, our base business momentum and our recovery from COVID continues, and it is broad-based.
We expect that momentum to carry into fiscal 22 and beyond.
As Chris will share with you, todays results underscore our confidence in strong mid-single-digit top line growth for our base business next year.
Second, we are executing well against our innovation-driven growth strategy, which includes our internal R&D as well as advancing our tuck-in M&A strategy.
And third, Im proud of the substantial progress in advancing our BD 2025 strategy and how that will unleash our growth potential in the years to come.
Well deliver innovations for our customers, empower our associates and create value for you, our shareholders.
Ive been with BD for 20 years, and Ive never been more excited.
We just completed our annual strategic review process, as I said, and the road ahead is looking more exciting than it did a year ago.
We look forward to sharing our BD 2025 strategy in greater detail at our November 12 Investor Day.
We hope you can join us.
Im also very pleased with our overall performance in the quarter, particularly with the base business, which showed continued strong momentum.
Third quarter revenues of $4.9 billion increased 26.9% on a reported basis and 22% on a currency-neutral basis and were ahead of our expectations.
Our current quarter results also include $300 million in COVID diagnostic testing revenues, compared to $98 million in the prior year period.
Excluding COVID diagnostic revenues in both periods, our base business revenues increased 17.6%.
Our base business reflects continued strong performance as the market continues to recover from the COVID pandemic, the impact from which was most acute in Q3 of last year.
The BD Medical segment revenues totaled $2.4 billion and were up 7.7% versus the prior year.
MDS revenues increased 24%, reflecting a strong recovery in the U.S., led by strong growth in catheters and vascular care devices.
Additionally, worldwide revenues included $18 million from COVID vaccination devices.
In MMS, the double-digit increase in our dispensing revenues was more than offset by the expected declines in our infusion solutions.
As you may recall, when the pandemic started, we saw a higher level of demand for infusion pumps and sets globally.
Diabetes Care benefited from an easy comparison to the prior year, the timing of sales and slightly better-than-expected market demand.
Pharm Systems continued to deliver strong growth with revenues up 12%, driven by demand for our prefilled devices.
BD Life Sciences revenues totaled $1.4 billion and were up 43%.
This included the $300 million in COVID diagnostic testing revenues, $212 million related to our BD Veritor system, with the remaining $88 million from BD MAX collection, transport and swabs.
Year-to-date, COVID diagnostic testing revenues were over $1.6 billion.
Despite lower average selling prices, driven in part by geographic mix, we are still on track to deliver on our target of total worldwide revenues of $1.8 billion to $1.9 billion for the fiscal year.
Excluding COVID diagnostic testing revenues, our Life Sciences segment grew revenues 27%, driven by strong performances in both Integrated Diagnostic Solutions and Biosciences.
IDS revenues increased 49%.
Excluding COVID diagnostic testing, IDS revenues increased 27%, driven by strong double-digit performance across specimen management and microbiology.
Biosciences increased 27%, driven by both research and clinical solutions.
We continue to see strong demand for research reagents and instruments as lab activity is returning to normal levels.
We also continue to see steady demand for research reagents globally, fueled by COVID research activities related to vaccines and variants, especially from academic research and biopharma companies.
BD Interventional sales totaled nearly $1.1 billion and were up nearly 35%, reflecting the COVID anniversary impact on elective procedures.
Surgery revenues increased 68%, and Peripheral Intervention increased 32%.
Both businesses saw the greatest recovery in the U.S. and Western Europe, which experienced the greatest impact on elective procedure volumes in the prior year quarter.
We saw sequential improvement in both surgery and peripheral intervention.
However, in the last several weeks, we are seeing some impact from the COVID delta variant on elective surgeries in certain U.S. states.
Urology and Critical Care revenues were up approximately 14%, driven by continued growth in our PureWick and Targeted Temperature Management franchises.
Now turning to our P&L.
As we expected and have communicated, our gross margins this year are being negatively impacted by COVID-related expenses, manufacturing variances and FX headwinds, which are more acute in the second half of the year.
Also, as expected, our gross margin declined sequentially.
Our gross margin was 51.5%.
However, this included a net negative 90 basis point impact from COVID testing and reinvestments.
The 90 basis point impact includes a negative 140 basis point impact from an inventory provision related to COVID testing.
Adjusting for the net impact of COVID testing and reinvestments, our underlying base business gross margin was 52.4%.
On a sequential basis, our base business gross margin declined from our second quarter rate of 53.7% due to three factors: 70 basis points of incremental FX headwinds; 40 basis points from inflationary pressures, including higher raw material costs and inbound freight as these costs roll through our inventory; and 20 basis points of other expenses, including Alaris quality remediation.
Now turning to SSG&A.
Our total SSG&A spending increased 21% on a currency-neutral basis to $1.2 billion or 25.2% of revenues.
As a reminder, in the third quarter of fiscal 2020, we implemented several cost-containment measures in response to the COVID pandemic.
In addition, we are continuing to see higher shipping costs.
This quarter also included higher expenses related to our COVID profit reinvestment initiatives.
As a reminder, the COVID testing reinvestments we made in FY 21 will not reoccur.
Our R&D spending totaled $321 million, an increase of 31.1% on a currency-neutral basis.
The higher R&D reflects the timing of project spending, including a higher spending related to the BD Innovation and Growth Fund.
Our R&D spending was 6.6% of revenues, which is higher than our long-term target of 6%.
On a currency-neutral basis, our operating income increased 26.5% as compared to our revenue growth of 22%.
Our operating margin of 19.8% was slightly below our guidance of below 20%.
The inventory provision related to COVID testing I referenced earlier negatively impacted operating margins by approximately 150 basis points.
Interest and other expenses were essentially flat year-over-year at $98 million.
The adjusted tax rate was 5.8%, lower than we previously expected due to discrete tax items that occurred this quarter.
The lower tax rate essentially offsets the impact from the COVID diagnostic inventory provision in the quarter.
The average diluted share count used to calculate our earnings per share in the quarter was 291.9 million.
We repurchased a total of 4.1 million shares for a total of $1 billion at an average price of approximately $242.
Our adjusted earnings per share increased 24.5% over the prior year to $2.74 on a reported basis and were up 25.9% on a currency-neutral basis.
Now Id like to turn to guidance for the balance of the fiscal year.
Our guidance continues to assume no major widespread hospital restrictions on elective procedures related to the COVID pandemic.
However, we did start to see some impact on elective procedures from the COVID delta variant in the last one to two weeks in certain U.S. states and have assumed some continuation of this in our guidance.
That said, given the continued positive momentum of the base business, we are pleased to be able to cover this and still raise our currency-neutral revenue growth to about 14%, up from our previous range of 10% to 12%.
Our revised revenue range would incorporate a base business currency-neutral growth assumption of 7.5% to 8%.
Further, we reaffirm our previously communicated COVID diagnostic test revenue range of $1.8 billion to $1.9 billion.
We now expect a favorable 250 to 300 basis point impact from currency.
This brings our total reported revenue growth to approximately 16.5% to 17.5%.
For the full year, we now expect our fiscal 2021 adjusted earnings per share to be in the range of $12.85 to $12.95.
This higher guidance reflects the positive base business momentum and a lower tax rate.
These benefits allow us to continue to invest while offsetting the COVID testing inventory provision and lower COVID selling prices.
Next, I want to share with you our expectations for gross operating margins for full year fiscal 21 and provide you with an estimate of the net impact of COVID testing and the related reinvestments of profits on our margins.
We expect our full year adjusted gross margins to be in the range of 53.5% to 54%, and this range includes a net neutral to slight positive impact from COVID testing reinvestments.
We expect our full year adjusted operating margin to be in the range of 23.5% to 24%.
This range includes a 200 basis point contribution from the net impact of COVID testing and reinvestments.
Finally, Id like to address FY 22.
We plan to provide our specific fiscal 2022 guidance on our November earnings call, but we wanted to provide some directional color today.
To give you a sense as to what a floor could look like in fiscal 22, we have taken the following approach: As you know, there is a great deal of uncertainty around the level of COVID testing.
Therefore, we have not modeled any testing revenue beyond the typical flu season.
With the continued momentum we are seeing, we have increased confidence in our ability to deliver strong mid-single-digit revenue growth in fiscal 22 over our fiscal 21 base revenues, which, as a reminder, adjusts for COVID diagnostic testing revenues.
With respect to Alaris, our filing is comprehensive and more complex than most submissions.
As we have previously stated, it is possible that the review could be in line with past pump time lines.
However, as we have also mentioned, it was more likely to take longer for the FDA to review and ultimately grant clearance.
It is inherently difficult to predict clearance timing.
We are not assuming Alaris 510(k) clearance.
It is difficult to predict how things will play out as shipments are only being made under the medical necessity process.
At this time, we have incorporated the assumption that revenues associated with Alaris will be approximately similar to FY 21.
We believe it is prudent and responsible not to definitively predict FDA clearance time lines.
That said, we remain confident in our submission and the process we are undertaking, including working closely with the FDA to obtain comprehensive 510(k) clearance.
We expect to drive base business gross and operating margin expansion.
We expect the operating margins for our base business to expand more than our traditional annual target of at least 50 basis points and translate into double-digit operating income growth.
For reference, we expect our base business operating margins to be between 21.5% to 22% in fiscal 2021.
With these assumptions, we expect an adjusted earnings per share floor of at least $12.
This represents approximately low teens growth over our expected base business earnings in fiscal 2021.
Now before opening it up for Q&A, I want to take a moment to comment on todays announcement of my upcoming retirement.
With our strong base business momentum, our strengthened balance sheet and improved cash flows, which is evident by the increased number of tuck-in acquisitions that weve been doing and the restart of our share buyback program for the first time since 2017, I feel that now is the right time for the transition as the company is well positioned to continue to drive shareholder value and impact the lives of patients around the world.
I look forward to helping to ensure a seamless transition to the new CFO.
And Im very excited about the value-creating opportunities ahead for NewCo and helping to ensure this success as a member of their Board.
And Kristen, I think its -- we should open up the -- operator, open up the line to Q&A.
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brandywine realty trust - qtrly net income allocated to common shareholders; $18.9 million, or $0.11 per diluted share.
brandywine realty trust - qtrly funds from operations (ffo) of $61.4 million, or $0.36 per diluted share.
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Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer; as well as George Schuller, our Chief Operations Officer.
Before we get started, I'll remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today's date, November 5, 2020.
These expectations involve risks and uncertainties that could cause the company's actual results to differ materially.
A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com.
Our remarks today also include non-GAAP financial measures such as adjusted EBITDA and free cash flow.
There are several reasons for that delta, primarily related to delayed ordering of Plant Nutrition products in our North and South American markets.
Those timing issues were driven by very dry weather in both Brazil and key North American markets, as well as extreme wildfires in the western part of United States.
We also reported an unfavorable non-cash inventory adjustment related to an error in bulk stockpile measurements at our Ogden, Utah, SOP facility, which Jamie will discuss in more detail shortly.
Because we expect these third quarter market disruptions to be short-term, I'll focus my remarks instead on our year-to-date performance.
On a consolidated basis, operating earnings for the year-to-date period increased 19% and EBITDA rose 10% compared to 2019 results.
In addition, we generated over $188 million of cash flow from operations, which is a 93% increase from 2019.
These are very strong results given the fact that we experienced a mild winter and all of our deicing markets in the first quarter as well as the operational challenges stemming from the global pandemic beginning in March.
As many of you have heard me say before, our number one priority as a management team is ensuring our employees go home at the end of their shift as healthy as when they arrived.
Our focus on this Zero Harm culture has been as critical to our ability to navigate the current pandemic as it is toward the sustainability of our organization.
And anyone who has spent their career in mining knows the value of this focus, benefits all stakeholders, as it has been proven time and time again that over the long-term, the safest operations are also the most productive operations.
This quarter, we continued to see a decline in our total case incident rate or TCIR, in addition to achieving a multi-year low for our 12-month rolling TCIR average.
I'm very happy to share that our TCIR in September was among the lowest of any month in the history of the company.
I would also like to specifically commend the employees at our Ogden facility for their exemplary safety performance.
They're very near to achieving 1 million exposure hours with no lost time safety incidents.
As a leading indicator for operational success, this continuous improvement in our safety metrics speaks volumes about the discipline and commitment to safe and responsible operations our employees bring to their jobs each and every day.
I may sound like a broken record here, but it's a song I'm really glad to sing.
Our Goderich mine continued to deliver very strong year-over-year production results.
For the quarter, production volumes were 53% ahead of third quarter 2019 results, while the cost to produce these tons declined 24%.
On a year-to-date basis, production tons have increased 28% from 2019 levels and production costs are down 11%.
These steadily improving metrics highlight the strength of our continuous mining platform there, which will help to ultimately secure Goderich's position as the leading salt mine in North America from both the cost and volume perspective as we continue to build our new mine plan there over the long-term.
Our Cote Blanche mine has also demonstrated strong performance year-to-date.
Not to mention, an impressive dose of moxie, by meeting the challenges posed by not one but four significant hurricane events in 2020.
These storms resulted in seven lost production days during the third quarter and another four lost production days in October.
The preparations made by our team to protect the site and the safety of our people meant we've been able to resume production efficiently and effectively after each event.
As another testament to our operational agility, we expect to make up most if not all the lost production from those unplanned outage days by the end of the year.
This quarter, the Salt segment also delivered early benefits from our enterprisewide optimization effort, particularly in terms of lower logistics costs.
Our logistics team has worked diligently to reshape our network of partners to maximize efficiencies across our operations to deliver cost savings, while maintaining strong service levels for our customers.
Keep in mind that we typically move more than 12 million tons of bulk materials using multiple transportation modalities each year.
Their work has helped to offset the impact of some of the short-term freight rate inflation, we are experiencing this year.
Our commercial teams have also been highly engaged in the enterprisewide optimization effort, looking for opportunities to adjust and improve customer mix as well as pricing levels.
These efforts were largely responsible for the 8% year-over-year increase achieved for consumer and industrial average selling prices this quarter.
These achievements were important drivers for the margin expansion we've reported that helped us overcome the impact of lower sales volumes due to mild winter weather so far in 2020, as well as the COVID-19 impacts on non-deicing salt sales.
Before moving on, I'd like to provide a final update on the 2020-2021 North American highway deicing bid season.
Given the mild weather during last winter, it came as no surprise that the bid season was competitive, as we noted in our second quarter call, with total bid tenders down roughly 15%.
We've essentially completed all bidding activity and have achieved 4% growth in our contracted bid volumes with a price decline of 11% compared to prior bid season results.
Consequently, these bid season results along with slightly elevated customer inventories had us trailing our full year salt volume guidance by about 250,000 tons for 2020.
Ultimately, our deicing salt sales are driven by winter weather, and we expect the production and logistics cost improvements we've made provide offsets to lower bid season prices.
Similar to the hurricanes hitting Louisiana, our Plant Nutrition business, particularly in North America, faced some unforeseen circumstances this past quarter, including extreme wildfires and drought.
The spoke from these events has delayed the harvest of key crops, particularly tree nuts.
This has also delayed the fall fertilizer application season and thus, we believe that a portion of expected third quarter 2020 sales volumes have been pushed into the fourth quarter.
Recent conversations with customers have reinforced our confidence that underlying demand remains robust for the remainder of 2020, particularly given that some of these harvests are expected to be very strong translating into nutrient deficiencies for the soil and thus the need for our products.
Similarly in Brazil, we experienced some timing issues with sales volumes in the third quarter.
After a very strong second quarter, we believe some of our agriculture product sales were accelerated.
Additionally, the hot and dry weather in that geography has also been unfavorable.
So we believe a portion of what we expected to sell in the third quarter has now shifted into the fourth quarter.
On a positive note, South American farmer economics continue to be very attractive, particularly for soybeans.
In fact, a record level of the soy crop in Brazil has already been forward sold, which means farmers need yield and thus will need our specialty plant nutrients to support that yield.
As a result of these underlying positive market fundamentals in Brazil and North America, we're keeping our sales volume ranges for 2020 unchanged for both the Plant Nutrition North and South America segments.
Against the backdrop of the challenges we've all faced in 2020, I'm even more impressed with the efforts of our employees to engage and execute on our enterprisewide optimization effort.
This effort is focused on five broad value streams namely; operations, commercial, logistics, procurement and working capital.
I referenced previously in my comments some of the early benefits coming through our Salt segment results from certain of these value streams.
We also highlighted last quarter the progress we're making with engaging our employees through our organizational health focus, as well as a compaction project at Goderich mine to essentially recycle salt fine waste into salable product at a minimal incremental cost.
Today, I'd like to share a little detail regarding a very exciting project at our Ogden, Utah facility.
As many of you know, our solar evaporation pond-based SOP production at this site is among the lowest cost processes globally for the specialty form of potassium.
Anything we can do to expand our ability to produce with that low-cost feedstock further increases our competitive advantage domestically and globally.
In a typical year, the very convinced brines from which we extract both salt and SOP feedstock has been two months in the final evaporation stage.
After draining those ponds, we then spent 10 months harvesting, which is essentially scooping up the material from dry pond beds and transporting the material to the production plant.
The goal of our optimization project is to extend the evaporation season and decrease the length of the harvest period.
Doing so is expected to materially increase the yield of feedstock from the ponds, by insourcing our harvest and haul activities using pond-appropriate equipment, we can do just that.
The change in equipment allows us to work faster and deliver more tons per load of material to our Salt and SOP plant.
Currently, under this new equipment setup, we're delivering 28% more tons per load for SOP and about 14% more for salt.
As a result, we're able to shorten our harvest season to eight months and extend our evaporation season to four months, which ultimately provides us with more and higher quality SOP feedstock.
Further this new equipment is expected to be safer for our ponds, further reinforcing our sustainable harvest practices.
This project highlights our ability to look at old problems and generate new and innovative solutions to help ensure the long-term sustainability and growth of our company.
As we continue to execute on the many projects throughout these value streams, over the next couple of years, we expect to fundamentally improve the earnings potential of Compass Minerals.
In the near-term, we continue to aggressively work to overcome the various external factors, which have reduced our earnings compared to our original outlook for 2020.
Just to level set a bit, we entered the year with a strong expectation for around 20% EBITDA growth using the midpoint of our guidance provided in February.
We now estimate a combined negative impact of this original forecast of about $45 million from several factors, which were largely outside of our control.
These include mild winter weather in the first quarter, a Brazilian currency that progressively weakened throughout the year and COVID-19 impacts, including both the cost of preventative measures at our sites and demand impacts on certain customer and industrial products.
Despite these external challenges, through a laser focus on cost and buttressed by our improved operational performance, we still expect to deliver EBITDA growth for the full year and additional growth in 2021.
This is possible because of the underlying resilience of the markets we serve with our essential products, the strength of our advantaged assets and the dedication of our employees to drive improvements through our optimization effort.
We've also stayed on course with our strategic priorities and maintained close contact with our customers throughout these unprecedented times.
I've recently had the chance to talk with a number of them personally, about their own challenges in growth opportunities and through their perspective, have an even greater appreciation for the essential nature of our products and the important role we serve for our customers as well as the communities where we operate.
All of these things generate great excitement for me and the entire Compass team.
Now let's hear from Jamie who will discuss the third quarter results and outlook in more detail.
I'll start on Slide 9 with some comments on our consolidated results, which were challenged by several factors as Kevin discussed.
First, sales volumes were lower in each of our segments versus the third quarter of 2019.
However, we're actually performing quite well on a year-to-date basis, due to a number of timing issues across all three segments which pulled sales into the first half of 2020.
Salt segment sales volumes are down just 9% on a year-to-date basis, which is more than explained by the weak winter weather we experienced during the first quarter of 2020.
As a reminder, first quarter 2020 snow events were 24% below the 10-year average and 30% below 2019 levels.
This weak weather caused customers to take their minimums in the second quarter and therefore put pressure on our third quarter early fill orders.
On a year-to-date basis, Plant Nutrition North America sales volumes are up 20% versus the 2019 period, which you may recall with very challenging due to the excessive rainfall in our served markets.
Our Plant Nutrition South America segment generated a 5% year-over-year increase in sales volume on a year-to-date basis as strong and early demand for plant nutrients in the first half of the year offset third quarter sluggishness.
Our third quarter Salt operating results helped offset the lower year-over-year third quarter operating earnings and EBITDA results in both of our Plant Nutrition businesses.
Lower year-over-year third quarter sales volumes in both Plant Nutrition segments and an inventory adjustment charge in the Plant Nutrition North America segment were the primary drivers of the decline.
Despite the challenges we faced, we delivered double-digit consolidated earnings growth as well as strong free cash flow of $126 million through the first nine months of 2020.
We discuss our Salt segment third quarter 2020 results on slide 10.
Third quarter revenue declined 11% compared to the prior year on a 13% drop in sales volume, slightly offset by a 1% increase in average selling prices.
Volumes declined for both our highway deicing and consumer and industrial sales.
In addition to lower year-over-year pre-season demand for deicing products, we are still experiencing some slack in demand for other consumer and industrial products due to COVID-19 challenges.
Average salt selling prices in the third quarter of 2020 increased 1% compared to third quarter 2019 results.
A shift in sales mix toward lower price chemical sales pushed highway deicing pricing down 8%, while consumer and industrial average selling prices increased 8%, largely due to strategic price increases implemented as a result of our enterprisewide optimization effort.
On a net price basis, we actually achieved a 5% improvement in average selling price versus third quarter 2019 results, with highway deicing average net price flat to prior year results and consumer and industrial net price up 8%.
Improved production and logistics costs in the 2020 third quarter more than offset lower revenue and resulted in year-over-year increases of 21% for operating earnings and 17% for adjusted EBITDA.
In addition to improved Goderich production, we have aggressively implemented initiatives across logistics and procurement that are driving our costs lower.
Beyond the logistics improvements Kevin mentioned, we have rationalized our spending patterns to reduce waste.
We've also upgraded our global sourcing efforts with comprehensive negotiation of agreements with key contractors and optimization of raw material pricing across all businesses to achieve more favorable scale.
These efforts contributed to the expansion of the Salt segment EBITDA margins of 30% compared to 23% in the third quarter of 2019.
While these initiatives are expected to drive sustainable improvements for all segments over time, we're pleased to see these early benefits in our Salt results.
Turning to our Plant Nutrition North America results, which we discuss on Slide 11.
We reported a 21% year-over-year decline in revenue on a 22% decline in sales volumes and a 2% higher average selling prices.
As already noted, the extreme wildfire conditions in the Western US have delayed the start of the application season and we believe they have shifted the timing of SOP sales for the fourth quarter this year.
Earnings for this segment were further reduced by an inventory adjustment due to an error we identified in our measurement of our bulk stockpiles with standard SOP at our Ogden, Utah facility.
This is the product that we stockpile and then process through our compaction system into the various high value grades of SOP that our customers demand.
While we regularly estimate the size of our stockpiles, this can be difficult to assess due to the size and limited accessibility of our storage domes in silos.
As we depleted our standard SOP inventory, we detected a stockpile shortfall which occurred over a period of time, as these particular domes had not been zeroed out or fully emptied for several years.
Once we identified the issue, we reviewed our processes and are implementing several additional operational control enhancements that will improve our estimates going forward and prevent this from occurring in the future.
It is important to note that we have determined that this inventory adjustment is not material to any single prior period, and furthermore, this adjustment has no impact on our 2020 free cash flow, and we don't expect these operational enhancements to impact our ability to serve our customer demand or the future profitability of the Plant Nutrition North America segment.
We discuss our Plant Nutrition South America segment results on Slide 12.
This segment delivered a 5% year-over-year increase in third quarter 2020 revenue in local currency, driven by increases in average selling prices for both agriculture products and chemical solutions products.
These price improvements offset a year-over-year decline in agriculture and chemical solutions sales volumes.
As we noted on our second quarter earnings call, demand came early for many of our specialty Plant Nutrition products due to a very attractive grower economics for the Brazilian farmer.
Therefore, some of that pull forward in Q2 is showing up as weakness here in the third quarter.
However, we continue to see strong third quarter year-over-year revenue growth in our direct-to-grower sales channel on flat volumes and improved product sales mix.
Both direct-to-grower and B2B sales volumes were also impacted by the late start of the spring rains in the Cerrado region in the Central of Brazil.
These dry conditions delayed fertilizer applications and we believe they are therefore pushing some of our sales volumes into the fourth quarter.
In local currency, third quarter 2020 operating earnings and EBITDA declined 9% and 7% respectively, which was mostly attributable to lower volumes in our B2B business compared to the prior year quarter and continued aggressive investment in our direct-to-grower sales force.
We discuss our outlook for our segments on Slide 13.
While we have reduced our full year Salt sales volume guidance, we still expect an increase in our Salt sales volumes and revenue in the fourth quarter compared to prior year.
Our EBITDA margin for this business is expected to contract, due to the reduction in average awarded bid prices for our North American highway deicing customers.
Ultimately, our average reported highway deicing sales price will be impacted by the sales mix we achieved in the quarter based on winter weather activity.
In an average winter scenario, we're expecting highway deicing average selling prices to decline about 8% compared to prior year and the Salt segment overall is expected to see a price decline of around 5%.
We continue working to offset the impact on our operating margins with both value creation and cost containment through our enterprisewide optimization effort.
We expect improved sales demand sequentially and year-over-year for both of our Plant Nutrition businesses.
In North America, our sales and earnings are expected to be driven by a rebound in SOP sales to Western US markets that have been negatively impacted by wildfires and dry conditions.
The fourth quarter is also typically the strongest selling season for micronutrients.
And that seasonality should drive modest improvements in sequential price results.
In Brazil, given the fact that so many soybean growers forward sold their crops, achieving strong yields will be important and we anticipate a strong rebound in sales volumes in the fourth quarter.
Additionally, the spring rains in many of these important growing regions is now well under way which bodes well for our fourth quarter results.
Although we expect increases in sales volumes compared to 2019 fourth quarter results, the weaker currency is expected to keep our reported US GAAP results flat with prior year.
In local currency, however, we expect to deliver 20% to 25% EBITDA growth compared to prior year.
Full year outlook items are found on Slide 14.
Due primarily to the modest reduction in our full year salt sales volumes, weaker Brazilian currency and the ongoing COVID-19 operational and commercial impacts, we have decided to update our full-year adjusted EBITDA guidance.
Excluding the inventory adjustment, we are now expecting to deliver $330 million to $345 million of adjusted EBITDA for the full year 2020.
Now finishing up on Slide 15.
We are very pleased to report that we still expect strong free cash flow generation of around $125 million for the full year despite the headwinds Kevin and I have discussed today.
Our net debt to adjusted EBITDA ratio is expected to end the year below 4 times as we continue to make progress improving our balance sheet and maintaining a very strong liquidity position.
As we enter these last two critical months of 2020, we remain focused on keeping our people safe, controlling our costs, optimizing our operations and delivering our essential products to satisfied customers around the world.
With that, I will ask the operator to begin the Q&A session.
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q2 earnings per share $4.10.
q2 revenue $6.1 billion versus refinitiv ibes estimate of $6 billion.
sees fy revenue up 20 to 24 percent.
also announcing exploration of strategic alternatives for its filtration business.
potential strategic alternatives to be explored include separation of cummins filtration business unit into a stand-alone company.
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Let me start by highlighting some of our full-year financial accomplishments in 2021.
Our revenues of $20.4 billion, net income of $3 billion, adjusted EBITDA of $5.3 billion, and free cash flow of $2.1 billion were all-time annual records in our company's history.
The M&A consolidation that we executed in 2020 was a huge driver of the industry market conditions that led to the outstanding annual results that we achieved in 2021.
With this record annual profitability, we put the cash we generated to good use.
We reinvested in our business, acquired the leading prime scrap processor in North America, delevered our balance sheet, and reduced our diluted share count by 10% last year.
Just to give you an idea of how 2022 is going so far, on a year-over-year basis, we have already generated more adjusted EBITDA in January of 2022 alone than we did in the entire first quarter of 2021.
Now, focusing back on our Q4 2021 results.
Last quarter, we generated adjusted EBITDA of $1.5 billion on 3.4 million tons of steel shipments, the second-best quarterly performance in our company's history, only behind the previous quarter's $1.9 billion adjusted EBITDA on 4.2 million tons shipped.
The main driver of this quarter-over-quarter decline in EBITDA from Q3 to Q4 was this shipment reduction.
Additionally, service centers and distributors pulled even less tons than usual during this already typically weak period in late November and December.
Remaining steadfast in our disciplined supply strategy and based on this rebound we expected and are already seeing from our automotive clients this year, we elected to move up several operational maintenance outages originally planned for 2022 into the fourth quarter of 2021.
These actions reduced our sequential quarter-over-quarter steel production by 675,000 crude tons in Q4, ultimately also impacting our unit costs.
Partially offsetting the volume and cost impacts were higher selling prices in Q4, which rose by approximately $90 per ton from $1,334 to our highest level of the year of $1,423 per net ton.
This is also only an early indication of the success we have achieved in renewing our fixed price sales contracts as only a portion of our contract renewals were already in place during Q4 of 2021.
Remember, the majority of our renewals were not in place until January 1, 2022.
As this year progresses, the selling prices we report every quarter going forward will continue to demonstrate the successful renewal of these fixed-price contracts, and that will be even more evident if the index HRC price continues to drop.
For context, if we applied the contracts we have in place now in 2022 to the fourth quarter of 2021, holding all else constant, our Q4 2021 adjusted EBITDA would have been nearly $500 million higher.
This level of fixed contracts is the key differentiator in favor of Cleveland-Cliffs relative to all other steelmakers in the United States and gives us significant visibility into our cash flows for 2022.
Despite the lower shipments and additional inventory build, we generated $900 million of free cash flow in Q4 of 2021.
Of this $900 million, we used $761 million to acquire FPT and use the remaining $150 million or so to pay down debt.
So, in other words, with only one quarter's worth of free cash flow, we were able to pay for a meaningful acquisition and still had enough cash flow left over in the quarter to pay down some debt.
Now, speaking of our debt, we have already accomplished a lot more than we originally expected in terms of improving our leverage.
We keep a close eye on our overall debt levels on a dollar basis, but we also look at our overall leverage on a total debt-to-last 12 months adjusted EBITDA basis.
With total debt and LTM adjusted EBITDA at essentially the same level, at the end of 2021, we are at a total leverage of only one time.
By next quarter, our LTM-adjusted EBITDA will likely be even higher, which will continue to further reduce our overall leverage metrics.
As a reminder, our leverage was over four times in 2019, pre-COVID and before our transformation.
While overall leverage is in great shape, we will continue to simplify our capital structure by paying down debt, replacing existing bonds with cheaper ones, and extending debt maturities.
The significant free cash flow we anticipate in 2022 should allow us to pursue the dual goals of repurchasing shares and reducing debt.
We have already redeemed our convertible notes in 2022 and several other tranches of our bonds become callable this year at pre-negotiated prices, including the two tranches of secured notes we issued in 2020.
We fully intend to redeem or refinance these notes at some point in 2022.
As expected, last year, we built a substantial amount of working capital, which should be worked down throughout this year.
Given this increased collateral base, we were able to take advantage of these asset levels and upsized our ABL facility last quarter, increasing our available liquidity by $1 billion to our current level of $2.6 billion.
On another very important note on the balance sheet, our net pension and OPEB liabilities saw a $1 billion reduction during Q4, primarily due to actuarial gains and strong asset performance, leading to a $1.3 billion or nearly 30% net reduction during 2021.
Also importantly, in the rising rate environment that we are in today, we have meaningful potential for further pension and OPEB liability reductions.
Just for reference going forward, for every 50-basis-point increase in our discount rate, our expected liabilities would decline by about $500 million, all things equal.
Looking ahead, even under today's pessimistic HRC futures curve, we would expect higher overall average selling prices in 2022 than we saw in 2021 when HRC averaged $1,600 per ton.
On the cost side, we expect to see increases related to energy and materials, with the largest annual change in coal and coke.
Countering this, we have been offsetting our coke usage by increasing the usage of HBI in our blast furnaces and increasing the percentage of scrap in the charge of our BOFs.
Our capex budget for this year is $800 million to $900 million, an increase from the previous year, primarily due to an additional reliability and environmental projects, inflation and the reline of one of our Cleveland blast furnaces, which will be out for over 100 days during Q1 and Q2.
Full-year DD&A should be about $900 million.
Exclusive and one-time items, our 2022 SG&A expense should be around $520 million, which includes higher wages and also $40 million of FPT overhead.
Now that we have effectively exhausted our tax NOLs, our cash tax rate should be in the 15% to 20% range, with our book tax rate at 21%.
Our first full calendar year as the new Cleveland-Cliffs was an absolute success, and we could not have accomplished all the great results we were able to accomplish without the hard work and commitment of our 26,000 employees, approximately 20,000 represented by the USW, the UAW, the Machinists, and other unions.
We believe in manufacturing in the United States and in good-paying middle-class jobs.
We really appreciate the work of each one of our employees and the unions representing them.
We could not have done all that without you.
As great as 2021 was for Cleveland-Cliffs, we would have done even better if the automotive industry had resolved their supply chain problems.
The shortage of microchips cut their opportunity to build 18 million cars or more in 2021.
And the automotive sector ended the year with a much smaller 13 million units.
When we at Cleveland-Cliffs realized in the third quarter of 2021 that our automotive clients were still not performing up to the level that they were guiding us to build inventories for them, we then made the decision to move up to Q4 some important maintenance jobs originally scheduled for the first four months of 2022.
That decision, albeit correct, has clearly impacted our Q4 results.
Now with the first month of 2022 behind us, we are starting to see improved deliveries to our automotive clients.
While it is just a one-month data point, deliveries to automotive clients in January were stronger than each of the previous three months: October, November, and December.
And our adjusted EBITDA in January was a solid $588 million.
Furthermore, as the microchip shortage improves during 2022, the automotive companies will need a lot more steel this year than in 2021.
This steel comes primarily from Cleveland-Cliffs.
We are, by a huge margin, the largest supplier of steel to the automotive industry in the United States.
Let's make this abundantly clear to our investors.
There is no other steel company, integrated or mini mill, in the U.S. or more broadly in North America capable of supplying all the specs and all the tonnage we supply the American automotive industry.
Cleveland-Cliffs already has all the equipment and technological capabilities that other companies are only now spending several billions of dollars to try to replicate by building new melt shops and new galvanizing lines.
We typically sell 5 million tons of steel directly to automotive manufacturers and also sell another 2 million to 3 million tons through intermediaries.
Put another way, almost half of our steel sales ends up in automotive functions.
Another interesting fact, even though we have not deliberately tried to grow our automotive market share in 2021, we have actually increased our market share through tons resourced by our clients.
While the clients do not tell us why they are taking the order away from another steel company and reassigning this specific item to Cleveland-Cliffs, we can only assume that these other steel companies are not meeting the automotive industry's high standards.
That's probably why these competitors have to invest several billions of dollars to play catch-up.
Cleveland-Cliffs does not have to spend this type of money and will not.
With our capex needs in 2022 relatively low and strong confidence in our cash flows, we are very comfortable putting in place the $1 billion share buyback program just announced.
Another differentiating big feature of our way of doing business is the predictable pricing model that we have in place with automotive and tin plate and some select clients in other sectors as well.
This feature eliminates the worst cancer in our industry, which is self-inflicted volatility.
Going forward, we will work with more clients to move sales under this model.
Real clients don't need indexes.
They need reliable suppliers and fair prices.
We currently sell about 45% of our volumes under annual fixed-price contracts, by far, the highest in our industry and we want this number to continue to grow.
The harm caused by the volatility of steel pricing is most damaging for smaller service centers, who leave out of their inventory values.
Ironically, these same folks are the ones who create volatility in the first place, panic buying, double and triple ordering when supply is tight, and then halting purchases altogether when inventories are temporarily adequate, perpetuating a never-ending cyclicality.
We are convinced that it is in everyone's best interest to limit volatility in our industry.
And that's not only desirable but also feasible.
That's why we are moving away from sales to smaller players, further concentrating on the larger clients, which already make up the vast majority of our sales.
At this point, all important clients of Cleveland-Cliffs are being offered index-free deals to continue to do business with us.
Marrying stable costs with stable prices up and down the supply chain can create a much healthier business environment for steel in the United States.
Another ongoing important matter for the future of Cleveland-Cliffs is our commitment to ESG.
That was evident with our purchase of FPT, the national leader in prime scrap, which was completed in the fourth quarter.
The integration of FPT has gone remarkably well, and we are grateful for the buy-ins of the 600 employees of FPT, they are now employees of Cleveland-Cliffs.
Since closing the deal on November 18, we have made substantial moves securing a number of additional sources of prime scrap uptake.
Most notably, the largest automotive stamping plant in the country.
This particular stamping plant alone generates more than 150,000 tons of prime scrap per year.
Our agreement replaced an incumbent scrap company, who had been servicing this stamping plant for decades, even before this scrap company was acquired by a mini mill several years ago.
Our deal was made possible with a compelling proposition.
This automotive manufacturer buys the steel primarily from Cleveland-Cliffs, and now we can feed their scrap directly back to our steelmaking shops.
This is not just recycling steel, it's a real closed loop.
A closed-loop is a key piece of our automotive clients' environmental strategy, as well as a key piece of our own environmental strategy at Cleveland-Cliffs.
On the carbon emission side, we continue to lower our usage of coal and coke by increasing the utilization of HBI as a significant part of the burden in our blast furnaces.
While our flagship direct reduction plant in Toledo was originally built to supply third parties EAFs with HBI, this HBI is now being exclusively used in-house within Cleveland-Cliffs; the vast majority in our blast furnaces, playing a central role in lowering both our coke rate and our CO2 emissions.
Furthermore, we are currently working with Linde, our largest supplier of industrial gases, to implement the utilization of hydrogen in Toledo.
As you may know, our state-of-the-art direct reduction plant was originally designed and built with the possibility of using up to 70% of hydrogen in the mix as reductant gas.
We expect to report on the usage of hydrogen and the production of the first hydrogen-reduced HBI in steel in 2022.
The same goes for our iron ore pellets, another key competitive advantage we have and a driver of lower emissions relatively to foreign competition that uses primarily sinter feed ore in their blast furnaces.
Going forward, we will be limiting the tonnage of iron ore pellets we sell to third parties.
Iron ore is a finite resource and the time and cost it takes to get permits and extend life of mine is incredibly cumbersome.
In addition, iron ore pellets are Scope 1 emission for Cleveland-Cliffs, but they are Scope 3 emissions for the clients we sell them to.
Unfortunately, the Scope 3 emissions are not accounted for, not counted in anyone's reduction targets and surprisingly, at least for now, no one really seems to care about Scope 3 emissions, therefore, producing fewer tons of pellets automatically reduce our Scope 1 emissions.
And that's good enough for us, at least until Scope 3 becomes a topic of concern.
Also, with the use of additional scrap in our BOFs, our iron ore needs are not as high as before, and we no longer need to run our mines full out.
When determined where to adjust production, our first look is at our cost structure because we are now able to produce DR-grade pellets at Minorca and mainly due to the ridiculous royalty structure we have in place with the Mesabi Trust.
We will be idling all production at our Northshore mine, starting in the spring, carrying through at least to the fall period and maybe beyond.
At Northshore, no production, no shipments, no royal payments.
With more scrap in the BOFs, we need fewer tons of hot metal to produce the same tonnage of liquid steel.
As a consequence, the Northshore idle could go longer than currently planned.
As another consequence of our strategy of hot metal stretching, we have dramatically lowered our needs for coke and coal.
We already announced last quarter that we idled our coke battery at Middletown.
Now that our coke needs have been reduced even more, in the second quarter of 2022, we will also permanently close our Mountain State Carbon coke plant.
This action will not only further improve our carbon footprint but will also save us approximately $400 million in capex originally planned for this facility over the next few years.
Even though jobs are going to be eliminated at Mountain State Carbon, we have enough job openings at other nearby Cleveland-Cliffs facilities.
And we can ensure all good employees will have other employment opportunities within our company.
On that note, the last piece of our environmental strategy relates to how we operate our eight blast furnaces.
Our presence in highly specified automotive grade materials, particularly exposed parts, necessitates the use of blast furnaces.
EAFs continue to be unable to demonstrate that they can compete and produce the entire spectrum of specs demanded by the car manufacturers.
That's the main reason why all the major steel suppliers located in countries with a strong presence of automotive manufacturing like in Japan, in South Korea, in Europe, and here in the United States, are not mini-mills operating areas.
They are all integrated steel mills with blast furnaces and BOFs.
Cleveland-Cliffs is the one here in the United States.
And we do not use the sinter, we use only pellets and HBI in our blast furnaces, enabling us to establish the new world benchmark in low coke rates and low emissions.
This is particularly relevant when our automotive clients, with a worldwide presence, compare Cleveland-Cliffs against their other well-known automotive steel suppliers from countries like Japan, South Korea, Germany, Austria, Belgium, or France, among others.
Our full control over the entire supply chain from pellets to HBI to prime scrap creates a huge differentiation in favor of Cleveland-Cliffs, one that is impossible to replicate in Asia or in Europe.
That said, we also produce a lot of steel that goes to less quality intensive end users.
A blast furnace reline is a capex-heavy undertaking, albeit totally expected in our multiyear projections.
Under this evaluation process, we also take into consideration other upgrades to the upstream hot end, as well as the capital related to extending the life of mine of our iron ore mines.
With all that, in some cases, the capital requirements of a new EAF compared to the avoidance of reinvesting in a blast furnace reline and its associated supply chain could come out close to a wash, particularly because we at Cleveland-Cliffs already have the rolling and coating capabilities in place.
If and when that happens, the wash or better, we might consider an EAF as a replacement to a blast furnace reline in the future.
One final piece on the environmental to note.
Of all CO2 emissions generated in the United States, the emissions related to the production of steel represent just 1% of the total.
One more time, just 1%.
This number is 15% in China and 7% worldwide.
But here in the United States, it is just 1%.
The steel industry in the United States is the most environmentally friendly in the entire world.
Meanwhile, transportation, particularly affected by automotive tailpipe emissions, is responsible for 29%, while energy is responsible for another 25%.
This is where the importance of steel made in U.S.A. is most significant as our very small emissions footprint, again, just 1%.
We will play a critical role in improving the emissions of these two sectors, which, combined, are responsible for more than 50% of all CO2 emissions in the United States.
For one, Cleveland-Cliffs has been prepared for the transition from ICE to electric vehicles long before EV's rapid adoption.
And we have the right steels necessary to meet the automotive industry target of 50% EV adoption by 2030.
On the energy side, we need more renewables, like solar and wind, and both are steel-intensive.
Cliffs is the only producer in the United States of the electrical steels needed for the modernization of the electrical grid, which received $65 billion in funding under the recently passed infrastructure bill.
Our non-oriented electrical steels, we call it NOES, is used for motors in both hybrids and BEVs.
The infrastructure bill also includes another $7.5 billion earmarked for charging stations for electric vehicles.
Each charger uses approximately 50 pounds of GOES, grain-oriented electrical steel, and we are talking about half a million of charging stations, plus the equivalent amount of transformers to tie down these charging stations into the grid.
With all that and no other producer of GOES or NOES in North America other than Cleveland-Cliffs, in 2022, we have a more than full order book for electrical steels.
And that's just the beginning of the EV revolution, which will certainly progress between now and 2030.
With all we at Cleveland-Cliffs are doing related to carbon emissions, I can't believe so many companies are being given a free pass by the investment community, despite not doing much more than just saying they will be carbon-neutral by 2050.
What I have just laid out here are real, concrete, undeniable measures to reduce emissions, and we are implementing them all companywide at Cleveland-Cliffs.
We will continue to be able to track our progress in 2022, 2023, 2030, and beyond.
And we will watch how much others will actually do here in the United States and abroad.
The future, and specifically, 2022, is clearly bright for Cleveland-Cliffs.
Underlying demand remains strong, infrastructure-related spending has started, particularly regarding electrical steels.
And the chip shortage affecting the automotive has begun to ease, leading to meaningful pent-up demand for cars and trucks.
That should benefit Cleveland-Cliffs a lot more than any other steel company in the United States.
In the meantime, we will take full advantage of the market's lack of appreciation or lack of understanding of our business by buying back our stock, all to the benefit of our loyal shareholders.
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compname reports full-year and fourth-quarter 2021 results and announces $1 billion share repurchase program.
q4 revenue $5.3 billion versus $2.3 billion.
as of february 8, 2022, company had total liquidity of approximately $2.6 billion.
expect to see higher average selling prices for our steel in 2022 than in 2021.
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Both of the documents are available at Old Republic's website, which is www.
Risks associated with these statements can be found in the company's latest SEC filings.
In the past, Rande Yeager, our Title Group Chairman; and Mark Bilbrey, our Title Group CEO, have joined us on the call.
Appreciate having you join us for the discussion today.
As we work through the challenges resulting from COVID-19, we certainly want to send all of you, your families, friends and coworkers our very best wishes.
Although in most states, we're recognized as an essential industry and essential workers, currently more than 95% of our General insurance group and approximately 80% of our Title Insurance associates are working remotely.
The small number of associates we have in the offices are working to ensure that mail gets processed, checks get mailed and that our IT infrastructure remains vibrant to support all of those working remotely.
I'd also note that we're among the fortunate to be able to say that we have not furloughed any of our associates during this time.
So before handing things over to Karl, I'll offer a few initial comments regarding our first quarter.
As you saw in our release, Old Republic posted strong first quarter 2020 operating results relative to the first quarter of 2019 and these results were driven by an exceptionally strong quarter for our Title Insurance segment.
As noted in our release, COVID-19 had minimal effect on our first quarter results.
Our first quarter operating results, again, demonstrate that our strategic diversification between Title Insurance and General insurance works very well to produce consolidated revenue and earnings growth over time.
So at this point, I'll turn matters over to Karl to discuss our overall consolidated financial results.
I'll also ask him to address our small RFIG run-off segment.
After which, he'll turn things back to me to discuss the General Insurance segment.
Then Carolyn will discuss the Title Insurance segment.
I'll make a few closing comments and then finally, we'll open up the discussion to Q&A.
So with that, Karl, take us away.
Before commenting on the first quarter results, I'd like to add to Craig's earlier comments and recognize our accounting and financial reporting associates for their diligence and commitment during this period of turmoil resulting from the COVID-19 pandemic.
Despite the fact that most of our employees were working remotely, we were able to complete the financial close without significant disruption while at the same time, retaining the integrity of our internal control process.
Job well done by everyone.
Turning now to the quarterly results.
On a diluted per share basis, that equates to $0.47, which is an increase of 17.5% from the prior year.
However, the resulting disruption to the financial markets led to substantial declines in the fair value of our equity portfolio.
The pre-tax fair value decline of approximately $963 million was really the main contributing factor to the first quarter reported net loss and corresponding reduction in book value.
Consolidated net premiums and fees earned registered strong growth of a little over 10% to $1.5 billion.
The General Insurance group increased about 2.5%, and our Title group grew by almost 24%, as Carolyn will address in a few moments.
Net investment income grew nearly 2% to a due to a larger invested asset base and greater dividend income, which arises from the relatively higher-yielding equity portfolio and that was offset by slightly lower yields on the bond portfolio.
From an underwriting perspective, this quarter's consolidated combined ratio of 94.9%, marked about a 1.1 percentage point improvement over 2019.
The quarterly claims ratio trended lower, and the expense ratio ticked upwards slightly primarily due to a mix of business shift.
And then that shift was more toward the Title segment, which as you know, carries a lower loss and a higher expense ratio.
Consolidated claim reserves developed slightly favorable in both periods, reducing the reported claim ratio by 0.8 and 1.6 percentage points for the current and prior year quarters, respectively.
We experienced favorable prior year development on the reported claims ratios for each of our operating segments to varying degrees during the quarter.
Turning now to our financial condition.
Total cash and invested assets decreased to $13.5 billion at the end of March.
Driving this change was the combination of strong operating cash flow of $216 million offset by, as I mentioned earlier, the substantial unrealized market depreciation in both the equity as well as the fixed income portfolios.
As a reminder, the composition of our portfolio is approximately 76% allocated to bonds and short-term investments and 24% to equity securities.
Our equity portfolio consists of approximately $100 million that are predominantly large-cap, value-oriented, dividend-paying companies.
We manage the portfolio within our risk management framework, which does take into consideration expected price volatility.
The value of our portfolio equity portfolio declined by approximately 24% during the quarter to an unrealized loss position of roughly $22 million at the end of March.
As of yesterday's close, the portfolio had rebounded to a $175 million unrealized gain.
Despite this significant downdraft in valuation at the end of March, we are still operating within our risk tolerance thresholds.
And consequently, we have not made, nor do we expect to make any material changes to our investment strategy.
Old Republic's book value per share decreased from $19.98 at the end of 2019 to $17.29 at the end of March.
As previously noted, the most significant contributor to this decline relates to the $2.53 per share reduction in the fair value of the equity portfolio.
Operating income of $0.47 was additive to the book value, and we returned capital to our shareholders in the form of the regular cash dividend, and that amounted to $0.21 per share or $0.84 on an annual basis.
And this year's annual dividend payout represents about a 5% increase over last year's regular cash dividend rate.
This year, 2020, marks the 79th year of paying uninterrupted regular cash dividends as well as consecutive years of increasing the dividend rate for the past 39 years.
We ended the quarter with $6.1 billion of total capitalization, low debt leverage ratios and adequate liquidity throughout the enterprise.
As highlighted in the release, we believe that our strong financial position will enable us to weather these challenging times.
So as Craig mentioned, let me now just briefly discuss our run-off mortgage insurance segment.
From a capital management perspective, we entered this year with the anticipation of beginning to withdraw excess capital from our mortgage guaranty run-off operation.
During the quarter, we did, in fact, obtain regulatory approval and received a $37.5 million extraordinary dividend from our two principal mortgage insurance companies.
Total statutory capital at the end of March continues to remain strong and registered $410 million.
The first quarter mortgage insurance results were not significantly affected by the COVID-19 pandemic, as Craig mentioned earlier.
The impact on unemployment levels in real estate markets, along with the mitigating effects of the government loaned forbearance programs are areas that we are monitoring closely.
By definition, a mortgage in forbearance is not considered to be in default.
Let's also keep in mind that this is a mature book of business.
We've not written a new policy since 2011.
A large percentage of the in-force file was written in 2009 and earlier years.
In addition, approximately 60% of the loans that are insured have previously been modified or refinanced under the government's home affordability programs, the HARP and HAMP programs.
So these factors, along with the rate at which the U.S. economy recovers, could affect future claims experience and potentially slow the return of capital from the run-off business, until there is greater clarity.
So that said, we continue to pursue all previously mentioned options in the interest of producing the most beneficial long-term outcome for all stakeholders.
With that, I'll now turn things back to Craig for discussion of the General Insurance group.
So as the release indicates and as we show in the financial supplement, compared to first quarter 2019, General Insurance saw quarter-over-quarter operating revenue increase by 2.9% and quarter-over-quarter operating income was up 1.7%.
Net premiums earned in commercial auto rose by 3.6% quarter-over-quarter, attributable to the positive effect of rate increases that we have continued to attain on the commercial auto line.
And in the first quarter, those rate increases remained in the high teens.
On the other hand, premiums were somewhat offset by a decline in the exposure base.
As can be seen in the financial supplement, workers' compensation experienced a 9% drop in net premiums earned quarter-over-quarter.
This is attributable to the negative effect of rate decreases that continued in the low single digits for us during the first quarter and also from a decline in the exposure base.
Thus far, the lower rate level that we have in the workers' compensation line continues to correspond with the lower claim frequency trends that we and the industry are seeing on that line.
Quarter-over-quarter, the General Insurance overall composite ratio rose slightly to 95.6%, up from 95.3%, and this was attributable to a slightly higher expense ratio.
The first quarter expense ratio came in at 25.8% compared to the first quarter of 2019 when it stood at 25.5%.
So turning to claim ratios.
Our first quarter commercial auto claim ratio came in at 77% compared with 79.1% in the same period of 2019.
As demonstrated by our continuing level of rate increases for this line, along with our reduction in exposure from our risk selection efforts, we continue to work very hard to bring this claim ratio back into line with our target in the low 70s.
Turning to workers' compensation.
The first quarter claim ratio came in at 71% compared to 70.7% in the first quarter of 2019, and we continue to remain very pleased with this result, obviously.
For commercial auto, workers' comp and GL combined, given that we typically provide these coverages together to an account, we like to also look at that combined results, and the quarter-over-quarter claim ratio for those three combined was flat at 74.1%.
Still looking at the financial supplement, you can see that the remainder of our claim ratios are very much in line with our target.
And of course, all of the claim ratios we report are inclusive of favorable and unfavorable prior year claim development.
And in the latest quarter, we saw favorable development of 7/10 of one percentage point.
So for General Insurance, as I mentioned earlier, the remaining quarters of 2020 could prove challenging from a top line perspective, but we will continue to seek the appropriate price that we need for our products.
And we'll continue to focus on the long-term when it comes to managing our expense ratios.
So on that note, I'll now turn the discussion over to Carolyn for her comments on Title Insurance.
While these have really been challenging times, the employees in the Title division have embraced this challenge and are working through the chaos in order to continue business and serve our customers.
Despite the COVID-19 pandemic, residential and commercial sales and refinances continue to fund and transactions need to close.
Amidst this, we are ever mindful of the safety and well-being of our employees and customers.
Access into our offices is generally restricted to employees only, which has really caused us to be very creative in carrying out our business.
Our direct operations and our Title agents have conducted drive through closings, set up tents outside of offices, provided single-use pens for signing documents, all while continuing to practice social distancing My heartfelt appreciation goes out to all of our employees and our Title agents on their creativity and most importantly, the positive and really collegial attitude that we hear about on our daily calls with the leadership team in our Title group.
The COVID-19 disruptions have led to a variety of emergency state orders that impact our business.
Many motorization statutes have been amended in order to comply with distancing requirements and to create avenues through which closing transactions may continue.
Based on these orders, our Title technology company Pavaso, which was originally designed for electronic closings and law legislation, was able to pivot and adjust its technology to allow our agents and offices to continue conducting closings through a secure platform, which allows for adherence to social distancing restrictions.
This platform provides an essential notary function that allows for the entire notarization of documents to be completed remotely.
Between the ingenuity of our offices and agents and the supportive technology like Pavaso, we have been able to keep pace in our current environment.
The Title group kicked off the first quarter of 2020 on a record pace.
The market experienced near record lows on mortgage rates.
All-time first quarter highs were set in terms of both direct and independent agency revenue and operating profitability.
For the first quarter, total premium and fee revenue was $628.1 million, which was an increase of nearly 24% over the first quarter of 2019.
Agency premiums were up around 21% and direct operating revenue approximately 31%.
In terms of operating profitability, the Title group reported pre-tax operating income of $43.3 million for the quarter compared to $20.5 million in the first quarter of 2019, an increase of 110.6%.
We ended the first quarter with some of the highest open order counts in the history of our company.
We continue to adjust to doing business while operating under the various state shelter in place orders and social distancing requirements.
We are mindful of the challenges ahead for our organization and our nation in general.
Our firm belief is that with the continued unwavering commitment of our employees and the support of our Title agents, we will be more than ready for these challenges.
We will rely on the same guiding principles of integrity, managing for the long run, financial strength, protection of our policyholders and the well-being of our employees and customers that have served us well over the last 100-plus years.
So again, our first quarter operating results indicate that our business continues to perform very well.
We continue to focus on underwriting excellence during these challenging times.
And our capital position remains very strong with significant dry powder to weather the macroeconomic disruptions and to be well positioned when the economy eventually rebounds.
I'll also note that our MD&A discussion in our upcoming 10-Q will provide additional more detailed disclosure around the risk factors associated with COVID-19.
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old republic international- impact on u.s. economic activity from covid-19 and the associated governmental responses occurred in the final weeks of q1.
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You'll hear prepared comments from each of them today.
Jim will cover high-level financials and provide a strategic update.
John will cover an operating overview, and Devina will cover the details of the financials.
John will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specific references to internal revenue growth or IRG from yield or volume.
During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons, unless otherwise stated, will be with the second quarter of 2020.
Net income, EPS, operating EBITDA margin, and SG&A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations.
These adjusted measures, in addition to free cash flow, are non-GAAP measures.
wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections.
Time-sensitive information provided during today's call, which is occurring on July 27, 2021, may no longer be accurate at the time of a replay.
Last quarter, we were feeling very good about the prospects for the year when we announced our Q1 results and raised our full-year guidance.
Now more than halfway through the year, all parts of our business have performed well above those revised expectations.
In the second quarter, we achieved an operating EBITDA of $1.31 billion, which we converted into strong cash from operations of more than $1 billion.
First and foremost, this superb performance is a result of our outstanding core business model.
In addition, this performance was driven by our continued focus on providing our customers with exceptional service, offering our employees a great place to work, and driving sustainability through our business model.
Our very strong results, in addition to our confidence in the transformative changes we're making to our business model, led us to increase our full-year guidance once again.
The size of our revisions in each of these first two quarters clearly demonstrates the earnings-producing potential of our strategy.
In the back half of the year, we expect continued strong volume, pricing that offsets inflationary pressures and record results from our commodity-based businesses.
With all of this powerful momentum, we now expect to generate 2021 adjusted operating EBITDA of at least $5 billion with free cash flow of at least $2.5 billion, all while continuing to make growth investments in our sustainable solutions and technology platforms.
At the core of these strong results is our recycling business, which is central to our sustainability and business strategy.
Our efforts to improve the recycling business, combined with robust demand for recycled commodities, led to second quarter delivering the recycling business' best ever financial performance by a considerable margin.
We've made substantial progress in derisking our recycling business by shifting to a fee-for-service contract structure, which has lifted the floor for recycled returns and created an economically sustainable business model.
We've also made significant technology investments to improve the cost structure and grow the business.
At our automated facilities, labor costs were 35% lower in the second quarter compared to our other single-stream MRFs.
These investments not only lower operating costs and improve plant efficiency but also allow us to adjust our equipment to respond to evolving end-market demands.
For example, we're now segregating out specific plastics that in the past were sold as a bundled lower-priced bales, reacting quickly as markets evolve for new recycled commodity types.
The capability to efficiently sort these materials allows us to extract more value for these commodities as demand increases for recycled material.
Overall, our investment in recycling technology -- our investments in recycling technology are generating solid returns, and we are accelerating our plans to roll out this new operating model across our MRF network.
Sustainability has been a central part of our strategy for many years, so I want to take some time to highlight how we're advancing our sustainability journey.
At the beginning of the month, Tara Hemmer transitioned into her new role as senior vice president and chief sustainability officer, bringing together our sustainable solutions and ESG efforts under one umbrella.
We believe this strong focus is critical to continuing to integrate environmental sustainability and social responsibility into a strategic business framework.
Our supply chain goals, which include increasing our spending, both with sustainable and diverse suppliers, are examples of how this focus is integrated in our day-to-day operations.
Next month, we're hosting a supplier diversity initiative called Share the Green, which will give women-owned businesses the opportunity to become a supplier for one or more of the 45 companies participating in the event.
This three-day nationwide event will provide great opportunities for diverse businesses and help participating companies to secure excellent suppliers.
And finally, we continue to make real progress on our digital transformation to differentiate our customers' experience.
In the past, I've mentioned our automated setup process that streamlines customers' orders and reduces our cost to serve.
Through our advanced technology, we're eliminating nearly all manual steps in setting up a customer account, allowing the setup to occur almost instantaneously after an order is processed.
This will save us several million dollars annually, improve setup accuracy and increase customer satisfaction.
This more accurate setup of customers also helps us to auto-route these customers, which increases operational efficiency and will optimize routes without manual processing.
We are now connecting our advanced technologies to automatically insert 90% of our new commercial customers into existing routes, reducing our cost to serve and improving our speed to service.
Our customer and digital teams continue to enhance the capabilities of our digital tools to provide a unique and engaging experience for our customers while, at the same time, connecting this front-end experience to our operational systems to allow for improved efficiency and lower costs.
We expect that these investments in technology will continue to benefit us for many years to come.
In conclusion, strong performance across all of our businesses, collection and disposal, recycling, and renewable energy generated outstanding results so far this year.
Our focus on disciplined pricing and cost management helped to offset the inflationary cost pressures that we've seen.
And we expect to continue this focus into the second half of the year to help us deliver on our newly revised outlook.
We're pleased with the excellent second-quarter results we achieved across our business.
We produced exceptional EBITDA growth of almost 24% in the collection and disposal business as the economy continues to recover from the pandemic's steepest impacts in the second quarter of 2020.
Collection and disposal volume climbed 9.6% in the quarter, which exceeded our expectations.
And our focus on disciplined pricing programs produced a substantive second-quarter collection and disposal yield of 3.7%.
Turning more specifically to our volume results.
Robust recovery in our highest-margin businesses, commercial, industrial, and landfill, drove our very strong performance.
In the second quarter, commercial and MSW volume reached pre-pandemic levels, and industrial volumes recovered to levels just shy of those before the pandemic.
While we're very pleased with the pace of volume recovery thus far, there remains opportunity for further volume improvement in the second half of the year from key areas of our business, including industrial, special waste, and certain geographies such as Canada.
Additionally, pockets of our commercial business, such as education and offices, have yet to fully recover.
For the full year, we now expect organic volume in the collection and disposal business to grow 2.5% or more.
Pivoting to price, our second-quarter results further demonstrate the focus the entire team has on overcoming our cost headwinds as well as improvements following the intentional customer-focused steps we took in the second quarter of 2020.
This focus is particularly evident in our residential core price of 5.4%, landfill core price of 4.7% and transfer core price of 3.4%.
We continue to be committed to pricing programs that are aligned with our cost structure, which is even more important as we see pressure on labor, transportation, supplies, and capital costs.
Our new full-year outlook for collection and disposal yield is 3.7% or greater.
Our strong revenue growth was also supported by great results in our customer metrics.
Churn was 8.8% in the quarter, and service increases outpaced service decreases by more than twofold.
Additionally, we increased our net customer growth rate, driven by the optimization of our sales force and investments in technology.
Looking at operating costs.
Second-quarter operating expenses as a percentage of revenue improved 10 basis points to 61.1%, demonstrating that we are continuing to manage our cost as volumes recover even in the face of inflationary cost pressures.
It's no surprise to anyone who follows economic indicators that most businesses are experiencing inflation in their costs throughout 2021, and our business is no exception, particularly with regard to labor.
We expect to overcome these pressures by increasing operating efficiencies and executing on our disciplined pricing programs.
There's no silver bullet when it comes to attracting and retaining talent, and we are using a multifaceted approach that includes addressing wages, offering flexible schedules, and broadening benefits.
Our long-term focus is on keeping our people first so that we are the employer of choice.
Overall, inflation trends are something we are watching very closely and managing very proactively with our area, supply chain, and revenue management teams.
We continue to make progress on the integration of the Advanced Disposal operations.
To date, we've combined around 45% of the ADS operations into our billing and operational systems, which has allowed us to capture synergies and provide additional services to those customers.
We are on track to migrate virtually all the ADS customers by the end of the year.
Year to date, we have achieved more than $30 million of annual run-rate synergies, and we expect cost synergies of between $80 million and $85 million in 2021.
This will bring the annual run-rate synergies to around $100 million at the end of 2021, and we continue to forecast another $50 million to be captured in 2022 and 2023 from a combination of cost and capital savings.
And finally, as Jim mentioned, our recycling team set new highs in the second quarter with record contributions to earnings and margins.
We also achieved strong growth in our renewable energy business as we generated and sold more RINs and sold them at higher prices.
We've made significant investments in these businesses in recent years, and we're pleased with the strong returns they're generating.
Our people really are the foundation of our success.
And with that, I'll hand off to Devina to discuss our financial results in further detail.
Our team once again delivered a strong performance in the second quarter.
Robust volume growth since last year's peak pandemic impact, dynamic pricing efforts, record recycling results, disciplined integration of the ADS business, and our continued focus on cost management combined to deliver 28% operating EBITDA growth and 50 basis points of operating EBITDA margin expansion.
As Jim mentioned, these outstanding results and our confidence in the continued strength of our business model have led us to raise our 2021 financial guidance yet again.
Full-year revenue growth is now expected to be 15.5% to 16%, with organic growth in the collection and disposal business of 5.5% or greater.
For adjusted operating EBITDA, we expect to generate between $5 billion and $5.1 billion, an increase of $225 million at the midpoint from the original guidance we provided in February.
Our business is exceeding the strong outlook we established at the beginning of the year on a number of fronts.
Volume has recovered, particularly in the commercial collection business at a faster rate than we expected.
Market values for recycled commodities and RINs have increased.
Our integration of the ADS business has generated more synergy value.
And certain of our technology investments focused on reducing our cost to serve have delivered more savings than planned.
While the bridge from our initial guidance to the current guidance has a number of puts and takes, the most significant drivers have accelerated price and volume recoveries in the collection and disposal business of about $135 million; improved recycling profitability of another $135 million; renewable energy increases of about $55 million; and additional ADS synergies of around $25 million.
These increases are partially offset by elevated cost inflation and incentive compensation costs that we currently estimate to be about $125 million.
The increase in adjusted operating EBITDA guidance is expected to translate directly into incremental free cash flow, and we now expect that we will generate between $2.5 billion and $2.6 billion of free cash flow for the year.
Turning to our second-quarter results.
SG&A was 9.6% of revenue in the second quarter, a 30-basis-point improvement over 2020.
This result demonstrates our success-making incremental technology investments that will benefit our customer engagement and cost to serve over the long term.
At the same time, we're realizing benefits from the integration of ADS and returns on certain of our new technology solutions.
We also continue to focus on managing our discretionary spending to optimize our costs.
Second-quarter net cash provided by operating activities grew more than 20%.
This increase was driven by our extremely strong operating EBITDA growth.
There was an unfavorable working capital comparison in the second quarter, but we attribute that to timing differences in tax payments and cash received from CNG credits.
We are encouraged to see continued progress on our DSO and DPO measures.
In the second quarter, capital spending was $396 million, bringing capital expenditures in the first half of 2021 to just over $665 million.
While capital spending in the first half of the year was expected to be less than the prior year due to timing differences in truck delivery schedules, our 2021 pace of capital expenditures has been slower than we planned.
The slower pace is due to supply chain and labor constraints impacting some of our vendors, and we've made deliberate decisions to defer spending in some categories as we observe what we expect to be temporary dislocation in certain markets.
To offset these delays, we're proactively pulling forward capital investments in areas we can and also where we know the returns will be strong.
As Jim mentioned, we're in the process of accelerating recycling investments as we have strong proof points of technology and equipment upgrades, reducing the cost structure of the business, and improving delivered quality of processed materials.
We continue to target full-year capital spending within our $1.78 billion to $1.88 billion guidance range.
In the first half of 2021, our business generated free cash flow of $1.5 billion, a conversion from operating EBITDA of 61%.
This very strong result positions us well to achieve our new higher free cash flow outlook even as we target capital spending increases in the second half of the year.
Our capital allocation priorities continue to be a strong balance sheet, prudent investment in the growth of our business and strong and consistent shareholder returns.
In the second quarter, we paid $242 million in dividends and allocated $250 million to share repurchases.
Our leverage ratio of 2.84 times has improved even more quickly than expected due to our strong operating EBITDA growth, and it's tracking well toward our target leverage of 2.75 times by the end of the year.
At the same time, our robust cash generation in the first half of the year positions us to increase our full year share repurchase expectation up to our full $1.35 billion authorization.
With this increase, we expect our weighted average share count for the full year to be approximately 422 million shares.
The successes of the first half of 2021 position WM to deliver on our commitments to our people, our customers, the communities we serve, and our shareholders.
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total company revenue growth in 2021 is expected to be 15.5% to 16.0%.
free cash flow is projected to be between $2.5 billion and $2.6 billion in 2021.
adjusted operating ebitda is expected to be between $5.0 billion and $5.1 billion in 2021.
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I'm Gabe Tirador, President and CEO.
On the phone, we have Mr. George Joseph, Chairman; Ted Stalick, Senior Vice President and CFO; Jeff Schroeder, Vice President and Chief Product Officer; and Chris Graves, Vice President and Chief Investment Officer.
Before we take questions, we will make a few comments regarding the quarter.
Net income in the second quarter was $228.2 million or $4.12 per share, which includes a $125.2 million of after-tax gains on our investment portfolio.
The rebound in the markets in the second quarter, helped to partially offset first quarter after-tax losses of $198.5 million on our investment portfolio.
Year-to-date, net income was $89 million or $1.61 per share, which includes $73.4 million of after-tax losses on our investment portfolio.
Most of the year-to-date investment losses are mark-to-market adjustments on securities that continue to be held by the Company.
Our second quarter operating earnings were $1.86 per share compared to $0.74 per share in the second quarter of 2019.
The improvement in operating earnings was primarily due to a reduction in the combined ratio from 98.3% in the second quarter of 2019 to 88.2% in the second quarter of 2020.
Catastrophe losses in the quarter was $12 million compared to $9 million in the second quarter of 2019.
The Company recorded $12 million in unfavorable reserve development in the quarter compared to $9 million in the second quarter of 2019.
The improvement in the combined ratio in the quarter was primarily due to improved results in our private passenger auto line of business.
Lower frequency in the quarter as a result of less driving from the COVID-19 pandemic was the primary reason for the improved results.
The lower frequency in the quarter was partially offset by an increase in severity and the give back of $100.3 million of premiums to personal auto customers as a result of less driving from the COVID-19 pandemic.
Partially offsetting the improved results in our private passenger auto line of business were worst results in our commercial auto, homeowners and commercial multi-payer lines of business.
Although our commercial auto line of business also saw a decline in frequency in the quarter, increases in severity, unfavorable reserve development of $7 million and the give back of $5.5 million of premiums to commercial auto customers negatively impacted our commercial auto results in the quarter.
In our homeowners line, both frequency and severity increased in the quarter.
In addition, $3 million of unfavorable reserve development negatively impacted our homeowners results this quarter.
To improve our homeowners results, a 6.99% rate increase in our California homeowners line went into effect in April.
In addition, a 6.99% rate increase was recently approved by the California Department of Insurance.
We expect to implement the recently approved rate increase in October.
California homeowners premiums earned represent about 87% of companywide direct homeowners premiums earned and 15% of direct companywide premiums earned.
Our commercial multi-payer results in the quarter were negatively impacted by a large $5 million fire loss net of reinsurance.
In the second quarter, we launched two new programs.
In June, we introduced our new personal auto usage-based insurance product MercuryGO in Texas.
Early adoption rates are encouraging and above our expectations.
We also introduced Phase 1 of our new commercial multi payroll product and system in California in the second quarter.
The new product and system have been well received by our agents.
We recently completed our catastrophe reinsurance treaty renewal effective July 1, 2020.
The total reinsurance limit purchased increased from $600 million in the prior period to $717 million for the July 2020 through June 2021 period.
In addition, the new reinsurance program has wildfire coverage in all layers.
Our retention remains the same at $40 million.
Total annual premiums on a new reinsurance program are approximately $50 million.
For the prior reinsurance treaty, total premiums were $38 million.
More details of the catastrophe reinsurance treaty renewal will be included in our second quarter 10-Q filing.
The expense ratio was 27.2% in the second quarter of 2020 compared to 24.4% in the second quarter of 2019.
The higher expense ratio in the quarter was primarily due to the reduction of premiums earned of $106 million due to premium refunds and credits to eligible policyholders for reduced driving and business activities as a result of the COVID-19 pandemic.
Excluding the premium refunds and credits, the expense ratio would have been 24.1%.
Premiums written declined 12.5% in the quarter primarily due to the $106 million in premium refunds and credits.
Excluding the $106 million in premium refunds and credits, premiums written declined by 1.2%.
In addition, we plan on returning $22 million of July 2020 monthly premiums to eligible policyholders in August.
Accordingly, we expect third quarter premiums written and earned to be reduced by approximately $22 million.
We will continue to monitor the extend and duration of the economic impact related to COVID-19 and make further adjustments as necessary.
We expect our underwriting and loss adjustment expense ratios to remain elevated in the third quarter as premiums declined from give backs without a proportionate reduction in expenses.
With that brief background, we will now take questions.
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marcus theatres temporarily closed 17 previously reopened theatres in early october due to lack of new film releases.
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With me on the call today are Denise Paulonis, our new President and Chief Executive Officer and Marlo Cormier, Chief Financial Officer.
I'm thrilled to be here with a little over a month under my belt and I'm looking forward to meeting and talking to our analysts and shareholders in the coming months.
Having served in the Sally Beauty board since 2018, I'm fortunate to be bringing the first hand perspective and a deep working knowledge of the business on day one.
I see a significant opportunity to utilize my leadership skills and retail and finance background to drive the business into a new era of profitable growth, capitalizing on all the new capabilities enabled by the transformation of the business over the past four years.
Virtually every aspect of the company's infrastructure has been retooled across technology, marketing, merchandising, supply chain, HR, finance, and talent, creating a robust platform from which we will grow.
I'm incredibly proud of our exceptional team who took on this challenge and helped us evolve into a modern dynamic omnichannel beauty retailer that is now set up for long-term success.
Before talking a bit more about our future, let me share a few highlights from last year.
In fiscal 2021 full year net sales grew 10%, gross margins exceeded 50% and adjusted earnings per share was up over 97%.
Additionally, we generated strong cash flow from operations of $382 million.
We delivered consistent performance throughout the year and concluded fiscal 2021 with fourth quarter results ahead of expectations, reflecting strong operational execution.
We're particularly pleased to see ongoing momentum and consistency across the business despite the various impact of the pandemic.
As we embark on our new fiscal year, our mission to recruit and retain color customers remains a core component of our roadmap and continued tailwinds around self-expression through hair, product sustainability and innovation and the growing number of independent stylists continue to reinforce the strength of our color and care business.
Putting the customer first and enhancing their experience with us is critical to our success.
We're continuing to prioritize the customer through personalization, inspiration, education and training.
We're also focused on creating the easiest shopping experience for our customers through our robust omnichannel platform and multiple fulfillment options our customers can get product, how they want it and when they want it, faster than ever before.
Against that backdrop, we'll be focusing on four strategic growth pillars to drive the top line in fiscal 2022.
Leveraging our digital platform, driving loyalty and personalization, delivering product innovation and advancing our supply chain.
First, I'll talk about digital.
As we increasingly become the unrivaled forced for color inspiration, education and training, our goal is to create an easy, reliable omnichannel platform for our DIY enthusiasts and stylists.
At BSG, we completed a critical set of strategic initiatives in fiscal 2021 that positioned us to become the go-to-platform for stylists.
We redesigned the CosmoProf website, introduced new value-added services around ordering and rolled out focus into our delivery.
In addition, we'll be connecting our store network to the CosmoProf app this month to further enhance focus into our delivery.
In short, our BSG stylists can now access everything sold by CosmoProf on their phone and within two hours.
Bringing together all these initiatives, truly positions BSG as a compelling resource for the stylist community, providing them with the tools they need to run their businesses most efficiently and profitably.
At Sally, we've seen a positive customer response to our expanded fulfillment model and we're continuing to gain traction across BOPIS, ship from store and rapid two-hour delivery.
In our most recent quarter, Sally U.S. and Canada stores fulfilled 34% of e-commerce sales as BOPIS fulfilled the 34% of e-commerce sales, as BOPIS comprised 22% and ship from store accounted for 8%.
Rapid two-hour delivery was launched in the middle of the quarter and represented 4% of Sally U.S. and Canada E-commerce sales.
Additionally, the adoption of these new fulfillment options exhibits our power of scaling our new tools and capabilities to meet the strong desire our customers have for this incredible convenience.
We're also laser focused on improving in stocks across our store and DC network through our new JDA platform.
So our customers are able to access our inventory.
However, they choose to shop and get most products in just two to three hours.
As we continue to scale and optimize a full suite of omnichannel services for both our Sally and BSG customers, we believe e-commerce can reach 15% or more of sales in the coming years.
In fiscal 2021, global e-commerce sales penetration was just over 7%.
Importantly, we know that an omnichannel customer at Sally U.S. and Canada spends approximately 75% to 80% more with us annually than a brick and mortar customer.
So this is not just a sales channel shift, it is a tremendous opportunity for growth.
Moving now to our second growth pillar: loyalty and personalization, which [Technical Issues] directly to our digital strategy.
As many of you know, the rise of personalization has changed the table stakes in retail.
With our rapidly growing loyalty program and a new push toward personalization, we have a significant opportunity to drive and increase customer engagement in sales.
At Sally U.S. and Canada, approximately 74% of our fourth quarter sales came from our loyalty program.
At BSG, because stylist have to register a shop with us, we have data on 100% of our customers.
Additionally, approximately 8% of our BSG's sales in the quarter came from our Rewards Credit Card that was launched about a year ago.
These are remarkable numbers and we've only scratched the surface in leveraging this asset.
In fiscal 2022, we'll be utilizing data science to engage our customers with inspiration, education and personalized offers at every touch point.
At Sally, this includes recommendations on product usage, reminders to replenish on time and incorporating DIY an educational component at key moments in their journey.
At BSG, this mean showcasing new product arrivals, reminding stylist to restock their backbar and notifications to replenish key styles products.
We believe these actions will drive higher customer lifetime value by minimizing attrition, growing spend per transaction and increasing purchase frequency.
Fiscal 2022 will also see us investing further in digital marketing and social media campaigns to drive traffic and sales.
Our current marketing campaign YOU by Sally continues to generate a tremendous amount of attention from customers and the trade.
Celebrating the transformative power of hair color, the campaign has received extensive coverage from Beauty editors and generated millions of views on social media.
Our third growth pillar is product innovation.
Fiscal 2022 will be highlighted by a big infusion of innovation across Sally and BSG and we'll be driving a large part of that ourselves.
The pipeline of new products is robust and includes our own and third-party brands across multiple categories.
We will continue to emphasize and support sustainable and clean products, which are increasingly being selected and commanding a premium from customers.
Importantly, we believe our authority in color and care provides a logical path and powerful platform for standing up new brands that go beyond our four walls.
The first initiative is our new exclusive brand line of vivid colors of Sally called Strawberry Leopard launched to positive response in October, this is a useful Gen Z focused brand that speaks to our ability to increasingly attract younger consumers through value of self-expression.
Concurrently with the launch, we created an individual digital platform for Strawberry Leopard that immersed the consumers in the brand ethos, enables a direct shopping experience.
As the brand gains velocity, we expect to unlock potential opportunities for expansion into additional distribution channels, including math, beauty and third party e-commerce.
The innovation pipeline at BSG is equally exciting, starting with Olaplex's new toning shampoo that just launched in September.
Olaplex is a great example of a high-profile brand that continues to innovate and remains a key partner to us.
Looking ahead, we're continuing to focus on being at the forefront of innovation with new product and brand launches to excite the consumer planned for 2022 and beyond.
Turning now to our fourth growth pillar, another critical element of our focus on putting the customer first is supercharging our supply chain to ensure that we are in stock in color and care every time.
A great deal of the heavy lifting has been done and we're now executing the final phase of JDA implementation.
The system is up and running in all BSG's locations and the majority of our Sally stores.
We're currently rolling out JDA to our remaining locations and fully integrating with our North Texas, DC.
Once completed, we'll have a highly automated integrated network with the best-in-class capabilities across inventory forecasting, localized assortment, pricing and promotions and in stock.
We believe that our initiatives underneath four growth pillars will allow us to drive top line growth of 3% to 4% and generate strong operating cash flows this year.
This reflects our ability to maintain strong gross margins, while mitigating inflationary pressures through careful cost controls, pricing levers and store optimization.
To that end, our 90-store optimization pilot remains in progress.
We are continuing to gather and analyze data from the sample and I'm pleased to note that we are significantly exceeding our sales transfer targets.
In fiscal 2022, we expect to launch a multi-year program designed to maximize the value of our large store portfolio, while offsetting inflationary headwinds.
By rationalizing the fleet, we can improve productivity and profitability, while delivering a convenient omnichannel experience that benefits our customers.
We're entering fiscal 2022 with solid infrastructure, a well-defined roadmap for growth and favorable industry dynamics that support the significant opportunity in front of us.
In the coming months, I look forward to working with the team to build out additional growth opportunities that will fuel our business and create meaningful shareholder value in 2023 and beyond.
We're pleased to conclude the year with strong fourth quarter performance, which exceeded the expectations we provided on our last earnings call and reflect strong consumer demand coming out of the pandemic.
Topline growth, solid gross margins and careful cost control, drove strong earnings and cash flow.
Net sales increased 3.4% and same-store sales rose 2.1% reflecting strong consumer demand with only some minor impact from pandemic related restrictions in Europe.
Fourth quarter traffic and conversion trends remain consistent with what we've experienced throughout the pandemic.
Traffic was down, but units per transaction, average unit retail and average ticket all increased versus prior year.
Basically, customers are still shopping less frequently, but are buying more when they transact with us.
Global e-commerce sales were $71 million, representing 7.1% of total net sales as compared to $63 million in the prior year.
The year-over-year increase reflects ongoing strength as we continue to scale our digital capabilities and implement our strategic initiatives around fulfillment and customer engagement.
Looking at gross profit, we achieved fourth quarter gross margin of 50.6%, reflecting our ability to maintain solid performance above our 50% target level.
On a year-over-year basis, gross margin deleveraged by 50 basis points, reflecting a higher mix of BSG sales, which carried a lower margin profile in the quarter.
Moving to operating expense, fourth quarter SG&A totaled $387 million, up 5% versus a year ago, primarily reflecting higher labor costs and planned increases in marketing spend.
Looking at the new fiscal year, we anticipate that SG&A dollars will increase and rate will be up slightly on a year-over-year basis.
Our expectation takes into account increased labor and freight costs, increased expense planned in our international markets related to a full reopening in 2022, as well as investments across our growth pillars that Denise discussed earlier.
We believe our store optimization program will serve as an important offset to wage inflation beginning in the latter part of 2022 and then more significantly in 2023.
Turning now to earnings.
We delivered strong profitability in Q4.
Adjusted operating margin came in at 11.7%, adjusted EBITDA margin was 14.5% and adjusted diluted earnings per share increased to $0.64.
Looking at segment results.
At Sally Beauty, we saw strong consumer demand in the U.S. Same-store sales increased 2.3% and e-commerce sales totaled $29 million for the quarter.
For Sally U.S. and Canada, the color category increased 4%, while vivid colors grew 5%, representing 28% of our total color sales as comparisons normalized to prior year.
Other categories also performed well.
Styling tools increased by 31% and textured hair was up 16%.
Gross margin declined slightly at Sally, which reflected strong product margins, offset by higher distribution and freight costs.
Segment operating margin increased to 18.1% compared to 18% in the prior year.
In the BSG segment, same-store sales increased 1.7% as salons returned to more normalized capacity levels in virtually all of our U.S. markets.
E-commerce sales totaled $42 million for the quarter.
The color category grew 9%, hair care was up 5% driven by Olaplex and styling tools increased 9%.
Gross margin and profitability at BSG reflected same dynamics we saw in Q3.
Specifically, we're experiencing higher sales from our larger volume, full service customers coming out of the pandemic and those customers tend to be lower margin.
Segment operating margin was down slightly versus prior year at 13.3%.
Moving to the balance sheet and cash flow.
We ended fiscal 2021 in strong financial condition.
For the full fiscal year, we generated $308 million of free cash flow and retired approximately $420 million of debt.
We ended the quarter with $401 million of cash and cash equivalents and a zero balance outstanding under our asset-based revolving line of credit.
Inventories at September 30th totaled $871 million, up 7% versus a year ago as we reinvested in our inventory levels coming out of the disruptions from the pandemic.
In addition, we were pleased that our strong performance over the course of fiscal 2021 helped drive our net debt leverage ratio down to 1.69 times at the end of September.
Now turning to our full year fiscal 2022 guidance.
We are confident about how the business is positioned heading into 2022 and we expect to achieve the following: net sales growth in the range of 3% to 4%, net store count to decrease by approximately 1% to 2% driven primarily by Sally U.S. stores as we continue to optimize our portfolio.
Gross margin expansion of 40 to 60 basis points, GAAP operating margin growth of 90 to 110 basis points, and adjusted operating margin approximately flat to 2021.
The business has demonstrated remarkable resilience during the past 18 plus months and our teams have done a terrific job of navigating the dynamic macro environment.
As the business continues to strengthen and generate strong cash flows, you can expect to see us prioritize strategic growth investments, as well as return cash to shareholders through the restart of our share buyback program.
As a reminder, during the fourth quarter, our Board of Directors approved an extension of our share repurchase program through September of 2025, which currently has over $700 million remaining under the authorization.
Additionally, we are evaluating opportunities to further optimize our capital structure, which could result in incremental interest expense savings.
Finally, I want to call out a housekeeping item related to disclosure.
Beginning in fiscal 2022, we will be replacing our same-store sales metric with comparable sales, which will include sales from our full-service divisions and franchise operations including any related e-commerce sales.
In 2022, for each quarter.
We will disclose both current and prior-year comparable sales under the new definition.
Now, I'll ask the operator to open the call for Q&A.
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q4 adjusted earnings per share $0.64.
q4 sales rose 3.4 percent to $990 million.
sees fy sales up 3 to 4 percent.
qtrly same store sales increase of 2.1%.
beginning in fiscal 2022, company will be replacing same store sales metric with comparable sales.
sees fy 2022 gross margin expected to expand by 40 to 60 basis points compared to prior year.
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Before we begin, I am sure you have noticed that Gary is not on today's conference call.
He is actively rehabbing from a knee replacement operation, and while he is recovering quickly he is doing very well.
He's just not a position to physically join us today.
We wish Gary well with this physical therapy and look forward to having him rejoin us on future calls.
During the third quarter we achieved some very strong business results, and Jerry will go over those with you shortly.
In the interim, I wanted to share news of the latest addition to our Rollins' Board of Directors.
As you already know over the previous year we have enhanced and diversified that group with several new members.
I am very pleased to announce our latest addition is Rollins' President and Chief Operating Officer, Jerry Gahlhoff.
This is in recognition of his strong leadership and his deep commitment to the company's long-term success.
We are proud to have Jerry serving on our Board moving forward.
Jerry hit -- is an important part of the Rollins leadership team and his in-depth knowledge of our business and experience gained from working in our industry since 1991 adds perspective.
We're fortunate to have him assume a greater role in the direction and future of our company.
Before turning the call over to Jerry I have two items to first update you on.
The first, we'll represent a recent development in Rollins Environmental, Social and Governance commitment.
We take very seriously the responsibility that we have to the communities in which we work and live.
As a recent example, we're pleased to share that Rollins made an in-kind donation originally costing $4.6 million dollars worth of personal protective equipment or PPE items during the third quarter.
Working with the Federal Emergency Management Agency and several philanthropic organizations including the Friends of Disabled Adults and Children, the Foundation of HOPE Food Bank, as well as COPE Preparedness in Los Angeles, we donated 27 pallets or 6.8 million pieces of masks, gloves and other items.
In addition to achieving a successful execution of our strategies as well as solid business results, we also have a responsibility to the communities in which we work and live.
ESG is a -- facet of our business is becoming more important to us.
We are proud to support these initiatives.
Last, as we have previously disclosed, the company has been responding to an investigation by the US Securities and Exchange Commission.
In accordance with accounting standard ASC 450, we have established a reserve related to this matter which we consider immaterial.
Given that the investigation is ongoing, we cannot answer any questions during our Q&A, but we remain focused on resolving this inquiry.
With that, I will turn our call over to Jerry.
We're very pleased with our third quarter results.
Revenue increased 11.4% to $650.2 million compared to $583.7 million for the third quarter of last year.
Our net income totaled $93.9 million or $0.19 per diluted share compared to $79.6 million or $0.16 per diluted share for the same period in 2020.
Julie will review the GAAP and non-GAAP results shortly.
Revenues for the first nine months of 2021 were $1.824 billion, an increase of 12.2% compared to $1.625 billion for the same period last year.
Net income for the first nine months increased 44% to $285.3 million or $0.58 per diluted share compared to $198.2 million or $0.40 per diluted share for the comparable period last year.
For the quarter, we experienced solid growth in all our business lines with residential increasing 11.7% and termite presenting percent growth over the third quarter 2020.
Additionally, commercial excluding fumigation delivered an impressive 10.1% growth over the third quarter last year.
This is also an improvement of 7.9% growth over two years ago when we were not experiencing COVID related shutdowns.
Overall, we are pleased with our performance.
Rollins remains well positioned for the remainder of the year and into 2022.
Looking deeper at our operating results, we're attracting customers to all our services and brands.
And one area I'd like to focus on today is our continued strong growth in our wildlife service offerings.
Trutech wildlife joined the Rollins family in 2010 followed by Critter Control in 2015.
Since 2010, the business has grown 800%.
Day-to-day operations of operating a wildlife control business is quite different than running a typical pest and termite business, and we are proud to have a dedicated team focused on this much needed service.
Originally concentrated in the Southeastern United States, the business has expanded across the nation as well as into Canada.
And with and with Critter Control expansion into Canada, it's Rollins' first brand to enter an international country without acquiring another business as a platform.
The wildlife division also operates a thriving franchise system.
There are currently 84 franchises with the most recent franchise launching in Mansfield Ohio.
We anticipate finishing the year with 12 new franchises, one of our strongest years in adding franchisees.
We have also been fortunate to add nine former corporate employees as franchisees.
Employees who have an entrepreneurial drive and a passion for nuisance wildlife and customer service have multiple career path opportunities, be it ownership of the franchise or growth within our company.
We believe there is meaningful opportunity for continued growth in our wildlife business and look forward to updating you in the quarters ahead.
I'd now like to discuss Hurricane Ida.
Our hearts go out to our Gulf Coast region and those that were affected by the hurricane.
But I must admit we are inspired by our team in that area.
They implemented an amazing plan that helped our team members, and alleviate the negative impact of the storm.
Ida shut down several of our branches for days but two locations were shut down for about two weeks.
The impact to our employees in the days following the storm was far worse than the impact to our business in the quarter.
Through the Rollins Employee Relief Fund, we granted 137 emergency grants to impacted employees within the first week following the hurricane to enable employees to address their personal essential needs.
Since then, another seven employees who endured greater hardships received full grants to address their more significant needs.
Additionally, our Orkin South Central division led by Leland Morris quickly initiated a preparedness and mitigation plan to assist our team members.
This included immediate procurement of much needed supplies for our employees and their families such as generators, dual, portable air conditioners, fans, water, and other essential emergency provisions that were not readily accessible to them locally.
Our team members in adjacent areas that were fortunate to avoid the brunt of Ida's force volunteered their time and energy often after work hours to load these suppliers into box trucks and drive them to those most in need.
For weeks they continued to shuttle fuel to these employees to keep their generators up and running.
This was a total team effort and we are tremendously proud of their care, compassion and commitment to one another.
In fact, we're so pleased with our effort that we plan to expand and formalize this program in other areas of the country so that we can rapidly respond in case of a natural disaster or emergency.
As we measure our performance and think about how to best articulate Rollins' business in the future along with what routine questions we've received from the investment community, we will now be presenting three additional measurements quarterly moving forward.
The first is a measure we have referred to periodically and that is EBITDA or earnings before interest, taxes, depreciation and amortization.
Due to our consistent high volume of acquisitions and hence high amortization expense related to these acquisitions, presenting EBITDA regularly will provide a clear picture of our operations ongoing financial performance.
Think about this, over the last three years we have averaged 30 acquisitions per year.
Next we will begin presenting our revenue growth through both constant exchange rate and actual exchange rate.
By utilizing historical baseline revenues for acquisitions [Indecipherable] through the due diligence process, we were able to include all acquisitions within the calculations, both stand-alone and tuck-in.
This will bring clarity and consistency to both our acquisition and our organic revenue growth measurements.
Third, we will be providing you with our free cash flow.
We believe that this will properly illustrate Rollins' strong ability to generate cash.
We have taken a simple approach to defining free cash flow, which is calculated as net cash provided by operating activities less purchase of equipment and property.
Our hope is that these measurements will enable investors to better assess our operating performance in the future and provide a deeper view of our business.
So onto the numbers.
Our third quarter revenues of $650.2 million was an increase of 11.4% over last year.
Of the 11.4% actual exchange rate revenue growth, acquisition growth was 2.2%, and organic equated to 9.2%.
For the constant exchange rate, the growth percentage is calculated within the hundreds of the actual exchange growth rate therefore presented the same.
For the nine months ended September 2021, revenue of $1.824 billion was an increase of 12.12 percentage over year-to-date 2020.
Of this actual exchange rate total revenue growth of 2.
-- or excuse me, of 12.2%, 2.7% was related to acquisitions, and 9.5% organic growth.
The constant year-to-date exchange rate total revenue growth for 2021 equaled 11.6%; 2.7% represented acquisitions and 8.9% organic revenue growth.
As Jerry pointed out, residential, commercial and termite all grew double-digits this quarter over the same quarter last year.
So, in determining my focus for today, I decided to take Jerry's lead and discuss wildlife, yet I'm discussing specifically company owned wildlife operations.
For the third quarter in 2021, wildlife revenues grew 24.1% over last year, and year-to-date wildlife has presented an overall revenue growth of 27.6%.
What makes us particularly impressive at this is that this is after their strong growth of 20.4% last year.
So similar to our residential pest control, wildlife did not feel a negative impact to revenue growth during the pandemic.
The way to go to the wildlife team.
Now onto our income.
For the third quarter and year-to-date, we are presenting adjusted EBITDA for comparison purposes due to the one-time super vesting of our late Chairman stock grants in the third quarter of 2020 and the impact of our gain on sale of several of our core properties in the first six months of 2021.
So, third quarter 2021 EBITDA was $150.9 million or 8.7% over 2020 third quarter adjusted EBITDA of $138.9 million.
Third quarter 2021 earnings per share was $0.19 per diluted share or 5.6% improvement over the 2020 third quarter adjusted EPS.
For the nine months ended September 2021, our adjusted EBITDA was $422 million or 22.1% over last year's adjusted EBITDA of $344.9 million.
Year-to-date 2021 adjusted earnings per share was $0.53 per diluted share or 26.2% over last year.
For the third quarter 2021, gross margin increased to 53% or 0.4% over last year.
Strong improvements in our materials and supplies were negatively offset by high overall fleet costs primarily from an increase in fuel of approximately $4 million over third quarter 2020, and lower vehicle gains of $900,000 compared to last year.
Sales, general and administrative third quarter margin increase over last year was strongly impacted by the PPE donations and the SEC accrual previously mentioned by John.
Travel expenses have also increased $1.3 million in the third quarter as we have begun to lift our company travel restrictions.
Amortization expenses for the third quarter 2021 increased $1.4 million due to the amortization of customer contracts from multiple acquisitions.
This was offset by a decrease in depreciation of $201,000 due to the sale of owned vehicles and centralizing of IT function.
Overall, this equated to a 5.1% increase in depreciation and amortization over the third quarter 2020.
Our dividends paid year-to-date 2021 was $119.7 million or an increase of 30.4% over last year.
We ended the current period with $117.7 million in cash, of which $73.6 million was held by our foreign subsidiaries.
So, this brings us to the final of our new three measurements, free cash flow.
For the third quarter of 2021, our free cash flow is $72.9 million or a decrease of 27.5% over the same quarter last year.
For the nine months ended 2021, our free cash flow equal $278.9 million or 13.6% decrease over year-to-date 2020.
This fluctuation occurred due to the deferral of $30.3 million in FICA taxes payable in 2020 as allowed under the CARES Act.
These associated taxes were then remitted in September of 2021.
We hope that with he discussion of these new measurements you will receive a greater clarity while reviewing our financial performance.
Lastly, I want to discuss that yesterday we were extremely pleased to announce that our Board has approved a 25% increase to our dividends.
The quarterly dividend increased to $0.10 per share from $0.08 per share and will be paid on December 10, 2021 to stockholders of record at the close of business on November 10, 2021.
Additionally, the Board also approved a special dividend of $0.08 to be paid on December 10, 2021 as well.
The dividend increase reflects our strong performance in the first nine months of the year and underscores our financial strength, our solid capital position, and the Board's confidence in our outlook for continued growth.
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q3 earnings per share $0.24.
q3 revenue $583.7 million versus refinitiv ibes estimate of $577.6 million.
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Such statements are based upon current information and management's expectations as of this date and are not guarantees of future performance.
As such, our outcomes and results could differ materially.
You can learn more about these risks in our annual report on Form 10-K, our quarterly reports on Form 10-Q and our other SEC filings.
We will also be making reference to certain non-GAAP financial measures such as segment operating income and other operating statistics.
I'm excited to be in Abu Dhabi this week, having just participated in the ADIPEC Conference, which has provided a unique occasion to meet face-to-face with colleagues, customers and of course, our strong partner, ADNOC Drilling.
Also joining Mark and me today in Abu Dhabi is John Bell, Senior Vice President, International and Offshore Operations.
And he will be available for International and ADNOC-specific questions.
Before getting into our traditional discussion topics, I wanted to first mention that ADIPEC, which is a global energy conference in Abu Dhabi, in this week there was over 150,000 attendees, 33 energy ministers and representatives from over 50 energy companies.
I've been impressed with the focus on ESG and especially the discussions of the impacts on energy, security for the globe.
In addition to industry leaders sharing their focus on sustainability and ESG, there were also leaders of countries from around the globe that were present to give their perspectives on the energy transition and the importance of ongoing investments to ensure a smooth transition.
Dr. Sultan Al Jaber, the ADNOC Group CEO and UAE Minister of Industry and Advanced Technology gave a very compelling speech at ADIPEC's opening ceremony.
He started with a reminder that energy transitions take multiple decades, and I quote, Rewiring the energy system is a multi-trillion dollar business opportunity that is good for humanity and good for economic growth.
He also had a call to action stating, what the world really needs is to hold back emissions now progress.
Let us together drive that progress.
Let us always keep in mind our industry must play a pivotal role in the energy transition.
We have the knowledge, the skills and the people to make a difference in our world.
Now that statement really resonates with me.
Working with our customers to reduce emissions and our collective environmental footprint is a major area of focus for us here at H&P.
The strategic alliance we signed with ADNOC is a great opportunity to deliver rig technology through the sale of eight high spec H&P FlexRigs as well as to make a significant $100 million investment in their initial public offering.
ADNOC has a 2030 oil production target of 5 million barrels per day and a goal to achieve natural gas independence.
We believe H&P can make significant contributions toward helping ADNOC achieve those goals through this new partnership, while also providing additional opportunities for us to expand in this pivotal and growing energy regions.
Looking at the rest of our international activity, historically, we've experienced a lag compared to the US.
So we are expecting activity to improve in these markets in the coming quarters.
A recent example is a couple of new agreements with YPF as we will put four rigs back to work under term contracts in Argentina during fiscal 2022.
We continue to pursue other international opportunities, and look forward to improving activity.
Shifting to North America Solutions, it is hard to believe that a year ago H&P had only 80 active rig drilling [Phonetic].
Today we have 141 active FlexRigs.
The response of our people and their leadership through the pandemic has been nothing short of amazing.
Particularly impressive is their service attitude in responding to customers as rig demand has been recovering.
Our folks are resilient and deliver on safety, efficiency and reliability for our customers each and every day.
We expected that the rig activity increases would be more measured during our fourth fiscal quarter as we realized more rapid rig churn among customers who are sticking to their disciplined spending plans.
Given that, we were pleased with the 5% incremental rig count increase experienced during the quarter, and are even more optimistic as we look ahead to the fourth calendar quarter where we expect to see our rig count increase sequentially and at a higher pace as E&Ps reset their annual capital budgets.
We believe our customers will remain disciplined.
And similar to 2021, the budgets for 2022 will be adhered to, but the new budgets will be reset at higher levels based on a higher commodity price environment, meaning more active rigs in 2022.
As evidenced by our rig count growth to date, we expect the rig count will have a significant increase in calendar Q4 of 2021 and Q1 of 2022.
As mentioned, our US land rig count stands at 141 rigs today, up from 127 at September 30, our fiscal year-end.
And we expect to add roughly another 10 to 15 rigs by year end of calendar 2021.
To summarize North America Solutions, during calendar fourth quarter, we expect to add 25 to 30 rigs.
To put that in perspective, this is approximately the same number of rigs we added in the preceding nine months.
Further, we are also readying several more rigs during the first fiscal quarter that we expect to commence work in the first half of January.
This activity increase is exciting as our customers are investing in their calendar 2022 budgets.
It does however cause near-term margin compression due to the one-time expenses incurred to reactivation.
Mark will discuss the details more in a moment, and I'll add that we are pleased with the future cash generation these rigs will have, post reactivation as we return to greater scale operations driving both pricing higher and leveraging our fixed costs.
Given the well publicized challenges in what we hope is finally a post pandemic environment, it's not surprising to see rig reactivation and field labor cost increasing.
All of the super-spec rigs that are available to work today have been idle for well over a year, which equates to higher start-up costs.
Competition for quality people is also escalating, and we will be increasing field labor wages accordingly.
And as a reminder, those cost increases are passed through to the customer.
The tightening supply of readily available rigs coupled with these cost increases have already begun to move contract pricing effort in the market.
Based upon what we are experiencing today, we expect price increases will become even more pronounced in the coming months as rig demand picks up heading into 2022.
Mark will talk about our strong balance sheet in his remarks, but I wanted to mention one of our goals was to generate free cash flow, and we are encouraged that we believe that is achievable in the back half of 2022 with the rig count and revenue expectations we have.
These market conditions demonstrate further potential for H&P's new commercial models and digital technology solutions.
Our digital technology solutions deliver value through improved efficiencies, reliability, lower cost and better overall outcomes.
Today, approximately 35% of our FlexRigs are on performance contracts, and several customers are experiencing the powerful synergies, a combination of performance contracts and digital technology can deliver.
Adoption continues to improve and is driving economic returns higher not only for our customers, but for ourselves as well.
In closing, we are encouraged heading into 2022 and fully expect that the demand for H&P's drilling solutions will continue.
E&P capital discipline, rising commodity prices and a collective vision to play our crucial role and a smooth energy transition will strengthen the industry.
There are still many challenges, but I'm confident that our people and solutions have the Company well positioned to deliver value for customers and shareholders in this improving environment.
Today, I will review our fiscal fourth quarter and full year 2021 operating results, provide guidance for the first quarter and full fiscal year 2022 as appropriate and comment on our financial position.
Let me start with highlights for the recently completed fourth quarter and fiscal year ended September 30, 2021.
The Company generated quarterly revenues of $344 million versus $332 million in the previous quarter.
The increase in revenue corresponds to a modest increase in our rig count during the quarter.
Correspondingly, total direct operating costs incurred were $269 million for the fourth quarter versus $257 million for the previous quarter.
During the fourth quarter, we closed on two transactions with ADNOC drilling.
First, H&P sold eight FlexRig land rigs including two already in Abu Dhabi and six from the United States for delivery during 2022.
Consideration received for this sale was $86.5 million and any gains above book values together with required investments to prepare and deliver the rigs will be recognized as each rig is delivered.
Second, H&P made a $100 million investment in ADNOC Drilling in conjunction with its initial public offering in early October.
General and administrative expenses totaled $52 million for the fourth quarter, higher than our previous guidance due primarily to professional services fees associated with the ADNOC transactions and our ongoing cost management efforts.
As well as increases to the short-term incentive bonus plan accruals to reflect full fiscal year operating results.
On September 27, we issued $550 million in unsecured senior note bonds to refinance our 487 million outstanding bonds that were due in May 2025.
Our new issuance came at a coupon of 2.9% and a 10-year tenure maturing in September 2031.
The additional debt of about $63 million funded the make-whole provision and accrued interest for the call of the existing bonds as well as an associated transaction cost.
This made the transaction and subsequent debt extinguishment in October, liquidity neutral.
Also, note that the make-whole premium and accrued interest will be recognized in the first fiscal quarter 2022 concurrently with the October 27 redemption.
Our Q4 effective tax rate was approximately 24%, in line with our previous guidance.
To summarize, fourth quarter's results, H&P incurred a loss of $0.74 per diluted share versus a loss of $0.52 in the previous quarter.
As of these select items, adjusted diluted loss per share was $0.62 in the fourth fiscal quarter compared with an adjusted $0.57 loss during the third fiscal quarter.
For fiscal 2021 as a whole, we incurred a loss of $3.04 per diluted share.
Again, this was driven largely by the non-cash impairments to fair value for decommissioned rigs and equipment, the majority of which were previously impaired and are held for sale.
Collectively, these select items constituted a loss of $0.44 per diluted share.
Absent these items, fiscal 2021 adjusted losses were $2.60 per diluted share.
Capital expenditures for fiscal 2021 totaled $82 million below our previous guidance due to the timing of supply chain spending that crossed in the fiscal 2022.
Relative to our original guidance range of $85 million to $105 million, the variance was primarily driven by a delay in the start of planned IT infrastructure spending that we have previously discussed.
Most of that planned IT spend will now be incurred in fiscal '22.
H&P generated $136 million in operating cash flow during fiscal 2021.
Considering the pro forma impact of our recent debt refinancing, the collective cash and short-term investments balances decreased minimally by $7 million year-over-year due in part to working capital improvements achieved during fiscal 2021 as well as asset sales.
Turning to our three segments beginning with the North America Solutions segment.
We averaged 124 contracted rigs during the fourth quarter, up from an average of 119 rigs in fiscal Q3.
We exited the fourth fiscal quarter with 127 contracted rigs.
Revenues were sequentially higher by $12 million due to the aforementioned activity increase.
North America Solutions operating expenses increased $18 million sequentially in the fourth quarter primarily due to the addition of six rigs as well as a higher material and supplies expense.
Throughout fiscal 2021, we prudently managed our expenses and inventory levels using previously expensed consumable inventory harvested during stacking activities in calendar 2020 rather than utilizing fully costed inventory or purchasing new inventory.
As rig activity increased, our level of previously expensed inventory or what we have been referring to internally as quote-unquote, penny stock, has been exhausted resulting in the issuance of a higher cost inventory and the purchasing of additional inventory to replenish stock levels, replenishments go on the balance sheet.
Through fiscal 2021, we did not experience inflation in our costs.
However, we are anticipating inflationary pressures moving forward, which I will touch on in a moment.
Additionally, as I will expand on later, we've put six rigs to work in the first half of October, the first fiscal quarter of 2022, but the reactivation costs are primarily incurred in fiscal 2021.
The onetime reactivation expenses associated with all of those rigs was $6.6 million in fiscal Q4.
Now looking into the first quarter of fiscal 2022 for North America Solutions.
As expected, rig count growth was moderate during the fourth fiscal quarter.
Publicly traded customers continued to operate within their calendar year budget plans, which are currently being reset for calendar 2022 in an oil and gas commodity environment that is significantly more robust than this time last year.
Accordingly, we expect to see sizable spending increases, especially with our public company customers during the first fiscal quarter of 2022.
As of today's call, we have 141 rigs contracted, and we expect to end our first fiscal quarter with between 152 and 157 working rigs with current line of sight for a few additional rigs turning to the right in early January.
In the North America Solutions segment, we expect gross margins to range between $75 million to $85 million inclusive of the effect of about $15 million in reactivation costs.
As I mentioned in last quarter, there is positive correlation between the length of time a rig has been idle and the costs required to reactivate it.
Most of the costs we are reactivating -- most of the rigs we are reactivating in the first quarter have been idle for 18-plus months.
Reactivation costs were mostly incurred in the quarter of start-up, so the absence of such costs in future quarters is margin accretive.
As John mentioned, we are expecting to achieve higher pricing in light of higher demand in tight, ready-to-work, super-spec supply.
I will now pause to comment on inflationary considerations ahead for fiscal 2022.
We have seen increases in commodity pricing such as for steel.
Products reflecting upward pricing due to this pressure include capital items such as drill pipe.
Note that our upcoming capital expenditure guidance is inclusive of such pricing increases.
For margin-related expenditures, I will touch on two items.
First, maintenance and supplies pricing is increasing across some categories such as oil-based products like lubricants and steel-based products like fluid ends [Phonetic].
Second, as John discussed, we are increasing field labor rates to respond to market conditions and assist in talent retention and attraction.
Further, our contracts are structured to pass through labor price increases over a 5% threshold.
Therefore, significant labor increases are margin neutral due to contractual protections.
Fair margin guidance was inclusive of our expectations for inflation in the first fiscal quarter.
As it relates to supply chain access to parts and materials to run our business, we are in constant communication with our suppliers and they've placed advance orders for certain IRS categories.
Our proactive approach to inventory planning, coupled with our scale and healthy vendor partner relationships provide us reasonable assurance of supply chain issues as we see them today will not materially impact our business.
We will continue to engage our suppliers and partners to stay ready to adjust as developments unfold.
Subsequent to September 30, 2021 we sold two peripheral service lines, which provided rig move trucking and casing running tools services to a portion of our North America segment customers.
These business lines were largely margin neutral to H&P having collected revenues in the fourth quarter and full fiscal year of 2021 of $10 million and $34 million respectively.
To conclude comments on the North America segment, our current revenue backlog from our North America Solutions fleet is roughly $430 million.
Regarding our International Solutions segment, International business activity increased by one rig in Argentina to six active rigs during the fourth fiscal quarter.
As we look to the first fiscal quarter of 2022 for International, activity in Bahrain is holding steady with the three rigs working, and we expect to go from three to four rigs working in Argentina as well as get the contract of the Colombia rig turning to the right.
Note that three of the YPF rigs John mentioned earlier will commence work in subsequent FY22 quarters in Argentina.
Turning to our Offshore Gulf of Mexico segment, we continue to have four of our seven offshore platform rigs contracted.
Offshore generated a gross margin of $8 million during this quarter, which was within our guided range.
As we look to the first quarter of fiscal 2022 for offshore, we expect that the segment will generate between $6 million to $8 million of operating gross margin.
Now, let me look forward to the first fiscal quarter and full fiscal year 2022 for certain consolidated and corporate items.
As we increased our rig count, capital expenditures for the full fiscal 2022 year are expected to range between $250 million to $270 million.
This capital outlay is comprised of three buckets, similar to fiscal 2021.
First, maintenance capex to support our active rig fleet will be approximately 50% of the total FY '22 capex.
In fiscal 2019, we had bulk purchases in capex to scale up rotating componentry for a then 200-plus working super-spec FlexRig count.
In addition, we harvested components from previously impaired and decommissioned rigs to conserve capital.
As such, we were able to utilize resources on hand and preserve capital in 2021.
But now we have reached the end of those inventories and we are needing to recommence a regular cadence of component equipment overhauls and drill pipe purchases.
This, coupled with a sharp activity increase we are experiencing is driving our fiscal 2022 maintenance capex back into our historical range of between $750,000 to $1 million per active rig per annum in the North America Solutions segment.
Second, skidding to walking capability conversions will approximate 35% of the fiscal 2022 capex.
Although our peers have walking rigs available in the market, select customers prefer certain rig design elements and commit to a conversion.
For customers that need walking rigs, we will invest to convert certain rigs from skidding to walking pad capability and exchange for a term contract that will enable the new investment, which we currently estimate is $6.5 million to $7.5 million per conversion.
Third, corporate capital investments will be about 15% of fiscal 2020 capex.
Over half of this bucket is comprised of modernization for data center, data and analytics platforms and enterprise IT systems, most of which has moved from fiscal 2021 to fiscal 2022 and will improve our infrastructure and cyber security posture.
Portions of the balance of this corporate capital investment are for Power Solutions capital associated with ESG research and development efforts, and for certain real estate matters.
As part of the ADNOC sale transaction mentioned earlier, we will deliver the eight rigs to ADNOC throughout the year of 2022 with sale proceeds of $86.5 million received in September 2021 and are included in accrued liabilities on our balance sheet.
In addition to the capital expenditures just described above, we will spend approximately $25 million in cash to prepare and deliver the rigs to ADNOC.
When we incur these expenses, they together with the net book values which among other assets are classified in assets held for sale will collectively represent the accounting basis in the rigs for the purpose of determining gains to be recognized in the upcoming quarters upon each delivery.
Depreciation for fiscal 2022 is expected to be approximately $405 million.
Our general and administrative expenses for the full 2022-year expected to be approximately $170 million, which is roughly consistent with the year just completed.
Fiscal 2022 SG&A will be partly front loaded in the first fiscal quarter due to short-term incentive compensation payments for fiscal year 2021 results and the timing of certain professional services fees.
Specifically, we expect $45 million to $85 million in Q1 with the remainder spread proportionately over the final three quarters.
Our investment in research and development is largely focused on autonomous drilling, wellbore quality and ESG initiatives.
And we anticipate these innovation efforts to yield further enhancements and solutions offerings on our technology roadmap.
We anticipate R&D expenditures to be approximately $25 million in fiscal '22.
We are expecting an effective income tax rate range of 18% to 24% for fiscal 2022.
In addition to the US statutory rate of 21%, incremental state and foreign income taxes also impact our provision.
Based upon estimated fiscal 2022 operating results and capex, we are forecasting another decrease to our deferred tax liability.
Additionally, we are expecting cash tax in the range of $5 million to $20 million.
Now looking at our financial position.
Helmerich & Payne had cash and short-term investments of approximately $1.1 billion at September 30, 2021.
When considering the aforementioned 2025 bond repayment and make-whole premium that occurred in October, the pro forma cash and short-term equivalents of September 30, 2021 were $570 million, sequentially compared to $558 million at June 30, 2021.
Including availability under our revolving credit facility, but excluding the $546 million, 2025 bond extinguishment amount, our liquidity was approximately $1.3 billion commensurate to the prior quarter.
Our debt to capital at quarter-end was temporarily at 26% given the debt overlap at the September 30 balance sheet date, accounting for the repayment of the 25 bonds.
However, pro forma debt to capital are just down to 16%.
Our working capital stewardship since the March 2020 downturn resulted in cash accretion.
As we look forward toward the end of fiscal '22, we do expect to consume a modest amount of cash given the one-time recommissioning expenses together with net working capital increases as our rig activity climbs.
Fiscal Q1 will experience lower cash flow from operations in the following quarters due to the rig ramp up and the seasonal cash expenditures for incentive compensation, property taxes, etc.
We do expect to end the fiscal year with between $475 million to $525 million of cash on hand and $25 million to $75 million of net debt.
In summary, we are expecting to generate free cash flow that when combined with the modest uses of cash on hand early in the fiscal year will cover our capital expenditure plan, debt service cost and dividends in fiscal '22.
The growth in rig count early in the fiscal year provides a platform for cash generation in the second half of the year that pointing forward fully covers our cash uses including our dividend and sets the stage for further cash accretion.
Our balance sheet strength, liquidity level and term contract backlog provide H&P the flexibility to adapt to market conditions, take advantage of attractive opportunities and maintain our long practice of returning capital to shareholders.
That concludes our prepared comments for the fourth fiscal quarter.
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compname posts q4 loss per share of $0.55.
q4 loss per share $0.55.
expects its q1 of fiscal 2021 north america solutions rig count to exit at approximately 90 rigs up over 30% during quarter.
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I'm joined by our Chief Executive Officer, Patrick Beharelle.
We use non-GAAP measures when presenting our financial results.
Any comparisons made today are based on a comparison to the same period in the prior year, unless otherwise stated.
I am pleased to report we had a strong start to the year.
We delivered net income of $7 million in the first quarter versus a loss of $150 million in the first quarter of the prior year.
As a reminder, the first quarter last year included a non-cash asset impairment charge of $152 million net effects.
Growth, excluding the impairment charge, was led by a series of new client wins, improving industry performance, including those hit the hardest last year, and disciplined cost management.
I'm pleased that on an adjusted basis, we experienced growth of $9 million in both adjusted net income and adjusted EBITDA year-over-year.
Before turning to the segment results, I want to highlight the early new win successes at PeopleManagement and PeopleScout as we are beginning to see increased interest in clients using more variable labor.
In PeopleManagement, new wins on an annualized basis are $44 million this year, up from $16 million same time last year, mainly in manufacturing, logistics and retail.
We have seen similar growth at PeopleScout where annualized wins are $30 million this year, up from $3 million the same time last year.
New client growth is coming from a variety of industries, including retail, healthcare and transportation, which is very encouraging.
Now let's turn to our results by segment, starting with PeopleReady.
PeopleReady is our largest segment, representing 59% of trailing 12-month revenue and 69% of segment profit.
PeopleReady is the leading provider of on-demand labor and skilled trades in the North American industrial staffing market.
We service our clients via national footprint of physical branch locations, as well as our JobStack mobile app.
PeopleReady's revenue was down 13% during the quarter versus down 18% in Q4.
PeopleManagement is our second largest segment, representing 33% of trailing 12-month revenue and 22% of segment profit.
PeopleManagement provides onsite industrial staffing and commercial driving services in the North American industrial staffing market.
The essence of a typical PeopleManagement engagement is supplying an outsourced workforce that involves multi-year multi-million dollar onsite for driver relationships.
PeopleManagement revenue is reaching pre-pandemic levels, by growing 7% in the first quarter versus up 5% in Q4.
Turning to our third segment, PeopleScout represents 8% of trailing 12-month revenue and 9% of segment profit.
PeopleScout is a global leader in filling permanent positions through our recruitment process outsourcing and managed service provider offerings.
Revenue was down 13% during the quarter, versus down 24% in Q4.
Now I'd like to shift gears and update you on our key strategies by segment starting with PeopleReady.
Our long-term strategy at PeopleReady is to further digitalize our business model to gain market share and improve the efficiency of our service delivery cost structure.
Most of our competitors in this segment are smaller mom and pops that don't have the scale or capital to deploy something like our JobStack mobile app.
This along with our nationwide footprint is what makes us unique.
As a reminder, we began rolling out JobStack to our associates in 2017.
And in 2018, we launched the client side of the app.
We now have digital fill rates north of 50% and more than 26,000 clients are using the app.
In Q1 2021, we sold 716,000 shifts via JobStack, representing a digital fill rate of 58%.
Our client user count ended the quarter at 26,500, up 13% versus Q1 2020.
The rise in heavy client user growth continues to be our primary focus.
Heavy client user has 50 or more touches on JobStack per month, whether it's entering an order, rating a worker, or approving time.
JobStack heavy client users continue to post better year-over-year revenue growth rates compared to the rest of the customer base.
In Q1 2021, the revenue growth differential between heavy client users and non-users was over 35 percentage points on a same customer basis.
This growth differential is largely driven by wallet share takeaways from competitors as heavy client users are telling us a major reason they are moving share to PeopleReady is due to JobStack's unique capabilities.
Our focus on heavy user growth is become more material in our overall results.
We increased our heavy client user mix from 24% of PeopleReady's business in fiscal 2020 to 31% in Q1 2021.
With the foundation of our digital strategy in place, our focus has turned to how we can better serve our existing customers and reach new clients.
Combining the strength of our geographic footprint with technology, centralized work activities and repurposed job roles will allow us to achieve this goal with greater efficiency.
At the end of the first quarter, we launched two market pilots.
Pilots use the elements I mentioned to provide an altered go-to-market approach and are intended to strengthen the local presence in the communities where we do business.
While it's still too early to report results, we are encouraged by the progress made by the team.
We'll continue to update on this front as the pilot progresses.
Turning to PeopleManagement, our strategy is to focus on execution and grow our client base.
Last year, we sharpened our vertical focus to target essential manufacturers and made investments in our sales teams to enhance productivity.
With these initiatives in flight, we have broadened the strategy to expand our geographic footprint by targeting more local and underserved markets.
We are seeing strong results, as mentioned earlier, with new win growth during the first quarter.
Finally, we are investing in customer and associate care programs in an effort to serve our client needs better and improve retention.
Turning to PeopleScout, the strategy leverages our strong brand reputation to capture opportunities in an industry poised for growth.
Before COVID struck, we along with our competitors experienced a trend toward more insourcing, with some clients bringing more recruitment functions in-house.
Many of the in-house teams have been reduced or eliminated during the pandemic and we're seeing companies move to hybrid and fully outsourced models as the economy recovers.
To capitalize on this trend, we've made investments in our sales.
We believe there is a big opportunity to increase wallet share at our existing clients and diversify the industry mix within our portfolio by adding new clients.
These efforts are already delivering results as shown by the $30 million of annualized new business wins across multiple sectors as I referenced earlier.
I'll now pass the call over to Derek, who will share greater detail around our financial results.
Total revenue for Q1 2021 was $459 million, representing a decline of 7%.
We posted net income of $7 million or $0.20 per share, compared to a net loss of $150 million in the prior year, which included a non-cash impairment charge of $152 million net of tax.
On an adjusted basis, we delivered adjusted net income of $9 million or $0.25 per share, an increase of $9 million compared to Q1 2020.
The increase in adjusted net income was driven by a decline in SG&A expense.
Adjusted EBITDA was $13 million, an increase of 189% compared to Q1 2020 and adjusted EBITDA margin was up 200 basis points.
Gross margin of 24.1% was down 140 basis points.
Our staffing businesses contributed 150 basis points of compression with 130 basis points due to a benefit in the prior year for a reduction in expected healthcare costs.
Adjusting for this, our overall gross margin was nearly flat.
There are also some other offsetting gross margin trends that I would like to point out.
In our staffing businesses, higher pay rates in relation to bill rates and sales mix provided 90 basis points of drag offset by 70 basis points of benefit from workers compensation expense, largely related to favorable development in our reserves.
PeopleScout also contributed 10 basis points of expansion.
Turning to SG&A expense.
We delivered another quarter of strong results with expense down $20 million or 17%.
Maintaining our cost discipline is important but of equal importance is doing it in a way that preserves our operational strengths to ensure the business is well positioned for growth as economic conditions continue to improve.
We are also implementing pilot projects to further reduce the cost of our PeopleReady branch network through greater use of technology, centralizing work activities and repurposing of job roles while maintaining the strength of the geographic footprint.
These pilots will occur throughout 2021.
And if successful, could lead to additional efficiencies in 2022.
Our effective income tax rate was a benefit of 2% in Q1, as a result of our job tax credits exceeding the income tax associated with our pre-tax income.
Turning to our segments.
PeopleReady saw revenue decline 13%, while segment profit was up 55% due to lower expense.
PeopleReady experienced encouraging intra-quarter revenue improvement with March down 3% compared to January down 18%.
We were also pleased to see revenue trends improve in some of our hardest hit markets.
Non-residential construction improved to a decline of 8% in March versus a decline of 24% in Q4 2020.
And hospitality improved to a decline of 9% from a decline of 49% for these same time periods.
California was our largest market pre-COVID and was one of our hardest hit geographies.
California's revenue trend improved to a decline of 4% in March versus a decline of 27% in Q4 2020.
PeopleManagement saw revenue increase 7%, which in combination with lower expense drove a $3 million increase in segment profit.
PeopleManagement also experienced encouraging intra-quarter revenue improvement with March up 15% compared to 5% in January.
Of the $44 million of annualized new business wins Patrick mentioned, $2 million was recorded in Q1 and approximately $28 million is expected over the remainder of the year.
Peoplescout saw revenue declined 30% while segment profit increased 61% as a result of lower expense.
Sequentially, revenue was up 11% compared to Q4 2020.
As Patrick noted, we are encouraged by the new business wins and the results within our hardest hit industries including travel and leisure which went from a decline of over 50% in Q4 2020 to a decline of about 25% in March.
We are also optimistic about the long-term signals we are seeing in these new win.
First, there are signs of a growing interest from clients to shift back from an in-house model to an outsource model.
Second, wins are coming from a variety of industries, including retail, healthcare, and manufacturing.
Of the $30 million of annualized new business wins Patrick mentioned, $2 million was recorded in Q1 and approximately $14 million is expected over the remainder of the year.
Now let's turn to the balance sheet and cash flows.
Our balance sheet is in excellent shape.
We finished the quarter with $88 million of cash, no outstanding debt and an unused credit facility.
While our profitability increased compared to Q1 last year, cash flow from operations was flat largely due to less benefit from working capital associated with better revenue trends this year.
In regards to the topline, the historical sequential revenue growth from the first quarter to the second quarter has averaged about 10%.
This average excludes 2020.
Turning to gross margin for the second quarter, we expect expansion of 180 basis points to 220 basis points.
Segment revenue mix and operating leverage from higher volumes at Peoplescout are expected to drive approximately 120 basis points of the improvement with the remainder coming from non-repeating workforce reduction costs incurred in Q2 2020.
We expect gross margin expansion of 40 basis points to 100 basis points for the full year.
For SG&A, we expect $108 million to $112 million for the second quarter and $446 million to $454 million for the full year.
I'd also like to remind everyone that we will anniversary most of our 2020 cost reduction actions in April of 2021.
For capital expenditures, we expect about $14 million for the second quarter and $37 million and $41 million for the year.
Included in our capital expenditure plan are build out costs for our Chicago support center, much of which will be reimbursed by our landlord.
Our outlook for fully diluted weighted average shares outstanding for the second quarter of 2021 is $35.1 million.
We expect our effective income tax rate for the full year before job tax credits to be about 26% to 30%.
And we expect the benefit from job tax credits to be $8 million to $10 million.
With the momentum of our first quarter results, a solid balance sheet, and a strong mix of operational and technology strategies, we feel we are well positioned to take advantage of growth opportunities during the recovery and beyond.
Please open the call now for question.
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trueblue q1 earnings per share 20 cents.
q1 adjusted earnings per share $0.25.
q1 earnings per share $0.20.
q1 revenue fell 7 percent to $459 million.
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First, I'd like to say we're very pleased with the results of this quarter.
Our inpatient businesses, including our critical illness recovery hospitals and our inpatient rehabilitation hospitals, realized significant growth in revenue, EBITDA and occupancy rates.
Occupancy rates in both business segments grew 500 basis points on a same-quarter year-over-year basis.
Our Concentra business segment has continued the trend we saw in Q4 with nice growth in revenue, EBITDA and EBITDA margins.
And while our outpatient rehabilitation business experienced double-digit negative variance in patient visits in both January and February, we saw a surge of visits in March, and this has continued through April.
All in all, it was a stellar quarter for Select.
We will continue to outline this information as long as we believe it provides insight to the impact of COVID-19 on the company's financial performance.
Overall, our net revenue for the first quarter increased 9.3% to $1.55 billion.
Net revenue in our critical illness recovery hospital segment in the first quarter increased 18.9% to $595 million, compared to $501 million in the same quarter last year.
Patient days were up 8.4% compared to same quarter last year with over 293,000 patient days.
Occupancy in our critical illness recovery hospital segment was 75% in the first quarter, compared to 70% the same quarter last year.
Net revenue per-patient day increased 10.1% to $2,024 per-patient day in the first quarter.
We continue to see strong referrals and higher acuity patients, which is driving both volume and rate in our critical illness recovery hospitals.
Case mix index in our critical illness recovery hospitals was 1.35 in the first quarter, compared to 1.27 in the same quarter last year.
Net revenue in our rehabilitation hospital segment in the first quarter increased 14.2% to $208 million, compared to $182 million in the same quarter last year.
Patient days increased 8.3% compared to same quarter last year with over 102,000 patient days.
Occupancy in our rehabilitation hospitals was 84% in the first quarter, compared to 79% same quarter last year.
Net revenue per-patient day increased 7% to $1,853 per day in the first quarter.
Net revenue in our outpatient rehab segment for the first quarter declined 1.3% to $252 million, compared to $255 million in the same quarter last year.
Patient business were down 1.1% with 2.1 million visits in the quarter.
Our net revenue per visit was $104 in both the first quarter this year and last year.
We did have one fewer operational days in the first quarter this year compared to the same quarter last year.
Our visits per operational day this quarter increased slightly compared to the same quarter last year.
Net revenue in our Concentra segment in the first quarter increased 6.1% to $423 million, compared to $399 million in the same quarter last year.
For the centers, patient business were down 2.8%, a 2-point [Technical difficulty] in business in the quarter.
Net revenue per visit in the centers increased slightly to $125 in the first quarter, compared to $123 in the same quarter last year.
While patient visit volumes in our centers was down, we realized increases in revenue from COVID screening and testing services, offset in part by sale of the veterans administration community-based outpatient clinics last year.
I also want to highlight that we recorded $34 million in other operating income in the first quarter this year.
This included $16.1 million related to payments received under the CARES Act for incremental costs incurred as a result of COVID.
The adjusted EBITDA results for our operating segments do not include any recognitions of these funds.
They are included in our other activities.
It also included $17.9 million related to the positive outcome of litigation with CMS. The adjusted EBITDA results for our critical illness recovery hospital segment included the recognition of this income.
Total company adjusted EBITDA for the first quarter increased 37.9% to $258.3 million, compared to $187.3 million in the same quarter last year.
Our consolidated adjusted EBITDA margin was 16.7% for the first quarter, compared to 13.2% for the same quarter last year.
Our critical illness recovery hospital segment adjusted EBITDA increased 27.9% to $113.3 million, compared to $88.6 million same quarter last year.
Adjusted EBITDA margin for the segment was 19% in the first quarter, compared to 17.7% in the same quarter last year.
Our rehab hospital segment adjusted EBITDA increased 31% to $50.5 million, compared to $38.6 million the same quarter last year.
Adjusted EBITDA margin for the rehab hospital segment was 24.3% in the first quarter, compared to 21.2% in the same quarter last year.
Our outpatient rehab adjusted EBITDA was $26.3 million, compared to $27.1 million in the same quarter last year.
Adjusted EBITDA margin for the outpatient segment was 10.4% in the first quarter, compared to 10.6% same quarter last year.
Our Concentra adjusted EBITDA increased 33.4% to $82 million, compared to $61.5 million in the same quarter last year.
Adjusted EBITDA margin was 19.4% in the first quarter, compared to 15.4% in the same quarter last year.
Earnings per common share increased 105% to $0.82 for the first quarter, compared to $0.40 for the same quarter last year.
Adjusted earnings per common share was $0.37 in the first quarter last year.
Adjusted earnings per common share excludes the nonoperating gain as related tax effects for the first quarter last year.
The proposed inpatient rehab rule, if adopted, would see an increase in the standard payment amount 2.47% and an increase in the high-cost outlier threshold.
The proposed long-term acute care rule, if adopted, would see an increase in the standard federal rate of 2.45% and an increase in the high-cost outlier threshold.
We expect these rules to be finalized in August after the required comment period.
Additionally, the Medicare Sequester Relief bill extended temporary suspension of the 2% Medicare sequestration cut that was set to expire March 31 through the end of 2021.
That concludes my remarks.
For the first quarter, our operating expenses, which include our cost of services and in general and administrative expenses, were $1.33 billion or 85.9% of net revenue.
For the same quarter last year, operating expenses were $1.23 billion and 87.3% of net revenues.
Cost of services were $1.29 billion for the first quarter.
This compares to $1.2 billion in the same quarter last year.
As a percent of net revenue, cost of services were 83.6% for the first quarter.
This compares to 84.9% in the same quarter last year.
G&A expense was $35.4 million in the first quarter.
This compares to $33.8 million in the same quarter last year.
G&A as a percent of net revenue was 2.3% in the first quarter.
This compares to 2.4% of net revenue for the same quarter last year.
As Bob mentioned, total adjusted EBITDA was $258.3 million, and the adjusted EBITDA margin was 15.7% for the first quarter.
This compares to total adjusted EBITDA of $187.3 million and adjusted EBITDA margin of 13.2% in the same quarter last year.
Depreciation and amortization was $49.6 million in the first quarter.
This compares to $51.8 million in the same quarter last year.
We generated $9.9 million in equity and earnings [Technical difficulty] subsidiaries during the first quarter.
This compares to $2.6 million in the same quarter last year.
We also had a nonoperating gain of $7.2 million in the first quarter last year.
Interest expense was $34.4 million in the first quarter.
This compares to $46.1 million in the same quarter last year.
We recorded income tax expense of $45.1 million in the first quarter this year, which represents an effective tax rate of 24.7%.
This compares to the tax expense of $21.9 million and an effective rate of 23.7% in the same quarter last year.
Net income attributable to noncontrolling interest were $26.7 million in the first quarter.
This compared to $17.3 million in the same quarter last year.
Net income attributable to Select Medical Holdings was $110.5 million in the first quarter, and earnings per common share was $0.82.
At the end of the first quarter, we had $3.4 billion of debt outstanding and over $750 million of cash on the balance sheet.
Our debt balances at the end of the quarter included $2.1 billion in term loans, $1.2 billion and 6.25% senior notes and $75 million of other miscellaneous debt.
Net leverage based on our credit agreement EBITDA dropped to 3.02 times at the end of the first quarter.
This is down from 3.48 times at the end of the year and 4.76 times at the end of the first quarter last year.
Operating activities provided $239.9 million of cash flow in the first quarter.
This compares to $44.1 million in the same quarter last year.
Our day sales outstanding, or DSO, was 56 days at the end of March.
This compares to 56 days at the end of December of 2020 and 53 days at March 31 of 2020.
Investing activities used $52.6 million of cash in the first quarter.
The use of cash included $39.7 million -- $39.7 million in the purchase of property and equipment and $12.9 million in acquisition and investment activities in the first quarter.
Financing activities used $14.1 million of cash in the first quarter.
This includes $13.7 million in payments and distributions to noncontrolling interest of $400,000 in net repayments of other debts in the quarter.
Our total available liquidity at the end of the first quarter was $1.25 billion, which includes $75 million of cash and close to $500 million in revolver availability under the Select and Concentra credit agreements.
For the full-year 2021, we now expect revenue in the range of $5.7 billion to $5.9 billion, expected adjusted EBITDA to be in the range of $870 million to $900 million and expected earnings per common share to be in the range of $2.41 to $2.58.
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sees fy earnings per share $2.41 to $2.58.
q1 adjusted earnings per share $0.82.
sees fy revenue $5.7 billion to $5.9 billion.
q1 revenue rose 9.3 percent to $1.547 billion.
q1 earnings per share $0.82.
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We appreciate you participating in our conference call today to discuss Flowserve's First Quarter 2021 Financial Results.
These statements are based upon forecasts, expectations and other information available to management as of May 4, 2021, and they involve risks and uncertainties, many of which are beyond the company's control.
We are pleased with our strong start to 2021.
Flowserve's adjusted earnings per share of $0.28 increased over 47% compared to last year's first quarter.
And our bookings for the first three months of 2021 were up by over 16% compared to the average of last year's final three quarters.
We were especially encouraged with this performance given that our first quarter results are traditionally lower.
Given what we saw in the first quarter, we believe that we are off to a strong start in 2021.
In the last two earnings calls, we indicated that we believe our end markets are well positioned for a post-pandemic recovery, and our first quarter results support this belief.
Although the various regions and countries we serve are on different trajectories in terms of vaccinations, infection rates, return to mobility and overall economic recovery, we are confident that the world is making steady progress as economies emerge from this global pandemic.
As a result, we have started to see these green shoots of activity translate into sequential bookings growth.
Assuming vaccines continue to roll out globally, and COVID issues subside without new setbacks, we are confident in our ability to deliver substantial year-over-year bookings growth in 2021.
With an improving environment, combined with our Flowserve 2.0 growth initiatives, we were encouraged to book $945 million in the first quarter, which represented over 15% growth sequentially and was driven primarily by increased MRO and aftermarket activity.
As we move through the quarter, our bookings by month tracked the overall pandemic progress.
January was slow, February improved but was impacted by severe cold weather in the Gulf Coast and March activity steadily increased.
In total, our bookings growth this quarter exceeded our original expectations.
The market inflection seems to have begun a quarter or two earlier than we had anticipated.
While North America led the increased activity levels, we delivered sequential bookings growth in all of our served regions.
In addition to increased aftermarket and MRO-related activity, we were pleased that project bookings levels approached approximately 85% of 2020's first quarter.
We saw a number of smaller projects get awarded with the largest of these in the $10 million to $15 million range.
We also experienced good diversity in our end markets and geographic regions, which highlights the comprehensive nature of our reach and offering.
These projects included a nuclear upgrade in Korea, a pipeline in Central America, a refinery in Mexico and a chemical plant in Asia.
The impact of the February winter storms forced us to close our Texas and Louisiana operations for about a week.
But we did see increased repair and replacement work in the storm's aftermath which drove an estimated $20 million of incremental repair in replacement business as we supported more than 30 customer installations in the region.
Flowserve's QRC footprint and our proximity to impacted customers uniquely positioned us to assist them in getting back online quickly and efficiently.
In addition, our channel partners and distributors also received unplanned storm-related business from a variety of end markets, including water and power, that should benefit us in future periods as they reorder and restore their inventory positions.
Despite damage and power outages to their own homes, our associates were committed to providing the necessary equipment and services to support our customer base and restore their critical operations.
We are confident that helping our customers in a time of need will result in stronger relationships and increased future business for Flowserve.
There is still work to be done at some of our customers' facilities to restore their operations to normal conditions.
We anticipate additional bookings at about the same level as we saw in February and March to continue throughout the second quarter related to the storm impact.
Turning now to our end markets and booking outlook.
Our discussions with customers indicate increasing optimism.
Rising utilization levels across industrial assets should result in an increase in their spending levels to maintain uptime and address pent-up maintenance activity that was deferred throughout 2020.
We continue to believe that the aftermarket and MRO will lead the early phases of the recovery throughout the year.
Project activity is also beginning to pick up and we expect this to increase as the year progresses.
Currently, our project funnel is about 12% higher than a year ago, and the compare period includes many of the projects that were placed on hold due to the pandemic.
We expect many of these delayed projects to progress toward funding in the coming quarters.
Opportunities are apparent across all end markets, but we expect general industry in chemical projects to lead the return to growth in a recovering economic environment.
In conclusion, it was a strong start to the year, both at our bookings and financial results.
We believe our end markets remain well positioned to benefit from the recovering economic environment.
While we expect to see COVID flare-ups in some regions, like what we're seeing in India today, we are optimistic that with increasing vaccinations, the world is beginning to move in the right direction, which will ultimately help support our ability to deliver bookings growth.
We are very pleased with our financial results in the first quarter.
Our adjusted earnings per share was up significantly compared to last year, and the margins we delivered in our SG&A levels continue to reflect the benefit of the decisive cost actions we took in 2020 and the ongoing Flowserve 2.0 transformation program.
For the first quarter, we delivered solid results, including an adjusted earnings per share of $0.28, which represents an increase of nearly 50% versus prior year.
On a reported basis, earnings per share of $0.11 included $0.08 of realignment, $0.04 of costs related to early retirement of debt and $0.05 of below-the-line FX currency impact.
As a reminder, with our focus on improving the quality of our earnings, we are now including 2021 transformation costs in our adjusted earnings in contrast to prior years when this expense was adjusted out.
First quarter revenue of $857 million was down 4.1% versus the prior year primarily driven by the 10% sales decline in original equipment, including FPD's 15% original equipment decrease.
We were pleased to see modest aftermarket sales growth as revenue of $450 million increased 2%, with both FPD and FCD contributing.
Our first quarter performance was largely driven by the significant cost actions we took in the middle of 2020 as well as ongoing transformation-driven operational improvements and a 400 basis point mix shift toward higher-margin aftermarket revenue, partially offset by increased under-absorption.
Adjusted gross margin of 30.4% was roughly flat versus prior year and the sequential quarter, driven by FPD's 60 basis point increase offset by FCD's 170 basis point decline, both as compared to 2020's first quarter.
On a reported basis, first quarter gross margin decreased 50 basis points to 29.3% due primarily to absorption headwinds and higher realignment costs versus the first quarter of 2020.
First quarter adjusted SG&A decreased $34 million to $194 million versus prior year and was largely flat on a sequential basis.
As a percent of sales, first quarter adjusted SG&A declined 290 basis points year-over-year.
The decisive cost actions we took in mid-2020 and our ongoing focus on cost control drove the improvement.
Reported SG&A decreased $47 million versus prior year, where in addition to cost action benefits, adjusted items were down $13 million compared to the first quarter of 2020.
We delivered a $20 million increase in adjusted operating income in the first quarter, a strong performance considering the $36 million decrease in revenue.
As a result, adjusted operating margin improved 250 basis points versus last year to 8.1%, driven by the previously mentioned cost actions, ongoing operational progress and the mix shift to higher-margin aftermarket products and services.
FPD and FCD improved 230 and 60 basis points to 10.3% and 10.4%, respectively.
First quarter reported operating margin increased 380 basis points year-over-year to 6.5%, including the roughly $12 million reduction of adjusted items.
Our first quarter adjusted tax rate of 23.2% is in line with our full year guidance of 22% to 24%.
Turning now to cash and liquidity.
Our first quarter cash balance of $659 million decreased $436 million compared to the year-end 2020 level.
The primary use of cash was for debt reduction, with the $407 million payment to retire the remaining portion of our euro notes.
Additionally, we returned over $30 million to shareholders through dividends and share repurchases.
Our ability to both pay down debt and return cash to shareholders underscores the strength of our balance sheet and our focus on value creation through capital allocation.
Total debt at quarter end was $1.3 billion compared to over $1.7 billion at year-end.
Compared to last year's first quarter, gross debt is down over $50 million, while the cash balance is up over $35 million.
Flowserve's quarter end liquidity position remained strong at over $1.4 billion, including $742 million of availability under our undrawn senior credit facility.
First quarter free cash flow was approximately $25 million.
And for the second year in a row and only the third time in the last 15 years, Flowserve delivered positive free cash flow in the first quarter.
This trend is an indication that our focus on cash management is delivering results.
As is typical, working capital was a use of cash in the first quarter of $40 million driven primarily by a reduction in accounts payable.
Inventory was also a use of $17 million, but I was pleased that our focus and improved processes to control inventory drove a 60% reduction versus last year's first quarter use.
Accounts receivable and contract liabilities were sources of working capital cash this quarter.
Taking a look at primary working capital as a percent of sales, we saw 110 basis point sequential increase to 29.6%, again, driven primarily by accounts payable and a lower top line.
Although our backlog increased over $30 million, we were pleased that inventory, when including contract assets and liabilities, decreased $4 million versus the fourth quarter of 2020.
As we continue to drive the integration and utilization of enterprisewide business planning systems across our operations and functions, we have direct line of sight on consistent improvement in our working capital metrics throughout the year.
And importantly, we remain confident in achieving free cash flow conversion in excess of 100% in 2021.
Turning now to our outlook for the remainder of 2021.
Based on our strong first quarter bookings and visibility into improving end markets, Flowserve increased and tightened our adjusted earnings per share guidance range for the full year to $1.40 to $1.60 per share and reaffirmed all other guidance metrics.
We now expect full year 2021 bookings to increase mid-single digits versus our prior outlook of low single digits.
And further expect the majority of this increase to occur in our aftermarket and shorter cycle MRO original equipment products where associated revenue may be recognized in 2021.
Based on the expected increase in short-cycle activity, we now expect the revenue decline in the 3% to 5% range versus our initial guide of down 4% to 7%.
The adjusted earnings per share target range continues to exclude expected realignment expenses of approximately $25 million as well as below-the-line foreign currency effects and the impact of potential other discrete items which may occur during the year.
On a quarterly basis, we expect our adjusted earnings per share to increase sequentially over the course of 2021 as we see the benefit of our first quarter bookings flow through and from the expected increase in short-cycle activity.
With our Flowserve 2.0 transformation program and its elements now embedded in our operations and functional teams, we expect 2021 transformation expenses of roughly $10 million, representing a decline of over 50% versus the prior year.
As previously mentioned, we are now including these costs in our adjusted earnings per share guidance.
Additional guidance components remain unchanged with expected net interest expense in the range of $55 million to $60 million and an adjusted tax rate between 22% and 24%.
Lastly, looking at cash.
As is historically the case, we expect free cash flow will be weighted to the second half of the year, largely in the fourth quarter.
Major planned cash usages this year include the recently completed retirement of our euro notes and an expectations to return over $100 million to shareholders through dividends and share repurchases.
We also intend to invest in our business as we return to the growth aspects of our Flowserve 2.0 program, including capital expenditures in the $70 million to $80 million range which includes spending for enterprisewide IT systems to further consolidate our ERP platform and support our transformation-driven productivity improvements.
In conclusion, based on our first quarter performance, we are more optimistic than ever about the opportunities in 2021.
Our end markets are likely improving at a rapid pace.
Our balance sheet remains strong and our operational and cost discipline has us well positioned for margin expansion and free cash flow generation as revenues grow.
I want to wrap up today with some comments around two key strategic priorities.
Our ongoing Flowserve 2.0 transformation and how Flowserve will support energy transition.
Let me first provide an update on our Flowserve 2.0 transformation progress.
In 2020, the pandemic-driven downturn dictated that we focus heavily on cost reduction.
We shifted our efforts and accelerated the cost reduction aspects of the transformation last year.
Additionally, we continue to progress our strategy to improve our overall enterprisewide IT systems.
These improvements in the overall rationalization are improving our visibility, streamlining our operations and improving our overall productivity.
All of these enhancements support the new Flowserve 2.0 operating model.
As our new operating model takes hold throughout the enterprise, we expect to continue to deliver margin and productivity improvements throughout the business.
As we look to fully embed the transformation into our operations by the end of 2021, I am confident that our Flowserve 2.0 process improvements will continue to provide benefit to Flowserve and our customers for years to come.
All of the fundamentals are now in place to fully leverage the expected market recovery.
During 2021, our transformation priorities are focused primarily on growth, including an improved customer experience, accelerated product innovation and further market penetration.
With our strengthened operating model, we are also better positioned to pursue value-added partnerships, and we are more confident in our ability to integrate potential acquisitions.
An important aspect of Flowserve's strategy in the coming years will be driven by the expected growth investment related to energy transition.
The energy transition theme is real, and we expect investments to rapidly increase in the near-term to support this global call to action.
We believe Flowserve is well positioned with our current portfolio to benefit from increased spending from our customers to achieve their carbon reduction targets and energy efficiency goals.
Energy transition has been at play for much of the last two decades.
However, 2020 served as a pivotal year, and began first with COVID, been an acceleration of investments in alternative sources of energy and further driven by social, political and regulatory changes.
These multifactor dynamics are accelerating the transition, resulting in increased urgency across the industrial sector and especially within the energy sector.
Our approach to energy transition includes: first, supporting our existing customers and markets by delivering energy efficiency through systems, automation, uptime and a life cycle view plan.
Second, we are scaling our flow control solutions for emerging and new value chains in gasification, carbon capture, hydrogen, energy storage, and non-fossil fuel energy sources.
And finally, by evolving flow control into autonomous flow using data and science to monitor, diagnose and correct through built-in intelligence, utilizing our recently launched RedRaven platform.
As part of our first quarter bookings, we participated in projects related to biodiesel, concentrate solar power, carbon capture and energy efficiency.
And we believe that this is just the beginning.
As an example, in the third quarter of 2020, we introduced a new liquid ring compressor designed specifically for flare gas and other vapor recovery.
This product positions us to support our customers' greenhouse gas emission-reduction goals through the production of blue hydrogen in carbon capture.
Since introduction, we have already received over $30 million of orders for the product, and we see growing demand for years to come.
The more conversations I have with our customers about their energy transition plans, the more excited I get about the opportunities that energy transition can offer Flowserve.
We are making good progress on developing our go-to-market strategy, and we are currently working closely with a few select customers to demonstrate and prove how our suite of capabilities can help them to drive efficiency and reduce emissions.
In addition to our current customers, we also believe energy transition will provide opportunities across the industrial spectrum, including end markets where we currently have limited scale, like water, food and beverage, cement, steel and mining.
We expect the largest near-term opportunities for Flowserve will be helping our existing customers achieve improved energy efficiency and reduced emissions.
We believe that our flow control expertise across pumps, valves and seals, combined with enhanced data analytics, can dramatically improve our customers' energy consumption and reduce carbon emissions.
We are also actively developing technology to expand our presence in other forms of energy, including solar, hydrogen and lithium mining and processing.
Overall, we feel that Flowserve is uniquely positioned to help our customers today and grow our business through the energy transition.
In January, we launched our RedRaven IoT offering, which can further instrument pumps, valves and seals to provide the capability to assist our customers with a data-driven approach on how to improve their operations, increase asset uptime and reduce associated energy consumption.
We are really pleased with the market's response to our IoT offering.
Since the rollout of RedRaven, we have been awarded, on average, one new contract or site installation per week and the pipeline of interesting parties continues to build.
The first quarter provided us a better start to the year than we previously expected, with bookings inflecting earlier and at a higher level than we initially assumed in our February guidance.
With an improved outlook for the remainder of the year, we feel confident in our ability to raise our adjusted earnings per share guidance.
We have improved visibility to market growth and are confident in our ability to execute.
We believe we are firmly in recovery from the pandemic-driven downturn.
Additionally, many countries around the world are announcing significant infrastructure spending plans that will inevitably include flow control equipment.
And finally, we are confident in our longer-term outlook and see energy transition as a significant growth opportunity for Flowserve.
After three years of hard work on our Flowserve 2.0 transformation program, we are now operating at a higher level and we are well positioned to transition to growth.
I am confident that we'll capitalize on the opportunities ahead of us and create value for our shareholders and other stakeholders.
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flowserve q1 adjusted earnings per share $0.28.
q1 adjusted earnings per share $0.28.
q1 earnings per share $0.11.
raised full-year 2021 revenue and adjusted earnings per share guidance, reaffirmed all other metrics.
sees 2021 adjusted earnings per share $1.40 - $1.60.
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These factors are detailed in the company's financial reports.
You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data.
Our core performance measures are non-GAAP measures used by management to analyze the business.
For the fourth quarter, the largest difference between our GAAP and core results stems from restructuring charges which are primarily noncash as well as noncash mark-to-market losses associated with the company's currency hedging contracts.
With respect to mark-to-market adjustments, GAAP accounting requires earnings translation, hedge contracts, and foreign debt settling in future periods to be mark-to-market and recorded at the current value at the end of each quarter, even though these contracts will not be settled in the current quarter.
For us, this reduced GAAP earnings in Q4 by $63 million.
To be clear, this mark-to-market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth, and our future shareholder distributions.
Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty it provides.
We've received one $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
A reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com.
You may also access core results on our website with downloadable financials in the interactive analyst center.
Today, we reported an outstanding finish to the year.
Each of our segments grew sales and profits year over year and we continue to progress our strategic initiatives.
For the fourth quarter, sales were $3.3 billion, up 11% sequentially, and 17% year over year.
Our operating margin expanded 500 basis points year over year to 19.4%.
Operating income grew 18% sequentially and 58% year over year.
EPS of $0.52 cents was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the fourth quarter, $948 million for the full year, and we finished the year with $2.7 billion in cash on our balance sheet.
It goes without saying, 2020 was an incredibly difficult year.
We joined the rest of the world to confront the pandemic, economic uncertainty, and social unrest.
Throughout the year, we focused on our customers and executed on strategic priorities while protecting our people.
For more perspective on our performance, I'll share three observations: first, we demonstrated our ability to adapt rapidly and remain resilient in the face of uncertainty; second, our more Corning content strategy clearly contributed to our growth and our performance against our end markets; and finally, throughout this difficult period, we're embracing the opportunity to make a difference wherever we are with what we had to contribute.
Now, I'll expand on my first observation.
Our decisive actions and strong operational execution have resulted in continued leadership in the capabilities that make Corning distinctive.
Like many companies, we focused on bolstering our financial strength, reducing production levels and operating costs, carefully managing inventory, reducing capital expenditures, and pausing share buybacks.
However, it's not about what we cut but what we kept.
While we adjusted production, we didn't reduce capacity keeping us positioned to meet increasing demand when the economy improved.
We continued to make strategic investments and advance major innovations with our customers to capture the growth playing out across our market-access platforms.
And we developed multifaceted programs to protect our talent and preserve our capabilities.
Our first-half actions generated significant cost savings in the second half of the year.
And as the economy started showing signs of green shoots, we effectively adjusted our operations, keeping pace as demand started to recover in many of the markets we serve.
Our results tell the story.
Our sales were down 12% in the first half as most economies were impacted by pandemic-related lockdowns.
But in the second half, we improved sales 24% over the first, while growing operating income, 122%, returning to year-over-year growth and generating very strong free cash flow.
For the year, we generated almost $1 billion of free cash flow and our balance sheet remains very strong.
We expect this strong momentum to continue heading into 2021.
We will continue to adapt and focus on execution as we have proven that our approach is working.
Turning to my second observation.
In all the industries we serve, important market trends continue to offer new challenges that Corning is just uniquely qualified to address and new opportunities to integrate more Corning content into our customers' products.
In this difficult year, we have proven that this is an especially powerful value creation letter.
We aren't relying exclusively on people buying more stuff, we're putting more Corning into the products that people are already buying.
In the fourth quarter, this strategy paid off as we grew sales year over year in every one of our businesses.
At the top were specialty materials with sales up 20% year over year, and environmental technologies up 19% year over year, both significantly outperforming their end markets.
Last quarter, I described our innovations in mobile consumer electronics.
Looking at how we're investing to create additional revenue streams and capture content opportunities.
Today, our focus on our automotive market access platform.
The auto industry is undergoing major disruptions.
Automakers are designing cleaner and safer vehicles while featuring technology that provides immersive experiences were uniquely suited to address these trends.
And for us, the opportunities are large.
In the range of $100 per car in Corning content, we're collaborating with more OEMs and we're offering more solutions to help move the industry forward.
Let's look at two of our biggest successes right now starting with our automotive glass solutions business.
We're building strong momentum.
Our advantaged solutions are enabling the very rapid shift toward in-vehicle displays that are interactive, that are integrated, and shaped.
We're collaborating with industry leaders across the auto ecosystem, including Visteon, LGE, BOE, and VIA Optronics to accelerate the adoption of our patented 3D ColdForm technology which enables lower-cost-shaped auto interiors.
Our large-scale facility in Hefei, China is now fully operational and servicing our growing demand.
And we continue to see strong adoption of our technology by auto OEMs. Our recent proof point is the new Mercedes-Benz Hyperscreen dashboard display, which features a Gorilla Glass cover nearly 5 feet wide.
Similarly, in environmental technologies, in a year when a global pandemic temporarily shut down OEM production, our proprietary gasoline particulate filter business still grew sales year over year.
When we introduced GPF, we said our technology increased our content opportunity per car by three to four times.
Like most of our innovations, it started with the customer challenge.
Europe and China are addressing fine particular pollution with new emissions regulations.
We applied our expertise in ceramic science with our advanced manufacturing capabilities and extrusion to rapidly develop filters that efficiently trap ion particulates.
And today, we're effectively helping automakers reduce these harmful emissions, meet new regulations, and produce some of the cleanest gasoline vehicles you can buy.
Demand for our GPF has grown quickly.
And with our market-leading product, we continue to win the majority of platforms awarded to date.
We're well on our way to building a $0.5 billion business.
We're actually ahead of schedule, and the content opportunity continues to grow.
We expect our GPF technology to migrate beyond Europe and China as other regions focus on improving air quality.
And many new car models will soon be required to get even closer to near-zero particulate emissions.
In response, we recently introduced our next-generation GPF, featuring enhanced filtration capabilities.
They're launching in upcoming models as automakers prepare for the next wave of regulations.
Across our markets, we see a similar content story playing out as we respond to key industry challenges with more Corning solutions.
Let me share some other accomplishments across our market-access platforms.
In life sciences, pandemic-related demand has highlighted our strength in the industry.
And we achieved major milestones toward building a significant Valor Glass franchise in 2020.
At the start of the year, we entered a long-term supply agreement to provide Valor Glass vials for a portion of the currently marketed Pfizer drug products.
Soon after, we were awarded $204 million in funding from the U.S. government to substantially expand domestic manufacturing capacity for Valor vials.
Today, we're supplying Valor Glass to several leading COVID vaccine manufacturers.
We produce millions of Valor vials and shipped enough for more than 100 million doses, supporting multiple vaccine developers.
In our life sciences segment, the global health fight is driving strong demand for our consumable products.
We're supporting the development of treatments in vaccines, as well as mass testing efforts.
We received $15 million from the U.S. government to expand domestic capacity for robotic pipette tips which are used for COVID diagnostic testing.
BioNTech recently recognized our contribution to their successful COVID vaccine development.
Turning to mobile consumer electronics.
We launched the toughest Gorilla Glass yet, Victus.
And it's already featured on six Samsung devices.
Corning also invented the world's first transparent color-free glass-ceramic which is featured on the front cover of the latest iPhone.
Apple and Corning partnered to develop and scale the manufacturing of Ceramic Shield.
It offers unparalleled durability and toughness.
I noted that specialty materials sales were up 20% year over year in Quarter 4.
They were up 18% for the full year in a smartphone market that declined 7%.
In optical communications, we returned to growth and we expect this growth to continue as customers increase spending to support growing bandwidth requirements.
In 2020, we introduced new and innovative solutions that help speed the deployment of 5G.
We launched our outdoor 5G-ready connectivity solutions, featuring compact easy-to-install terminals that can be deployed in any conceivable architecture.
Operators can actually save up to $500 per terminal location, dramatically lowering installation cost and speeding up deployment.
We're also collaborating with Verizon to enable 5G millimeter-wave indoor deployments for their enterprise customers.
We're also working with Qualcomm Technologies to deliver indoor networks that are 5G ready, easy-to-install, and affordable.
And we're collaborating with EnerSys to simplify the delivery of fiber and electrical power to small-cell wireless sites.
Retail demand for TV and IT products remains strong.
Demand for large-sized TVs continues to grow.
75-inch sets were up more than 60% for the full year.
Large TVs are most efficiently made on Gen 10.5 plants.
Corning is well-positioned to capture that growth with its Gen 10.5 plants in China including the two newest Gen 10.5 facilities in Wuhan and Guangzhou, which are now expanding production to meet customer demand.
Ramping these sites has been no small feat in the midst of a pandemic.
We are very proud of our innovative and dedicated expert engineering teams that rose to a host of unprecedented challenges to start-up tanks in both facilities.
Looking ahead, Corning's long-term growth drivers and content opportunities are strong in each of our markets.
And we believe some secular trends could accelerate as consumer lifestyles continue to change in the aftermath of the health crisis.
And that leads to my third observation.
We're living through the kind of moment that tends to bring true character to light.
At Corning, our values are evident in our actions.
We've unleashed our capabilities to help combat the virus.
And we're proud to be creating life-changing technologies that contribute to keeping people safe and help society address the challenges of the pandemic.
We also recognize, in these unprecedented times, that we have the opportunity to share resources and leadership on a range of important issues.
We've launched racial and social quality programs, and our Unity Campaign supports vital human services and emergency relief in our communities around the world.
In conclusion, on all fronts, Corning is executing well.
We're delivering outstanding results and making important progress across our strategic priorities.
I am confident that we are entering the year with solid momentum and we expect to grow in 2021.
Our more Corning strategy will continue to drive outperformance across the diverse industries that we serve.
We're not just counting on consumers buying more cars, TVs, or smartphones to grow.
And I'm excited about how we're bringing our capabilities to bear in optical and life sciences, as operators expand their networks and we continue to support vital drug and vaccine development.
We feel good about our fourth-quarter results.
On a year-over-year basis, we grew sales and earnings.
We expect to grow again in the first quarter, and we expect to grow for the full year, driven by improving markets and our more Corning strategy.
We are building a bigger, stronger company that delivers sustainable results while remaining agile in our ability to respond to changing market factors.
Now let me walk you through our fourth-quarter performance.
In the fourth quarter, we grew sales 11% sequentially and 17% year over year to $3.3 billion, exceeding expectations.
Excluding the consolidation of Hemlock Semiconductor, sales grew 11% year over year, with every segment growing sales and net income.
Specialty materials and environmental technologies deli -- delivered particularly strong year-over-year sales growth, up 20% and 19%, respectively, both outperforming their underlying markets.
Optical communications returned to year-over-year growth, and we expect that growth to continue.
Our operating margin was 19.4%.
That is an improvement of 500 basis points on a year-over-year basis.
We grew operating income 18% sequentially and 58% year over year.
EPS of $0.52 was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the quarter.
Cumulative free cash flow for the full year was $948 million.
We ended the year with a cash balance of $2.7 billion.
We entered 2021 in an excellent financial position.
Now let's review the business segments.
In display technologies, fourth-quarter sales were $841 million, up 2% sequentially and 6% year over year.
And net income was $217 million, up 11% sequentially and 21% year over year.
Retail demand for TV and IT products remain strong remained strong during the promotional season in Q4.
Display's full-year sales were $3.2 billion, and net income was $717 million.
Our full-year price declines in 2020 were mid-single-digits.
The glass market and our glass volume were up mid-single-digits for the year.
The retail market was more robust than the industry -- than the industry expected, resulting in panel supply being tight for the second half of 2020.
Panel makers ran at high utilizations and the industry drew down inventory to satisfy demand.
These dynamics also resulted in glass supply being tight, and more recently in shortage due to a power outage at a competitor's glass plant.
Now let's look at 2021.
We expect the TV and IT retail markets to remain strong.
We remain confident that large-size TVs will continue to grow, and we are well-positioned to capture that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing.
We expect the glass market to grow a mid-single-digit percentage in 2021.
We expect glass supply to remain tight in the upcoming quarters.
As a result of these supply/demand dynamics, we are experiencing a very favorable pricing environment.
We expect Q1 2021 glass prices to be flat with Q4 2020.
This is significantly better than the sequential declines we've seen in any other first quarter over the last decade.
Glass prices for some customers in some gen sizes may actually see a sequential increase.
We believe the following three factors will continue to drive the favorable pricing environment for the upcoming quarters: first, we expect glass supply to continue to be tight; second, our competitors continue to face profitability challenges at current pricing levels; and third, display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Glass prices must support acceptable returns on these investments.
In optical communications, fourth-quarter sales were $976 million, up 8% year over year and 7% sequentially.
Our year-over-year growth can be attributed to broad improvements in demand for both carrier and enterprise customers.
Fourth-quarter core net income of $141 million was up 127% year over year, and 23% sequentially.
The improvement was driven by the incremental volume and favorable cost performance.
We have returned to growth in optical communications, and we expect that growth to continue.
Bandwidth demand is increasing and users are demanding higher performance connections.
We're seeing positive statements from customers on increasing investments in their optical networks.
Our sales and order rates are picking up, and we're ready to capture demand as it materializes.
We are confident we will grow sales in optical communications for the year.
We continue to monitor and evaluate market demand signals to determine the magnitude of growth, and we'll keep -- we'll continue to keep you updated as we go through the year.
In environmental technologies, fourth-quarter sales were $445 million, up 19% year over year and 17% sequentially, ahead of expectations as markets continue to improve and GPF adoptions continued in China.
Net income was $93 million, up 45% year over year and 35% sequentially, driven by strong operational performance globally and successful ramping of additional GPF capacity in China.
For the full year, sales were $1.4 billion and our performance was better than the underlying market.
Net income was $197 million.
While our full-year 2020 sales were certainly impacted by COVID-19, we are recovering faster than the market by increasing our content for both the automotive and diesel end markets.
Despite severely -- severely challenged markets we saw year overgrowth in GPF sales.
Strong GPF adoption continues in Europe and in China, where the China 6a regulation is being implemented nationwide this month.
We are ahead of our original timeframe to build a $500 million GPF business.
Specialty materials had an outstanding fourth quarter and a full year.
Q4 sales of $545 million were up 20% year over year, full-year sales were $1.9 billion, up 18% year over year, despite a 7% decline in the smartphone market, driven by strong demand for our premium cover materials and our other innovations.
Net income was $423 million, up 40% from 2019 on higher sales volume and strong cost performance.
The importance of computing and connectivity were amplified during the pandemic.
Our new product innovations, including Ceramic Shield and Gorilla Glass Victus, as well as our EUV products in the semiconductor market were important contributors to our strong performance.
Now before I get to our life sciences results, I'd like to note something of great importance to us.
Throughout the pandemic, our life sciences market access platform has applied its broad capabilities and full product portfolio to help the world combat the pandemic.
From our traditionally research-focused consumables to our bioproduction products to our transport media and, of course, our Valor Glass, we're playing a vital role in the development and supply of test kits and vaccines.
Now, let's look at our segment results.
Life sciences fourth-quarter sales were $274 million, up 7% year over year and 23% sequentially, driven by strong demand for COVID-related products, including bioproduction products used in clinical trials.
Net income was $42 million, up 11% year over year and 50% sequentially.
In summary, we successfully navigated a very challenging year.
We strengthened our balance sheet, established growth in the second half, and generated a free cash flow of $948 million for the year.
As we look ahead, we have strong momentum coming into 2021 and expect year-over-year growth to accelerate in the first quarter.
Specifically, we expect core sales of $3.0 billion to $3.2 billion, compared to $2.5 billion in the first quarter last year, and earnings per share of $0.40 to $0.44, which is double last year's first-quarter earnings per share at the low end of the range.
For the full year, we expect growth in sales and earnings and we anticipate generating more free cash flow in 2021 than in 2020.
And we will share more with you as the year progresses.
Let's turn to our commitment to financial stewardship and prudent capital allocation.
Our fundamental approach remains the same.
We will continue to focus our portfolio and utilize our financial strength.
We generate very strong operating cash flow, and we expect that to continue going forward.
We will continue to use our cash to grow, extend our leadership, and reward shareholders.
Our first priority for our use of cash is to invest in our growth and extend our leadership.
We do this through RD&E investments, capital spending, and strategic M&A.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
In 2021, we expect capex similar to 2020, as we have the capacity in place to meet higher sales.
Now, we'll invest more if we require capacity to support additional growth, any additional capital investment would be supported by a customer commitment.
We'll keep you updated as we go throughout the year.
Given our expected strong free cash flow generation in 2021, we expect to increase our distributions to shareholders.
That includes reinstating opportunistic share repurchases sometime this year.
In closing, we're very pleased with our strong close to 2020, highlighted by growing sales and profitability.
We continue to focus on a rich set of opportunities.
Our businesses are fundamental to the long-term growth drivers in the industries they serve, and our more Corning strategy continues to deliver sales outperformance relative to our end markets.
And I look forward to sharing our progress as the year goes on.
With that, let's move to Q&A.
Operator, we're ready for the first question.
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corning sees q4 core earnings per share $0.50 to $0.55.
sees q4 core earnings per share $0.50 to $0.55.
corning - lower production levels in automotive industry due to chip shortage reduced sales by about $40 million and earnings per share by $0.02 in quarter.
for q4, corning expects core sales to be in range of $3.5 billion to $3.7 billion.
q4 profitability is expected to decline slightly on a sequential basis.
for full year, on pace to reach $14 billion in sales and over $2 in eps.
incurred additional costs that were elevated by inflation.
have price increases underway in all of our businesses.
in display technologies, third-quarter sales were $956 million, up 2% sequentially and 16% year over year.
in optical communications, third-quarter sales were $1.13 billion, up 5% sequentially and 24% year over year.
qtrly core earnings per share $ 0.56.
market for large-sized tvs is projected to grow at a double-digit compound annual growth rate through 2024.
expects glass pricing environment to remain favorable in q4 and in 2022.
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Nucor continues to deliver strong results in our safety performance as we work toward our goal of becoming the world's safest steel company.
Our performance in 2021 is slightly ahead of last year, which was the safest year in Nucor's history.
Our team is committed to identifying and eliminating those risks, which could lead to injury.
Our most important value is the safety, health and well being of our entire Nucor family.
During the third quarter, we once again achieved record results.
With earnings per share of $7.28, our third quarter performance surpasses our previous record of $5.04 set in the second quarter of this year and nearly matches our full year earnings record of $7.42 that we set back in 2018.
I'd like to congratulate the entire Nucor team for delivering the phenomenal results we have seen so far this year, while staying focused on our safety goals.
I'm incredibly proud of our team and what we are accomplishing together.
Since our founding 56 years ago, sustainability has been at the core of Nucor's business model.
More than ever before, we see opportunities to advance our continued success by partnering with customers to help them meet their own growth and sustainability objectives.
Our recent launch of Econiq, which is a new line of net zero carbon emission seal products, gives our customers confidence and the trust that the products that they're purchasing from Nucor will not only help them meet their sustainability goals, but provide a differentiated value proposition for them for the future.
Our use of recycled scrap-based EAF technology enables us to operate at 70% below the current GHG intensity for the global steel industry.
Econiq steel will further advance our leadership position by applying credits from 100% renewable electricity and high-quality carbon offsets to negate any remaining Scope one or two emissions from our steelmaking process.
We are delighted that General Motors will be the first customer for Econiq.
With our first shipment slated for early 2022, Econiq is going to be a key piece of GM's vision of a net zero emission future, as GM continues to work toward reducing carbon emissions throughout their supply chain and through electrification of their model lineups, and we also look forward to deploying Econiq more broadly to help customers from across numerous other steel-consuming end markets meet their goals and develop more sustainable products.
And while I'm on the topic of sustainability, our new Corporate Sustainability Report can be found on nucor.com, along with our first TCFD aligned report and updated SASB aligned report from our steel mills segment.
We hope you will find all this information informative and useful.
The third quarter was a very eventful one for Nucor strategically as we announced or closed on several investments that will help us continue to advance our company's mission to grow the core, expand beyond and live our culture.
We announced our plan to build a state-of-the-art sheet mill in the Midwest on September 20.
With three million tons of annual capacity, this mill will be located to serve the country's largest steel consuming regions, the Midwest and the Northeast.
These are regions where Nucor is currently underrepresented.
With coil width of up to 84 inches, a tandem cold mill and initially two galvanizing lines, the new sheet mill will position Nucor to grow its market share in value-added products from automotive, appliance, HVAC, heavy equipment, agricultural, transportation and construction applications.
The mill's product mix will be approximately 2/3 cold rolled and galv.
The U.S. steel market is undergoing a structural transformation driven by the dual imperatives of economic efficiency and sustainability.
Our mill will be state-of-the-art and have a significantly lower carbon footprint than nearby competitors.
With our financial strength and multi-decade track record of innovation and execution, Nucor is uniquely positioned to continue leading this acceleration steel market transformation.
Our investment in this greenfield sheet mill represents a continuation of Nucor's balanced approach to capital allocation, investing in projects and acquisitions expected to generate returns that substantially exceed our cost of capital, while also continuing to return at least 40% of our net income to stockholders through a combination of dividends and share repurchases.
Also we recently announced our plans to expand out West.
We will build a new melt shop at one of our existing bar mills in the Western United States.
This facility will have the capacity of 600,000 tons annually.
Adding melt capacity positions Nucor to build on our market leadership position in the region, which is experiencing both population growth and the infrastructure investment that typically accompanies it.
Our bar mill group is where our steelmaking started over 50 years ago, and it continues to generate very attractive returns on capital.
In addition to prudently investing to grow our core steel businesses, we are executing on our opportunities to expand beyond.
During the quarter, we acquired Cornerstone's insulated metal panels business as well as Hannibal Industries, a steel racking manufacturer.
We are now able to offer a broad range of insulated metal panel products and racking solutions.
Each of these businesses is aimed squarely at serving fast-growing markets such as warehouses and data centers.
Our strategic investments will continue to be aimed at positioning Nucor to serve attractive growing end use markets as the economy evolves to rely more on renewable power and Internet-based services.
As you can see, we are adding capabilities to increase our presence in attractive markets and extend our company's long record of growth and value creation.
Nucor is positioned to provide the sustainable steel and steel products needed to build the 21st century green economy.
A key requirement of that economy is modern, resilient and sustainable infrastructure.
Republicans and Democrats agree that the bipartisan infrastructure bill is urgently needed, and we hope Congress can find a path forward to get this bill passed in order to ensure the safety of our citizens, the health of our economy and future opportunities for American workers.
We cannot afford to have Congress miss this opportunity.
You all should be very proud of the safety and financial results achieved in the first nine months of the year.
We can only benefit from these strong market conditions if our facilities are running safely, responsibly and reliably.
Nucor will continue to invest in our future and provide our customers a differentiated value proposition, while offering the most diverse set of capabilities of any steelmaker.
And as we approach the end of the year, let's continue to make 2021 our safest and most profitable year in Nucor's history.
Now Jim Frias will provide more details about our performance in the third quarter.
We are proud to report our third quarter of 2021 earnings of $7.28 per diluted share, establishing a new quarterly earnings record.
This quarter's results also compare favorably with year-ago third quarter earnings of $0.63 per diluted share.
We are benefiting from strong demand and profitability across Nucor's diverse portfolio of products and capabilities.
Nucor's product breadth continues to be a powerful driver of value creation for both Nucor customers and shareholders.
Due to higher-than-expected inventory profit eliminations, third quarter earnings were slightly below our guidance range of $7.30 to $7.40 per diluted share.
Year-to-date earnings of $15.34 per diluted share are more than double 2018's record annual earnings of $7.42 per diluted share.
We are extremely proud of our team's strong performance during the current up cycle and through all the pandemic-related challenges we have experienced this year and last.
Our confidence in Nucor's competitive positioning has never been greater, as we look to execute on further opportunities in the months and years ahead.
Our results reflect strong returns from consistent reinvestment in our operations over the years and outstanding execution by our team by significant organic growth investment projects, representing approximately $1 billion in aggregate capital investment, completed start-up and full product commissioning over the 2019 to 2020 period.
The rolling mill and modernization at our Marion, Ohio rebar mill, the hot band galvanizing line at our Kentucky sheet mill, the specialty cold rolling mill at our Arkansas sheet mill, the rebar micro mill in Missouri and the rebar micro mill in Florida, each of these projects are delivering life-to-date profitability well above their original projections.
During this past quarter, these projects together generated EBITDA exceeding $180 million.
The two completed sheet mill capability expansion projects merit additional comments.
Just two years after beginning operations in September of 2019, the Gallatin, Kentucky hot band galvanizing lines cumulative EBITDA exceeds the project's $200 million investment.
At 72 inches wide, this line is the widest hot rolling galvanizing line in North America and is uniquely positioned to serve value-added markets, such as automotive, solar tubing, grain storage, culverts and cooling towers.
The facility ran at 112% of design capacity in the third quarter of 2021.
Next, the Hickman, Arkansas specialty cold mill continues to be another great success story.
After beginning operations in mid-2019, the specialty cold mill's cumulative EBITDA already exceeds half of the project's capital investment.
This facility also ran at 112% of rated capacity in the third quarter of 2021.
Further, our specialty cold mill team is still very early in the process of developing unique product capabilities and applications, leveraging Hickman's flexible cold rolling mill to produce the high-strength, lightweight products that are increasingly demanded by OEM customers.
As most of you are aware, two more major capital projects also totaling approximately $1 billion are on schedule to begin start-up during the fourth quarter.
These investments will expand further Nucor's product capabilities into the sheet market.
They are the expansion and modernization of the Gallatin sheet mill's hot band production capability and the Generation three flexible galvanizing line at the Hickman sheet mill.
Gallatin would begin a 25-day production outage on November 23 for final equipment installation.
After the outage, start-up and commissioning will commence.
At Hickman, commissioning of the flexible galvanizing line is underway, with prime production expected in December.
Looking into 2022, our team constructing the $1.7 billion Brandenburg, Kentucky state-of-the-art plate mill is on track for start-up late next year.
Project-to-date capital spending totaled about $570 million.
Located in the middle of the largest U.S. plate-consuming region and able to produce 97% of plate products consumed domestically, this mill positions Nucor to support domestic production of wind towers, while securing a market leadership position in plate.
Turning to cash flow and the balance sheet.
Cash provided by operating activities for the first nine months of 2021 was approximately $3.6 billion.
Nucor's free cash flow, or cash provided by operations minus capital spending of $1.2 billion, was about $2.4 billion.
For full year 2021, we now estimate capital spending of approximately $1.7 billion.
At the close of the third quarter, our cash, short-term investments and restricted cash holdings totaled $2.3 billion.
This is a decline of about $900 million from the second quarter level.
During the third quarter, Nucor funded significant uses of cash totaling approximately $3.6 billion, including acquisitions of $1.3 billion, capital spending of $505 million, share repurchases of $858 million and cash dividends of $120 million and a net working capital expansion on inventory, receivables, payables and accruals totaling $766 million.
These uses were funded primarily from Nucor's ongoing strong cash generated from operations.
The cash and short-term investments drawdown, plus the receipt of $197 million from the issuance of green bonds tied to the Brandenburg project.
At the close of the third quarter, total long-term debt, including current portion, was approximately $5.6 billion.
Gross debt as a percentage of total capital was approximately 29%, while net debt was about 17% of total capital.
Financial strength continues to be a critical underpinning of Nucor's ability to grow long-term earnings power and provide attractive cash returns to shareholders.
We remain committed to returning capital through cash dividends and share repurchases a minimum of 40% of our net income over time.
For the first nine months of 2021, cash returned to shareholders totaled $2.1 billion.
That represents approximately 47% of Nucor's net income for this period.
The year-to-date capital returns consisted of dividends of $367 million and almost $1.8 billion of share repurchases.
During the third quarter, we repurchased 8.2 million shares at an average cost of approximately $105 per share.
Year-to-date repurchases totaled 20.35 million shares at an average cost of just over $87 per share.
Over the first nine months of 2021, Nucor's shares outstanding have decreased by about 5.5%.
As we approach year-end, Nucor's Board will consider a dividend increase for 2022.
We have paid and increased our regular quarterly dividend every year since dividends were instituted in 1973.
We expect the Board's deliberations will consider both the effects of our recent repurchases and the sustainable earnings power we see in our businesses.
Since the end of 2017, Nucor's capital allocation framework has helped us achieve significant value creation for our investors.
Issued and outstanding shares have been reduced by more than 10%, moving from 318 million shares at the end of 2017 to approximately 286 million shares at the end of the third quarter.
Over that same period, we have grown our steel bar production capacity by about 13% to 9.6 million tons.
We have also added about one million tons of value-added processing capability to our sheet business.
Additionally, our steel products capacity has also grown by more than one million tons.
Today, we have significant projects under construction that will grow our sheet and plate capacity to more than four million and one million tons, respectively, further increasing our earnings power for decades to come.
We are having a remarkable year in 2021, but it should not be missed that Nucor's ability to generate higher earnings per share is continuing to grow.
Turning to the outlook for the fourth quarter of 2021.
We are encouraged by ongoing robust demand conditions in most of the end markets served by Nucor.
In fact, order backlogs at most of our businesses suggest strength well into 2022.
At the same time, customer inventories remain relatively lean.
Logistical challenges throughout the economy continue to represent a risk factor.
However, the moderating influence this is having on current demand may prolong the duration of this favorable economic cycle.
We believe earnings in the fourth quarter of 2021 are likely to be at or near the record level achieved in the third quarter.
Compared to third quarter, we expect earnings growth at our steel mills and steel products segments.
The raw materials segment's performance will be challenged by margin pressures in our DRI business.
We are encouraged by our first nine months of 2021 performance, and we see great opportunities in our future.
We are committed to delivering increasing long-term value for our shareholders.
Living our culture means driving performance.
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average scrap and scrap substitute cost per gross ton used in q3 of 2021 was $511, a 84% increase.
expect profitability of steel mills segment to improve in q4 of 2021 as compared to q3 of 2021.
expect continued strong results for q4 of 2021, potentially exceeding net earnings record set in q3 of 2021.
q3 earnings per share $7.28.
demand remains robust across most end-use markets, a trend we expect will continue well into 2022.
backlogs in our steel mills and steel products segments remain elevated compared to historical levels.
raw materials segment's earnings in q4 of 2021 are expected to decrease compared to q3 of 2021.
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As always, I'm available by email or phone for any follow-up questions you may have.
Joining me for today's call are Roger Penske, our Chairman and CEO; Shelley Hulgrave, our Chief Financial Officer; and Tony Facioni, our Vice President and Corporate Controller.
We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA.
I direct you to our SEC filings, including our Form 10-K for additional discussion and factors that could cause results to differ materially.
I'm pleased to report all-time record third quarter results for PAG, in the best quarter in the history of the company.
Our total revenue increased 9% to $6.5 billion and income from continuing operations before taxes increased 53% to $476 million and income from continuing operations increased 44%, the $355 million and related earnings per share increased 45% to $4.46.
Although unit sales were impacted by supply shortages in both our retail automotive and commercial truck dealership operations, earnings growth was driven by a 39% increase in retail automotive, 135% increase in commercial trucks variable gross profit per unit retailed, also 4% increase in retail automotive service and parts gross profit and a 230 basis point reduction in SG&A to gross profit and $15 million in lower interest costs coupled with an increase in commercial truck dealership EBT of 106% and an 83% increase in earnings from Penske Transportation Solutions.
This demonstrated the continued strength of our investment and the benefit provided by our diversified business model.
Looking at our retail automotive operations on a same store basis for Q3 '21 versus Q3 '20, units declined 8%.
However, revenue increased 7%.
Gross profit increased 18% including 180 basis point increase in our gross margin.
Our variable gross profit increased 39%, to $5,769 per unit compared to $4,152 last year.
Looking at CarShop, we now operate 22 locations and expect to open one additional location by the end of the year.
We recently added locations in Leighton Buzzard and Wolverhampton in the UK and our Scottsdale location opened this week.
During the quarter, CarShop unit sales increased approximately 1% to 18,451 units, revenue improved 24% to $438 million and gross profit per unit increased 12% to $2,668.
Our current annualized run rate is approximately 70,000 to 75,000 units representing revenue of $1.6 billion and an EBT between $45 million and $50 million.
Turning to the retail commercial truck dealership businesses, our Premier Truck Group represented 11% of our total revenue in the third quarter.
Retail revenue increased approximately 26%, including a 6% on a same store basis.
On a same store basis, retail gross profit increased 40%, including a 10% increase in service and parts.
Earnings before taxe is increased 106% to $48 million and the return on sales was 6.7%.
The Class 8 commercial truck market remains very strong and during the third quarter, North American Class 8 net orders increased 28% and the backlog increased to 179% to 279,000 units, representing a 13-month supply.
Based on the current industry forecast, retail sales are expected to increase over the next two years and provide tailwinds to our commercial truck and truck leasing businesses.
Turning to Penske Transportation Solutions, we own 28.9% of PTS which provides us with equity income, cash distribution and cash tax savings.
PTS currently operates the fleet to over 350,000 vehicles.
For the nine months ended September 30th, PTS generated $8.2 billion in revenue and $949 million in income or a 12% return on sales.
In Q3, PTS generated $2.9 billion in revenue and income of $409 million or a 14% return on sales.
As a result, our equity earnings in Q3 increased 83% to $118 million.
Our full service leasing and contract sales were up 8%.
Our commercial rental revenue was up 51% and our utilization hit 88% with an additional 14,000 units on rent.
Our consumer rental is up 27% and our logistics revenue increased 27%.
Our gain on sale of used trucks is up 140%, as a strong freight environment and a supply shortage of new trucks is certainly driving a demand for used vehicles.
Looking at the PAG balance sheet and cash flow.
The balance sheet remains in great shape.
At September 30th, we have $119 million in cash and we ended the third quarter with over $2 billion in liquidity.
When looking at our capital allocation, we maintain a disciplined approach that focuses on opportunistic investments across both our retail automotive and commercial truck businesses, capital expenditures to support growth including our first half growth strategy, delivering a strong dividend to our shareholders, reducing that whenever possible and share repurchases.
In fact, year-to-date, we have repurchased 2.5 million shares representing approximately 3% of the total shares outstanding.
Year-to-date we generated $1.3 billion in cash flow from operation.
We invested $157 million in capital expenditures, including $18 million to acquire land for future CarShop expansion.
Net capex was $84 million.
At the end of September, our long-term debt was $1.4 billion.
We have repaid $922 million of long-term debt since the end of 2019.
In addition, we have either repaid or refinanced our senior subordinated debt to lower rates while lengthening the term to take advantage of current market conditions, which has contributed to a $34 million reduction in interest expense so far this year.
These initiatives have lowered our debt to total capitalization to 27%, compared to 37% at December 31st and 45.6% at the end of 2019.
Our leverage ratio fits at 0.9 times, an improvement from 2.9 times at the end of 2019.
At the end of September, our total inventory was $2.6 billion, retail, automotive, inventory is $2 billion, which is down $937 million from December last year.
We have a 19-day supply of new vehicles.
Our day's supply of premium is 22 and volume foreign is 9.
We expect the current supply challenges coupled with strong demand to keep our new vehicle supply at low but manageable levels.
Used vehicle inventory is in good shape with a 40-day supply.
Moving onto our digital initiatives.
We continue to grow, expand and enhance our digital footprint including the introduction of new tools and technologies to offer our customers a hybrid customer-driven shopping model.
Depending on their preferences, customers can purchase either fully online, in-store or any combination of the two.
We will also deliver vehicles directly to a location desired by our customers.
As part of our omnichannel customer experience, we strive to be a leader and online reputation including online customer reviews and star ratings on Google.
Looking at our other digital tools, we retailed 2,550 vehicles or 4.3% of our U.S. unit sales and 14% of our customers use preferred purchase and their buying journey.
Using the Sytner by-on tool in the UK, a customer reserve a car for 99 pounds, apply for financing, receive insta credit approval, obtain a guarantee price and pay online.
During the quarter, we sold 3,700 units using this platform.
When you combine all of our digital tools, including new technology available at CarShop, a customer may perform any part of the transaction online or may use these tools to shorten or visit to the dealership.
Looking at corporate development, in addition to the 220 million of year-to-date share repurchases, we completed acquisitions totaling $600 million in annualized revenue through September 30th.
In October, we acquired the remaining 51% of our Japanese-based joint venture of premium luxury automotive brands, which will add $250 million in consolidated annual revenue and we have another $300 million in annualized revenue of deals in our pipeline that we expect to close either in the fourth quarter or early in 2022.
We also opened up a new Porsche dealership in Washington D.C. earlier this year and we have three other open points under construction.
We increased our CarShop locations by five and expect to open one additional location by the end of the year, bringing our total to 23 locations.
We remain on track with CarShop to retail 150,000 in unit sales and generate $2.5 billion to $3 billion in total revenue and our $100 million of EBT by the end of 2023.
As we look across our diverse portfolio of businesses, we continue to target organic and acquisition growth, as well as further operating efficiencies to continue to grow and expand our businesses.
Before I close, I'd like to congratulate the 35 U.S. dealerships that were named by automotive news to the 100 best dealerships that work for listing.
We had more dealerships on the list than any other automotive retailer, including six of the top 10, 12 of the top 25 in the 2021 ranking.
Our Audi of charge stores ranked number one in the country.
Additionally, seven PAG dealerships were ranked in the top 10 nationally, including the top three places for their efforts to promote diversity, equity and inclusion.
We're honored by these accomplishments and are extremely proud of our team for their commitment to drive the passion and the efforts in working together to be one of the very best.
I'm also pleased to announce the Penske Automotive Group was ranked first in the listing of U.S. public dealerships teams in the 2021 automotive reputation report published by reputation.com.
In closing, our business remains strong and our record performance demonstrates the benefit of our diversification.
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sees q1 sales $220 million to $240 million.
sees fy 2021 sales $940 million to $980 million.
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Titan definitely had a good quarter as our results exceeded expectations as we posted our strongest third quarter for revenue and profitability since 2013.
We had adjusted EBITDA of $35.1 million this quarter on sales that were up 48% to $450 million.
This quarter's adjusted EBITDA has been exceeded only twice in any quarter since 2014, and one of those occurred just last period when we posted $37 million of adjusted EBITDA.
We are now expecting to see our full year adjusted EBITDA coming in above $130 million, which is our highest annual total since 2013.
Our global team has been working very hard to produce these results and increase production levels to meet growing customer demand as we continue to drive forward to grow our production capabilities further in coming quarters.
So looking at our segments, Titan, again, this quarter experienced strong sales growth in each of our segments, with agriculture leading the way with a 60% increase compared to last year.
Our order books continue to strengthen, especially on the ag side, where commodity prices remained at good levels with corn above $5, soybean above $12 and cotton at record highs, thus ensuring another year of farmer incomes, strong farmer incomes for 2022.
Yes, I realize that commodity prices have dipped from their peak levels earlier this year.
And farmer sentiment has dipped as well.
But let's not get caught in the trees and miss the abundant forest around us.
Farmer incomes are still at high levels again this year.
There is pent-up demand sitting on order decks.
There is an aged large ag fleet.
There's historically low inventory levels at all our dealers, whether it's small ag, large ag or an aftermarket dealer and also throw into that equation that current sales levels in large ag are still well below historical average.
And do not forget that large ag is Titan's long-term sweet spot.
We believe this all adds up to a good tailwind for business that we see continuing throughout 2022.
So moving from Ag over to Earthmoving and Construction.
We have seen demand continue to be above our expectations that we had at the start of the year with sales growth of this quarter of 36% on a year-over-year basis.
Our EMC segment continues to look increasingly promising as we round the corner to next year just like Ag, our order books are strong, but we also see those infrastructure investments coming into place -- coming into many places.
And as we've stated before, we are a global business in our EMC segment and a large part of our business from that segment does come from our undercarriage division, ITM.
ITM is a business that has a good global footprint.
It has a strong OEM and aftermarket channel for distribution.
And then we have a market-leading and almost unique; I think, I'm pretty sure it's unique.
I'm going to use that word today.
A foundry in Spain, and I mean unique for our undercarriage type operations, where we have our own foundry in Spain, that enables us to customize cast products that meet the specific needs of our customers.
Again, just a strong business for us and a large part of where we get our EMC growth and performance from.
David will spend some more time today talking about our financial results, but I do want to offer a couple of thoughts.
First, while our business operates in many different global geographies and produces three primary products, wheel, tires and undercarriage, which end up touching various end markets.
We, again, this quarter, saw growth and improved financial performance in all of our business units; so good, solid, consistent growth.
Second, we have and continue to operate with a disciplined mindset to control our costs in SG&A and within our overall operational structure, and you see that reflected in our results.
Next, we have invested our capex wisely and strategically in recent years to continue driving our innovative products into the marketplace and to increase capacity in our core businesses where the market needs it.
We've also made the necessary investments into safety, environmental and maintenance, and we will continue to ensure that happens in the future.
My point with all that is, while Titan has reduced our capex over the prior few years to ensure we protect our balance sheet, we have invested properly into our company and have not underinvested in recent years.
Lastly, we will continue to make the investments, incur the expenses into expanding our production capabilities and increasing our headcount in areas to meet demand.
We are not simply going to sell our existing production capacity into the market, but rather take advantage of this existing opportunity to get more of our market-leading products into the hands of our customers.
So let me conclude by saying something that we all know.
I mean, this is without a doubt, one of our most dynamic business environments, all of us in business have faced.
Titan, in addition to our solid operation results again this quarter and really for all of 2021 for that matter, Titan has strengthened our financial position this year by refinancing our $400 million bonds.
We've also, this year, further improved our liquidity with our recently announced ABL extension and upsizing.
We believe that Titan is in a position of strength within our industries with our global production footprint that is second to none in our business and our plants that are well suited geographically, excuse me -- for our customers.
We also have an expansive and innovative product portfolio with an arsenal of highly engineered tooling.
These attributes enable us to deliver a strong value proposition to our customers.
And as a result, for Titan to continue to benefit from the current trends that are in today's markets.
With that being said, our order books are strong, as we've seen really in years.
There are continuing positive signs in our end markets, which puts Titan in a good position, as I stated earlier, to post adjusted 2021 adjusted EBITDA of over $130 million.
And on top of that, we see a path to further growth for next year.
Again, Titan is in a good position at this time to capitalize on our reinvigorated strength, which makes me think about a comment this week that I heard from our Audit Committee Chair, who happens to be a leader in the private equity space.
The comment he made during our meeting this week was that Titan has reported strong results throughout 2021.
We have fortified our balance sheet this year.
And has all this positive going on, yet our stock is trading at only around 6.5 times current year adjusted EBITDA.
He's a pretty smart guy, by the way.
So with that, let's jump into the financials.
I appreciate everyone joining us today.
Well, the third quarter was just another significant step in the right direction for the company, and we were able to deliver a very strong result and build on the momentum that we've started more than a year ago.
Our global management team has managed this concurrent environment very well, and we believe we have solid plans in place to continue to do that moving forward.
Well, let's start with some highlights for the quarter, and then I'll get into more details.
Sales grew at a very nice clip at 48% this quarter.
Again, a very, very strong results for our Q3.
Our growth was led by the Ag segment with a 60% increase from Q3 last year.
And at the same time, the EMC segment was also very strong at a growth of 37%, and our growth in the consumer segment was nothing to sneeze at, with an increase of 32%.
Our gross profit increased by 93% in the quarter, and our margin improved to 13.4% compared to only 10.3% last year.
Adjusted EBITDA for the quarter was $35 million, representing the strongest third quarter performance since 2013 that bears repeating.
On a trailing 12-month basis, our adjusted EBITDA stands at $116 million as of this quarter, and we expect Q4 performance to be strong, improving that run rate to over $130 million for fiscal 2021.
Our cash position remained stable again this quarter at $95 million despite some growth in working capital.
We continue to do a very good job managing our inventory levels as well.
With our improvement in profitability and our strong management of the balance sheet, our debt -- our net debt leverage as of the end of Q3 stands at 3.3 times our trailing 12-month adjusted EBITDA.
This is obviously a dramatic improvement from a year ago.
Now let's get into the more detail for the Q3 performance.
Again, our sales levels for the third quarter were strong, and we saw another sequential increase of 2.5%, notwithstanding the normal seasonal variation from holidays and plant maintenance that reduces our production days.
Sales increased relative to last year by $146 million and $104 million or 30% from the third quarter of 2019, a more normal third quarter period.
Volume was up over 25% with all of our business units, except Australia, seeing significant double-digit percentage growth year-over-year.
Gross profit for Q3 was $60 million versus only $31 million in adjusted gross profit in the third quarter of last year.
Our gross profit margin in the third quarter, again, was very strong at 13.4%.
We believe our visibility is solid in terms of being able to know where our costs are and where we continue to see challenges that we -- in supply, and we intend to manage it in a very strong way, just as we've proven over and over again, and our track record is strong.
Now on to segment performance.
Our Ag segment net sales were $244 million, an increase of $91 million or 60% from third quarter last year, which makes it the strongest quarter for the segment in the last eight years, beating last quarter sales by 5.5%, reflecting strength in North America and Latin America.
Volume in the segment was up 30% -- 36% just like Q2.
Again, this quarter, the principal driver of the volume increases related to the OE sales across the business, while aftermarket sales remained very solid.
Every one of our business units saw increases year-over-year in the Ag segment, and our order decks reflects strength across the globe for the ag demand for the foreseeable future.
Our agricultural segment gross profit in the third quarter was $33 million, up from only $16 million last year, representing a 105% improvement.
Our gross margins in Ag were 13.6%, which is another significant improvement from the margin produced last year of 10.6%.
This is reflective of the increased volume and of the effect on efficiencies across our plants, along with continued strong cost control actions we have taken over the last couple of years.
These are timing -- there are timing impacts related to pricing actions and alignment with our costs as they flow through production, as we know.
Again, we've done a great job at this, a very effective job getting in front of these increases.
And I expect that we can remain in very strong territory overall on our margins in the segment and as a whole.
Our Earthmoving and Construction segment experienced another strong quarter as well.
Overall net sales for the EMC segment grew by $45 million or 37% from last year as well.
The third quarter is traditionally the lowest as we experienced normal summer slowdowns with holidays across Europe and our customer schedules.
This year was no different, and we saw a small sequential drop from Q2.
This is not a statement on the overall demand in the sector, just the normal seasonal cycle that we have.
All of the major geographies experienced year-over-year growth during the quarter with the largest growth coming from ITM, our undercarriage business, which grew 38% from third quarter last year.
ITM's primary growth came from Latin America and Europe.
Gross profit within our Earthmoving and Construction segment for the third quarter was $21 million, which represents an improvement of $9 million or 71% from gross profit last year.
Gross profit margin in the EMC segment was 12.7% versus only 10.1% last year, a very healthy increase.
Again, the largest driver of our increased profitability came from the increase in sales in ITM, while growth occurred across all of our businesses and geographies across the globe year-over-year.
The Consumer segment's Q3 net sales were up 32% or nine million compared to last year.
The volume was up very nicely in the quarter, and currency was also a positive tailwind.
As we discussed, our primary priorities -- production priorities have been with our Ag and the EMC segments and our customers, but we did see healthy increases related to our Latin American utility truck tire business and increased mixed stock rubber sales in the U.S. The segment's gross profit for the third quarter was 5.8%, a very healthy improvement from last year as well.
Gross margins were at 15%, which was an improvement from 9.5% last year, reflecting some positive mix and pricing improvements with our products.
This is the best margin performance in this segment since Q2 2018.
Our SG&A and R&D expenses for the third quarter were $34.6 million, down about $0.5 million sequentially from the second quarter.
Most importantly, SG&A and R&D expense was 7.7% of third quarter sales, a very nice improvement from a year ago.
Third quarter SG&A and R&D increased from the prior year by about four million.
As a reminder, we've taken strong spending control measures over the last few years.
This year's expenses included some variable spending and compensation levels, reflecting the increase in sales and our profitability during the period.
During the third quarter, we recorded tax expense of $5.3 million, somewhat higher than in the quarter than originally expected, but reflective of increased profitability in certain high tax jurisdictions for Titan, including Latin America, Turkey, Germany and parts of Asia.
Obviously, this is higher than what we stated in our guidance earlier in the year.
And again, this is entirely due to increased profitability expected for the full year.
I now expect taxes on the income to be about approximately $15 million for the year.
And again, this approximates our expected cash tax payments for the year as well.
Now let's move over to cash flow.
Our overall cash balances remained solid in the quarter at $95 million.
Again, this is despite the sequential growth in sales and necessary continued investments in inventory to support and sustain our sales levels moving forward.
Our operating cash flow for the quarter was positive at $15 million, and we generated positive free cash flow of over $5 million in the quarter.
With strong growth in sales throughout 2021, we remain in slightly negative territory on cash flow overall.
But when you look at all of our key metrics, including cash conversion cycle and working capital, as a percent of sales, we've made healthy improvements from a year ago through focus and control.
During the third quarter, inventory grew by approximately $28 million sequentially from Q2.
Much like the rest of the year, almost half of this increase came on higher raw material costs and the other coming from volume, mix and other currency changes.
As a percentage of the most recent quarterly sales, inventory stands at 20.7%.
This compares favorably to 23% -- over 23% from a year ago at this time.
Again, this is, again, a very strong focus across the business from our management team.
Our overall DSOs in the business improved sequentially from Q2 by two days and now stands at 53 days compared to 55 in Q2 and 58 from this very time last year.
I continue to believe that we will maintain and improve our cash flow and working capital metrics as we head toward year-end.
Traditionally, this is the time of the year where we build cash, particularly in the back half of Q4.
We will not likely get back to breakeven free cash flow for the full year.
I do expect Q4 to be in positive territory like Q3, which brings us much closer to that goal.
And our teams are very focused on driving a strong balance between production efficiency and working capital management.
capex for the quarter was up sequentially at $9.6 million as expected.
We have been making strategic decisions as to the investments to increase capacity, reduce costs and improve plant efficiency, along with putting tooling in place to drive production related to new product innovations.
As of the first nine months, we -- capex stands at $24 million.
Based on our latest forecast, I expect full year 2021 capital investments of around $35 million at the low end of the previous estimate for the year.
As Paul discussed earlier, we are targeted and measured in the investments we're making in the business for the long term.
As we disclosed last Thursday, we took another positive step for the business in renewing our domestic ABL credit line.
The credit facility was increased to $125 million and is extended until October of 2026.
It still has the option to expand by another $50 million through -- in an accordion provision.
The amended agreement is substantially similar to the previous agreement, while we attained improved terms surrounding pricing and other enhancements to improve the availability within the borrowing base.
I'm very pleased to be able to get this in place for the next five years and to provide stability for our liquidity on top of our healthy cash position across the globe.
Our overall debt level at quarter end decreased by five million from June.
All of the decrease came on paydowns on the international borrowings.
Our borrowings on the ABL stands at $30 million, roughly in line with last quarter.
I continue to expect there won't be any significant cash requirements related to debt in the near term, and it remains substantially at our discretion to pay down.
Overall, net debt decreased in the quarter about -- to $387 million, down $4 million from last quarter.
Again, I expect to trim that number over time as cash flow increases, and we are able to pay down on the revolving credit loans.
I stated it earlier, but it bears repeating that our debt leverage at the end of September based on 12 -- trailing 12 months adjusted EBITDA has decreased to 3.3 times, which is right in the target range that we have been discussing.
Our balance sheet is in solid position now, which allows us much more flexibility to manage the business for growth.
Now let me wrap up with a few thoughts on the remainder of the year and some concluding remarks.
As everyone should know, the fourth quarter of our year brings with it a number of normal disruptions due to holidays and year-end maintenance in order to be prepared for the first quarter, which is expected to be strong.
Our fourth quarter performance is expected to be at a continued high level and steady with what we've been experiencing so far in 2021 in terms of customer demand.
We've come a long way in the last year with the business.
And because of the effective decisions we made during tougher times and our ability to improve our liquidity, our situation has normalized and strengthened.
Even in the dynamic environment that we are in, we continue to fight hard every day, and it is making a difference in the trajectory for our business performance.
The future is bright for us.
And we are, as a leadership team, remain highly focused on managing the opportunities in front of us.
That's our story for now.
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compname reports strongest third quarter results since 2013 with net sales up 48 percent yoy.
full-year adjusted ebitda is estimated to finish over $130 million.
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Simply put, we have growing confidence that our strategies across merchandising productivity, real estate growth and e-commerce put us at a transformational moment for the Company.
We see a clear path to growing our business by several billion dollars over the coming years.
Our Board of Directors echoes this confidence and yesterday authorized an incremental $250 million share repurchase program, underscoring our collective belief in Big Lots' positive growth story and our continued commitment to returning value to our shareholders.
Turning now to our third quarter.
We were pleased to deliver results in line with guidance despite incremental supply chain disruptions compared to our beginning of quarter two.
In discussing our results and outlook, we will continue to reference comparisons to 2019, as generally being the most relevant given the abnormal impacts of COVID-19 on our business in 2020.
On a two-year basis, Q3 comparable sales increased 12%, while declining 5% to 2020.
Total sales increased over 14% [Phonetic] versus 2019 with 210 basis points of favorability from our net new and relocated stores.
The two-year growth in sales reflects the strength and resilience of our Operation North Star strategies as stimulus has faded as a factor in our results.
A loss per share of $0.14 was within our guidance range.
And while we were subject to the continuing macro pressures of which I'm certain you are all aware, including supply chain disruption, inflation and labor constraints, we were able to contain these for the quarter.
Sales for the quarter benefited from growth in basket, driven by AUR expansion across each category and positive mix effects as we penetrated deeper end of furniture and seasonal.
We saw strong positive two-year comps in Furniture, Seasonal, Soft Home, Hard home, and apparel, electronics and other.
As expected, consumables experienced single digit two-year growth and food was down mid-single digits due largely to a strategic reduction in square footage in conjunction with our pantry optimization reset last fall.
Furniture delivered another very strong quarter with two-year comps up low double digits.
Seasonal though was the quarter highlight with comps over 30% on a two-year basis with lawn and garden and Halloween and Harvest all doing very well.
We feel very good about the fourth quarter and even with some delayed receipts, we anticipate high sell-through of our holiday merchandise that will translate to a strong seasonal comp for the quarter.
Turning to marketing, we are thrilled with the continued rollout of our be a BIGionaire brand campaign that started in spring.
As a reminder, this campaign is grounded in extensive consumer insights around why customers love to shop us.
She sees us as the home of the hunt for exceptional bargains and surprising treasures.
As we turn to the fourth quarter for our holiday BIGionaire campaign featuring Eric Stonestreet and Molly Shannon, we are receiving excellent feedback that the ads are attention-grabbing, likable and driving intention to shop.
You can look forward to great things from this campaign featuring not only superstars, but more importantly, unique gifts and decor and always incredible value.
The campaign, coupled with our rewards program is resonating.
Rewards active members were up over 9% versus Q3 last year.
Now with 22.1 million members still boasting a five-year CAGAR of 10%.
In Q3, rewards members accounted for 64% of transactions and 76% of sales, both up 400 basis points to same quarter last year.
Before turning to our discussion of our strategic opportunities, I would like to provide a few brief comments on Q4.
First and foremost, our absolute focus for Q4 has been to position ourselves appropriately with inventory to drive sales and deliver an excellent holiday for our customers, and the quarter has started off strongly with positive 10% two-year comps for fiscal November.
While manufacturing and supply chain pressures will impact both our top and bottom lines in Q4, we are aggressively managing through them as we continue to grow the business.
This includes partnering closely with our manufacturing and transportation partners, strategically prioritizing receipts, creating new capacity with our forward distribution centers and our DC bypass program and ensuring we are competitive in recruiting and retaining DC associates.
In addition, we have taken pricing actions and we'll continue to do so in response to volatile supply chain costs, while continuing to deliver great value for our customers.
And we have line of sight to ending the fourth quarter with a strong inventory position to meet spring demand and deliver strong Q1 sales, and we know that we left sales on the table in each of the past two years.
Looking a bit further out, it is too soon to give specific guidance for 2022 as a whole.
So while we face a big hurdle with the lapping of stimulus in Q1 and Q2 of this year, which we estimate was worth about 5 points of comp on a full year basis and will result in negative comps in Q1 of '22, we expect to deliver overall sales growth in '22 on top of two years that greatly exceeded any prior sales level we achieved as a Company.
That growth in '22 and beyond will be achieved through the three key Operation North Star drivers we have referenced on prior calls, specifically growth in same-store sales, driven by our many successful merchandising initiatives, accelerated growth in our store footprint and growth driven by a rapidly scaling e-commerce and omnichannel operations.
I would like to take a moment on each of these to talk about the opportunity we see ahead of us.
Strategically building our merchandise assortment to maximize productivity will be a key driver of our growth in the coming year and beyond.
This will be driven by discrete in-store programs, new tools and by leveraging our rapidly growing owned brands.
Starting with our next generation furniture sales team, this initiative is rolling out presently and is making a strong positive sales and margin impact, driving close to a 50% lift to the furniture business in stores where it has rolled out.
This program is currently in 100 stores and will initially scale to around 500 stores in '22, driving at least a point of comp on an annualized basis for the entire Company.
Big Lots has been known for winning at holiday and in lawn and garden in the spring and summer with our outdoor seasonal patio sets, gazebo and pools [Phonetic].
However, we have a major whitespace space opportunity for elevating our seasonal assortment, increasing our newness in transitioning between seasonal moments with greater efficiency and effectiveness.
We will show a big for not just holiday, but for Valentine's Day, St Patrick's Day, 4th of July and other seasonally relevant moments, winning the seasons throughout the year.
Additionally, as I will discuss in more detail shortly, furniture and seasonal volume will both be supported by the expanded DC network capacity that we are developing to more efficiently flow bulky merchandise to our stores.
Moving to our own brands, in particular Broyhill and Real Living, we see major upside both with furniture and beyond.
Most importantly, we have proven that they resonate well with our customer.
Broyhill and Real Living each have the potential to achieve $1 billion in annual sales across all home categories and are well underway toward that, both north of $0.5 billion in sales on a year-to-date basis through Q3.
Broyhill accounted for over $160 million in Q3 sales, up close to 50% over the same quarter in 2020.
Approximately 40% of sales came through our home decor, Seasonal and hard lines.
Similarly, Real Living continues on its strong trajectory, almost doubling versus Q3 of last year and delivering over $60 million of growth during the quarter across multiple product categories.
As we referenced last quarter, our increased investment in apparel has helped us bring in new customers and is well on its way to making apparel significant category for us.
As the first graduate category from the Lot, we have built apparel in a scrappy way to be over $200 million program this year with a clear opportunity for more than doubling sales in the years to come.
Customers are giving us credit for our expanded offering as we better organize our offering in store around casual loungewear.
Additionally, while we will not become an apparel store, we have recruited seasoned leadership to bring focus to this productivity enhancing opportunity.
Additional space productivity enhancements have been made through our Lot and Queue Line strategies.
These two strategies now in over 1,300 stores have maintained their accretive sales impact and we plan to complete our rollout in '22.
In addition to these strategies, new initiatives such as Lots under $5 offering represents a further opportunity to drive higher productivity.
The Lots under $5 which will roll out in the middle of 2022 will create a value destination for our customers, anchored on surprise and delight treasure hunt products priced at $1, $3 and $5.
The assortment will be seasonally relevant and have impulse items to create excitement for newness as she increases visit frequency.
This is just an example of the ongoing category innovation that will be an integral part of our business going forward.
Supported by new tools and processes and an outstanding team, we are confident that our merchandise related strategies will deliver tremendous growth in productivity.
On our last few calls, we have discussed our whitespace opportunity for net new stores.
In 2021, we are reversing the historical trend of relatively stagnant store count and will increase our net new store count by over 20 stores.
In 2022, we expect that figure to be over 50.
While sales volumes will range depending on square footage and market demographics, we expect at least $120 million of annualized impact from next year's net new stores and that they will deliver 4-wall EBITDA margins of 10% or greater.
Turning to e-commerce, our year-to-date sales growth is around 300% versus 2019, and we have a clear line of sight to e-commerce becoming a $1 billion business over the next few years.
Our approach to date has been to replicate the friendliness of our in-store interactions online by removing friction points and allowing our customers to purchase where she wants, how she wants, with what tender she wishes and to have that product filled through the channel that she prefers.
Since the initial rollout of BOPUS in 2019, we now provide curbside pickup, ship from store capabilities and same-day delivery via Instacart and Pickup.
To support holiday, we increased the number of stores providing ship from store fulfillment to 65.
We continue to see over 60% of our demand fulfilled through these new capabilities.
Additionally, joining our lineup of Apple and Google Pay, we expanded our mobile wallet capabilities this past quarter with both PayPal and PayPal paying for, our first Buy Now Pay Later solution.
In the coming year, we expect to unveil further capabilities and additional Buy Now Pay Later choices.
Mobile payment now represents 35% of our total online transactions.
As I mentioned, even though our e-commerce channel has grown from close to nothing in 2017, to well over $350 million expected in 2021, huge opportunity remains to further upgrade user experience and drive conversion, where we have already made great strides.
Enhanced user search and checkout experience, enhanced inventory visibility and access further extending our isle and accelerating supplier direct fulfillment will all fuel this growth.
Perhaps more importantly, over the past few years, we have worked to expand our online choices to better reflect our in-store assortment selections.
What was less than 20% of our assortment a few years ago is now approximately two thirds of our over 30,000 choices.
I would now like to pivot to some of the key enablers of our future success.
Earlier this year, and specifically during last quarter's call, we discussed our need to invest in our supply chain through the rollout of our forward bulk product and furniture distribution centers or FTCs, and our transportation management system.
Our legacy distribution center network was designed for a $5 billion pick and pack, brick and mortar business model.
As we have grown substantially over the past few years, lean further into bulk furniture and seasonal businesses and significantly grown our e-commerce business, we have outgrown our capacity.
We are addressing this by distorting processing and logistics for bulk goods out of our five legacy distribution centers into our new FTC network, enabling us to better leverage the capacity of our original regional DCs that were designed for carton flow.
In addition, our transportation management system that launched last year and completed rollout this year will optimize how our more complex and higher capacity network functions.
In 2022, we plan to launch two additional FTCs, further relieving pressure on our regional DCs and enhancing our ability to process bulk product.
Additionally, through our strong relationships, we have the ability to open pop up, bypass DCs to further assist regional DCs and handling seasonal receipt peaks.
Finally, in 2022, we will begin work on our centralized repacking facility at our Columbus distribution center to handle individual unit pick products, further enhancing our regional distribution center throughput.
As we optimize our store footprint and enhanced inventory availability, we need to ensure consistent customer experience across our stores.
Another key enabler as we referenced on the prior quarter's call is our Project Refresh program to upgrade approximately 800 stores, which were not included in the 2017 to 2020 Store of the Future program.
Completing this project will create a more consistent consumer experience, while better representing the Big Lots brand and will harmonize internal processes as we are currently catering to too many differently formatted or condition stores.
At an average cost of a little over $100,000 per store, far below our Store of the Future conversions.
These stores are getting new exterior signage, interior repainting and floor repair, a new vestibule experience, remodel bathrooms and interior wall graphics.
Project Refresh is underway with around 50 stores being completed in the fourth quarter and we are in the process of finalizing our plans for a more extensive rollout in 2022.
To summarize, I'm greatly enthused about not just where we can be in a few years, but in what we are achieving every day to make that reality occur.
Our growth driver is led by an ambitious driven and highly talented team, will continue to materially scale our business in the coming years.
Our mission at Big Lots is to help her live big and save lives and we'll do that by being her best destination home discount store, chockfull of exceptional value and surprising and fund products, all wrapped in a delightful and easy shopping experience.
As I turn the discussion over to Jonathan, I do wish all of you a wonderful and meaningful holiday season.
Be safe, stay healthy and stop into your local Big Lots for you gifts, decorations, special treats and supplies.
Net sales for the quarter were $1.336 billion, a 3.1% decrease compared to $1.378 billion a year ago, but up 14.4% to the third quarter of 2019.
The decline versus 2020 was driven by a comparable sales decrease of 4.7%, in line with our negative mid single-digit comp guidance.
Two-year comps were 12.3% and was strongest in August, but remained healthy throughout the quarter, driven by basket size.
Our third quarter net loss was $4.3 million compared to $29.9 million net income in Q3 of 2020, and a loss of $7 million in 2019.
EPS for the quarter was a loss of $0.14, in the middle of our guidance range.
As a reminder, we reported diluted earnings per share of $0.76 last year.
Supply chain impacts across gross margin and SG&A accounted for around $0.60 of the year-over-year reduction in EPS.
The gross margin rate for Q3 was 38.9%, down 160 basis points from last year's third quarter rate and 80 basis points below 2019, slightly outperforming our guidance.
The 38.9% rate reflects the freight headwinds that we have discussed, partially offset by pricing increases.
Total expenses for the quarter, including depreciation were $523 million, up from $515 million last year.
This was also in line with our expectations coming into the quarter and driven by incremental expense investments in labor and in our forward distribution centers.
While expenses deleveraged versus last year, they leveraged 90 basis points to Q3 2019, driven primarily by efficiencies in store expenses, partially offset by supply chain expense, including the costs of our new forward distribution centers and expense from the June 2020 sale and leaseback of our regional DCs.
Operating margin for the quarter was a loss of 0.3% compared to a profit of 3.1% in 2020, and a loss of 0.4% in 2019.
Interest expense for the quarter was $2.3 million, down from $2.5 million in the third quarter last year and down from $5.4 million in Q3 2019.
In September, we announced the successful amendment and extension of our unsecured revolving credit facility.
The amendment provides more favorable pricing and covenants.
With this new facility, we anticipate saving a minimum of $850,000 in interest and fees on an annualized basis and substantially more if we draw on the revolver.
The income tax rate in the third quarter was a benefit of 29.3% compared to last year's expense rate of 24.1%, with the rate change primarily driven by the impact of the disallowed deduction for executive compensation and the favorable impact of the discrete item in the prior year.
On a full year basis, we expect our tax rate to be slightly favorable to 2020.
Total ending inventory was up 17% to last year at $1.277 billion and up 14% to 2019, somewhat ahead of our beginning of quarter guidance.
The increase versus prior years was a purposeful heavy up of inventory to support holiday to right set furniture depth and support incremental inventory for the Lot and apparel.
The increase versus guidance reflects our successful efforts to get more inventory receipts into the supply chain ahead of holiday, as well as increased unit costs due to inbound freight.
During the third quarter, we opened nine new stores and closed three stores.
We ended Q3 with 1,424 stores and total selling square footage of $32.5 million.
Capital expenditures for the quarter were $46 million, compared to $34 million last year.
Depreciation expense in the third quarter was $35.9 million, up $3 million so the same period last year.
We ended the quarter with $70.6 million of cash and cash equivalents and no long-term debt.
As a reminder, at the end of Q3 2020, we had $548 million of cash and cash equivalents and $39 million of long-term debt.
The year-over-year reduction in cash levels reflects our deployment of proceeds from the sale and leaseback of our distribution centers toward share repurchases and the payment of taxes on the gain on the sale and leaseback.
We repurchased 2 million shares during the quarter for $97 million at an average cost per share of $47.43, completing our August 2020 $500 million authorization.
Under that authorization, we have repurchased 9.35 million shares in total at an average cost of $53.49 per share including commission.
We announced today that our Board of Directors has approved a new share repurchase authorization, providing for the repurchase of up to $250 million of our common shares.
The authorization is effective December 8th and is open-ended.
Also, our Board of Directors declared a quarterly cash dividend for the third quarter for fiscal 2021 of $0.30 per common share.
This dividend is payable on December 29, 2021 to shareholders of record as of the close of business on December 15, 2021.
As Bruce commented earlier, we see ongoing capital return as a key component of long-term shareholder value creation.
For the quarter, we expect diluted earnings per share in the range of $2.05 to $2.20, compared to $2.59 of earnings per diluted share for the fourth quarter of 2020 and $2.39 cents in Q4 of 2019.
For the full year, we now expect diluted earnings per share in the range of $5.70 to $5.85.
The $0.20 reduction from our prior guidance range is entirely accounted for by additional supply chain, SG&A expense, which I will come back to in a moment.
The guidance does not incorporate any share repurchases we may may complete in the quarter.
In addition, the Q4 sales will see a benefit of approximately 180 basis points from net new and relocated stores.
On a two-year basis, we expect comps to be up high-single digits.
For the full year, we expect a negative low-single digit comp versus 2020, which will again equate to double-digit comps on a two-year basis.
We expect the fourth quarter gross margin rate to be down around 150 basis points from last year and and also Q4 2019.
This is somewhat more erosion and estimated in our prior guidance, impacted by higher freight as we have successfully worked to move inventory through the supply chain to drive sales.
For the full year, we expect gross margin rate to be down approximately 70 basis points versus 2019 and approximately 120 basis points versus 2020.
At this point, we are not counting on any early abatement of freight pressures, but we do expect this over time.
In the meantime, without factoring in any freight-driven tailwind, we expect to see 2022 margin improvement, driven by taking additional price increases where appropriate and reflecting a benefit from new pricing and promotion capabilities as well as from the deployment of new planning tools.
We expect Q4 expense expense dollars to be up by a mid single-digit percentage to last year, driven by incremental expense investments in store and DC labor, our forward distribution centers and depreciation expense.
Relative to our prior full-year guidance, forth quarter distribution and transportation expenses have increased by around $14 million.
This includes $4 million related to additional receipt volume during the quarter, in addition to the $6 million we called out on our last earnings call.
It further includes $4 million of higher initial costs related to our new FTCs, $2 million related to fuel and domestic carrier rates, and $2 million related to additional actions we have taken on DC labor rates.
We expect most of these expenses to be transitory or timing related.
For the full year, SG&A expense dollars will be up around 3% to 2020, driven by the full year impact of the sale and leaseback of our distribution centers, additional supply chain expenses, including investments in our new FTCs, other strategic investments and higher equity compensation expense.
We now expect inventory to end Q4 of approximately 20% to 2019.
This reflects strong progress in rebuilding our inventories to support spring sales and as noted above, will result into additional receipt processing expense in Q4.
As a reminder, we began both 2020 and 2021 with depleted inventories.
In addition, we have intentionally pulled forward seasonal inventory receipts.
We now expect 2021 capital expenditures to be between $170 million and $180 million, including around 55 store openings, of which around 20 will be relocations.
The reduction from prior quarters guidance in capex is driven by timing shifts, including the move of our new centralized repacking spend out of 2021.
Our capital projection includes approximately 50 Project Refresh stores in 2021.
On a net basis, we expect total store count to grow by around 20 stores in 2021, we expect to further accelerate store count in 2022 and beyond.
As Bruce described, we are increasingly confident in our long-term topline opportunity and we expect to achieve -- to achieve a record new sales year in 2022, driven by our net new store openings.
In addition, as noted a moment ago, we expect to turn the corner on gross margin rate for 2022.
We will have some additional growth-related expenses in 2022 related to new stores, our FTC rollout and other strategic investments, and we will also face inflationary wage and other pressures.
To help fund these investments, we will maintain our focus on achieving structural reductions in our expenses, building on the excellent progress we have already made under Operation North Star.
We are excited by the opportunities ahead of us in '22 and beyond, and we look forward to providing more color on this as we enter 2022.
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big lots q2 earnings per share $1.09.
q2 earnings per share $1.09.
qtrly sales of $1.46 billion with 2-year comp of 14%.
sees q3 loss per share $0.10 to $0.20.
qtrly ecommerce demand up 10% to q2 2020 and up 400% to 2019.
sees full year earnings per share in range of $5.90 to $6.05.
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Joining me on the call today are the members of Nucor's executive team including Jim Frias, our Chief Financial Officer; Dave Sumoski, Chief Operating Officer; Al Behr, responsible for Plate and Structural Products; Doug Jellison, responsible for Raw Materials and Logistics; Greg Murphy, responsible for Business Services and our General Counsel; Dan Needham, responsible for Bar and Rebar Fabrication Products; Rex Query, responsible for Sheet and Tubular Products; MaryEmily Slate, responsible for our Enterprise Commercial Strategy; and Chad Utermark, responsible for Engineered Bar and Fabricated Construction Products.
With demand for steel remaining strong in most of our facilities operating at peak performance, we have not lost focus on our goal of becoming the world's safest steel company.
We continue to perform well on the safety front as we look to make 2021 our safest year ever besting our record set just last year.
I encourage all of our teammates to maintain their focus on safety, so we can achieve the most important goal that we have set for our company.
Consistent with last month's guidance, Nucor posted record quarterly earnings in the second quarter.
Our earnings of $5.04 per share surpassed our previous earnings per share record set last quarter, our first half earnings of $8.13 per share exceeds our full year earnings per share record of $7.42 set in 2018.
All three operating segments are continuing to generate robust profits due to strong demand, higher average selling prices and excellent execution across Nucor.
In our Steel mills segment, we saw the greatest improvement in profitability from our sheet and plate mills.
The performance of our steel products group also improved compared to the first quarter.
Jim will provide more details about our performance of this quarter and our outlook for the third quarter in a few minutes.
This level of performance is the result of years of work strategically growing and positioning our company to thrive in market conditions like we are experiencing today.
My congratulations to the entire Nucor team.
There are several fundamental drivers of the strong market conditions Nucor is benefiting from today, the most important of these is robust demand.
Virtually all the steel end-use markets that we monitor are growing.
Some of this growth may simply be catch-up from the pandemic-induced economic lull we experienced here in the U.S., but we think it goes beyond a temporary rebound.
One sign of this is the increasing confidence about next year that we sense from our customers ranging from automotive, trucking, heavy and ag equipment, and across the construction sector.
There are noteworthy new drivers for growth in steel demand.
Warehouses for e-commerce, renewable energy projects, and an increase in U.S. manufacturing investment focused on greater supply chain resiliency are all creating new market opportunities for Nucor.
Very strong housing and automotive markets are also creating incremental steel demand, not to mention activity by State DOTs whose infrastructure investment spending has held up better than expected.
We are fortunate that several of our strategic growth investments have come online during this period, and our results reflect better than expected contributions from Nucor steel mills in Sedalia, Frostproof, Kankakee, Marion, Gallatin's new galvanizing line and Hickman's new cold mill.
Our strategy continues to be, grow the core, expand beyond, and live our culture.
We are continuing to make targeted investments in acquisitions to grow our share in attractive markets, and increase our long-term earnings power.
We are complementing our investment strategy with a sharpened commercial focus that is enabling us to leverage our broad portfolio and deliver increased value to our customers with more integrated solutions.
Acquisition announcements we made in the second quarter are focused on the expand beyond part of our mission statement.
Our pending acquisition of Cornerstone Building Brands' insulated metal panels business, IMP for short, is squarely aimed at some of the fastest growing markets I've mentioned.
For example, distribution center investments driven by evolving consumer preferences regarding e-commerce in grocery delivery as well as the expansion of data centers and server farms, which all require temperature-controlled environments.
Cornerstone's IMP business is a market leader and innovator in the growing IMP product category.
IMP products are gaining market share as companies and institutions continue to focus on environmental performance and energy efficiency.
The superior insulating performance of IMP products reduces energy usage and overall operations-related greenhouse gas emissions.
Additionally, IMP products are easier to install with lower maintenance cost versus other wall and roofing solutions.
Cornerstone's IMP business is an excellent fit with Nucor Buildings Group and we are confident that we can help the team there take performance to an even higher level.
We also announced, earlier this week, our agreement to acquire Hannibal Industries, one of the largest steel pallet rack manufacturers in the U.S. Hannibal provides racking solutions to warehouse serving the e-commerce, industrial, food storage and retail segments.
Adding Hannibal to Nucor creates a new growth platform that broadens our offering to the distribution center market including beams, joist, deck, metal buildings, and of course, insulated metal panels.
As an employee-owned company, we are optimistic that Hannibal Industries will be a great fit with the Nucor culture.
Also, on the expand beyond front, we continue to build out our own growth platform in industrial gases enabling lower-cost supply to our steel mills while also creating additional streams of revenue with sales to third parties.
The team that joined Nucor with our acquisition of Universal Industrial Gases in 2019 continues to do a great job executing these initiatives.
We have an operating air separation unit at Nucor Hertford and are actively selling liquid gases on the open market.
We will continue to have more ASUs supporting our other mills up and running in the coming months.
As one of the cleanest steel producers on the planet, Nucor will continue to take our environmental leadership position even farther.
Our new greenhouse gas reduction commitment will take our carbon intensity down to 77% below today's world average.
Our commitment is to reduce our Scope 1 and 2 greenhouse gas emissions intensity by a combined 35%.
This commitment will be measured against the 2015 baseline, the year the Paris Climate Agreement was signed.
At our current greenhouse gas intensity, Nucor's already achieved the steel sector benchmark established in the Paris agreement.
Our performance today is what many of our competitors around the globe are aspiring to achieve by 2030, '40, '50 and beyond.
And compared to many of our integrated competitors, our starting point is already better than their near and intermediate goals.
And now we're going to get even better.
We are a leader today in sustainable steel production and our commitment to further reduce our emissions intensity will keep us a leader as we move forward.
We urge Congress to make good on the recent Bipartisan Framework reached in the Senate and come together to pass a significant infrastructure funding bill.
We strongly believe that modernizing our infrastructure will boost our nation's economic competitiveness, not to mention making us all safer.
Federal infrastructure spending plans currently under consideration are expected to increase U.S. steel demand by as much as 5 million tons per year for every $100 billion of new investment.
Nucor is incredibly well positioned to provide steel for infrastructure projects across U.S.
We are encouraged that the President and members from both parties continue to focus on this issue, and we are hopeful that they can come together to form a bipartisan solution.
Again, it is gratifying to see how years of hard work and planning are paying off in this incredibly strong steel market.
We're excited about the expanded capabilities we can offer our customers because of our capital investments and acquisitions we have made in recent years.
To the entire Nucor team, congratulations on an excellent first half of 2021.
Let's continue to execute and make this our safest and most profitable year.
Now, Jim Frias will provide more details about our performance in the second quarter.
Second quarter earnings of $5.04 per diluted share exceeded our guidance range.
Better than expected results for the month of June were achieved across a broad group of businesses, including our beam mills, bar mills, sheet mills, rebar fabrication, tubular products and joist and deck.
Nucor's diverse portfolio of products and capabilities is consistently a powerful driver of value creation for Nucor shareholders and customers.
Recently completed capital projects made significant and above budget earnings contributions in the first half of this year.
These projects are the rolling mill modernization at our Ohio rebar mill, the hot band galvanizing line at our Kentucky Sheet Mill, the specialty cold rolling mill at our Arkansas sheet mill, the rebar micro mills in Missouri and Florida and the merchant bar rolling mill at our Illinois bar mill.
These targeted investments are enabling Nucor to earning a growing and profitable share of the markets we serve.
The Hickman, Arkansas specialty cold mill is an excellent example of Nucor's growth strategy.
There are no other carbon steel mills in North America that match our new range of capabilities.
In the second quarter, the Hickman specialty cold mill ran at 118% of rated capacity, more than double its originally projected production ramp timeline.
Since beginning operations in mid-2019, this project's life-to-date profitability also substantially exceeds its initial forecast, and the Hickman team is looking ahead to further expanding long-term earnings power as it begins the work of commissioning its third-generation flexible galvanizing line equipment.
The state-of-the-art capabilities of these new assets will position Nucor to further grow our automotive footprint.
We will provide our automotive customers the greenest, most advanced high strength steels in the industry.
These deals will provide our customers the ultimate solution that satisfies their needs long into the future.
Our success bringing strategic projects like this online reflects the Nucor team's commitment to being effective stewards of our shareholders' valuable capital.
Our growth investments are targeted at defined market objectives and opportunities to generate attractive returns with reduced volatility through the economic cycle.
Financial strength continues to be a critical underpinning to Nucor's ability to grow long-term earnings power.
At the close of the second quarter, our cash, short-term investments, and restricted cash holdings totaled $3.2 billion.
Compared with the end of the first quarter position, our second quarter cash position increased by about $226 million.
That increase is after funding share repurchases of $614 million, cash dividends of $123 million, capital expenditures of $389 million and a working capital expansion on the inventory receivables and payables line items totaling about $945 million.
Nucor's liquidity also includes our undrawn $1.5 billion unsecured revolving credit facility, which does not mature until April of 2023.
Total long-term debt including the current portion was approximately $5.3 billion at quarter-end.
Gross debt as a percent of total capital was approximately 30%, while net debt was 12% of total capital and remains well below our targeted range of 18% to 23%.
We remain materially under leveraged on this basis, but we anticipate that this will change somewhat as we deploy capital to acquire Cornerstone's IMP business and Hannibal Industries.
We're excited to be moving forward with these new growth platforms.
We expect that these businesses, along with the numerous internal growth projects we have been executing on, will materially add to Nucor's earnings and cash flow generation in the years ahead.
Cash provided by operating activities for the first half of 2021 was $1.9 billion.
Nucor's free cash flow or cash provided by operations minus capital spending was $1.2 billion.
Nucor's financial strength and robust through-the-cycle cash flow allows for a consistent balanced approach to capital allocation.
We now estimate total year capital spending of approximately $1.8 billion.
Each of our three most significant capital projects, the expansion and modernization of the Gallatin, Kentucky sheet mill, the Generation 3 flexible galvanizing line at the Hickman, Arkansas sheet mill, and the greenfield Brandenburg, Kentucky plate mill remain on schedule.
At Brandenburg, the timing of some equipment deliveries has been delayed but overall, the project remains on schedule for a late 2022 commissioning.
During the second quarter, we continue to see attractive value in our shares repurchasing 6.765 million shares at an average cost of approximately $91 per share.
Over the first half of this year, Nucor share repurchases totaled more than 12 million shares at an average cost of about $75 per share.
Shares outstanding have been reduced by approximately 3% from the year-end 2020 level.
For the first half of 2021, total cash returned to shareholders through dividends, and share repurchases totaled just under $1.2 billion representing approximately 47% of net earnings for the period.
As we have said previously, we intend to return a minimum of 40% of our net income to Nucor shareholders.
We are rewarding shareholders with substantial cash returns while continuing to invest for future profitable growth and maintaining a strong balance sheet.
Turning to the outlook for the third quarter of 2021.
We are encouraged by a number of positive factors impacting our markets.
As Leon mentioned, we see improving or stable market conditions for the vast majority of the end-use markets served by Nucor.
In fact, order backlogs at most of our businesses suggest strength well into 2022.
Further supporting our optimistic outlook, inventories throughout supply chain remain lean.
We expect earnings in the third quarter of 2021 to again set a new record.
Compared to the second quarter, we expect earnings growth at all three of our segments, most notably our Steel mills segment.
Additionally, with our expectation of a strong fourth quarter, we believe second half of 2021 earnings will exceed first half of 2021 earnings.
Nucor's record results highlight the success of our 27,000 team members building a stronger and more profitable Nucor.
Our teams' 2021 performance is simply outstanding.
We remain excited by the opportunities ahead for our company.
We have great determination to deliver increasing long-term value for our shareholders.
Living our culture means driving sustainable performance.
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qtrly net earnings of $5.04 per diluted share.
expect earnings in q3 of 2021 to be highest quarterly earnings in nucor history.
primary drivers for expected increase in earnings in q3 of 2021 are improved pricing and margins in steel mills segment.
expect increased profitability across steel mills segment, with largest increase at sheet mills in q3.
steel products segment and raw materials segment are expected to have increased earnings in q3 of 2021 compared to q2 of 2021.
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Today is important and transformative day for the technology distribution industry as SYNNEX and Tech Data come together.
For over four decades we have each worked to help our customers and partners grow and achieve their strategic priorities.
We have both been leaders in the space and I and the entire SYNNEX management team have the utmost respect for the team at Tech Data and what they have created.
Like us, Tech Data has established a reputation for excellence and we are thrilled to partner with its 14,000 plus talented colleagues.
For SYNNEX, this combination is beneficial as it accelerates our strategic growth initiatives by multiple years versus what we could have done by acquiring several smaller, geographically diverse companies.
Thus, the combined company will be able to bring additional services and capabilities to our respective partners.
Even with a well planned and executed strategy, I'm not sure we could have achieved -- over time -- all that is accomplished with this merger.
For our investors, we have the opportunity to create value by accelerated revenue growth, scaled efficiencies, increased cash flow and greater earnings power.
I am pleased to be able to partner with Rich Hume and the go-forward combined entity.
Rich is a talented leader with significant industry expertise and we're fortunate to have him as the CEO of the business going forward.
[Technical Issues] the transformative transaction we are about [Technical Issues] I along with our shareholder Apollo, believe combining our business with SYNNEX accelerates the momentum that was already under way to create growth opportunity that neither company could achieve independently.
The combined company will deliver superior value for shareholders, offer our customers and vendors exceptional reach, efficiency and expertise across the entire technology ecosystem and be an employer of choice in the IT industry.
Importantly, together, we have the portfolio, the financial strength and the talent to enable us to achieve these objectives.
We will have premier, best-in-class, end-to-end offerings through a broad diversified portfolio of more than 200,000 products and solutions.
The combined company will be positioned to transform value creation from the linear model to the multi-point model, enabling collaboration among all of the ecosystem participants.
This will enable us to drive effective go-to-market strategies that our vendors can capitalize on and help to deliver optimal business-oriented solutions for their customers.
Our ability to orchestrate the access, interaction, delivery and services required to solve business challenges at scale is the foundation of how we will continue to grow.
As you know, change is constant in our business and this is a pivotal time in our industry.
Technologies such as cloud, analytics, IoT and security are changing our customers and their end user customers' buy, sell, consume and finance technology solutions causing the IT ecosystem to evolve faster than ever before.
This evolution has accelerated further due to the work-from-home and return to office trends which are contributing to explosive growth in these areas in which we are ideally positioned to serve.
The combined company will have a solid financial foundation, including an investment grade profile and strong free cash flows to support investments in our core growth platforms as well as investments in these next generation technologies.
The breadth and diversification of the combined company extends well beyond our products and solutions.
Together, SYNNEX and Tech Data will have a global footprint that serves more than 100 countries across the Americas, Europe and Asia Pacific.
This combination brings new market opportunities for both companies.
For example, SYNNEX has a well-established presence in Japan, where Tech Data does not.
Similarly, Tech Data is a well-established business across Europe, where SYNNEX has a more limited access.
This meaningful reach across products, services, geographies will also provide increased value and purchasing efficiencies to the combined companies' customers and vendors.
Both SYNNEX and Tech Data have excelled at driving top and bottom-line growth and has successfully acquired and integrated companies in the past.
I have full confidence that our combined team will deliver on the exciting growth underpinning this transformational merger, especially given the complementary values of our organization.
Very well said, and I'm looking forward to working with you to achieve all these benefits and also to continue to drive and support the great cultures each of the company's bring to this transaction.
Over to you, Marshall.
This transaction is valued at $7.2 billion, including net debt; and at close, SYNNEX will issue 44 million shares.
Pro forma ownership will be 55% SYNNEX shareholders and 45% Tech Data shareholders.
We expect the transaction to close in the second half of 2021, subject to customary closing conditions, including approval by SYNNEX shareholders and regulatory approvals.
From a financial perspective, the combined company will be on very solid footing with pro forma revenue of $57 billion, healthy EPS, EBITDA and cash flow generation.
We expect the transaction to be accretive to our non-GAAP diluted earnings per share by more than 25% in year one.
Given the complementary customer set and geographic footprints, we see the opportunity to generate revenue synergies as a combined company.
There is little overlap among our top customers and partners, and we believe SYNNEX's deep and narrow strategy combined with Tech Data's broad customer base minimizes risk regarding diversification.
From a cost perspective, we expect to realize $100 million of net synergies in year one, and $200 million in year two.
This transaction will be facilitated by a new capital structure that we will use to refinance debt at both Tech Data and SYNNEX.
It will consist of a $1.5 billion term loan A and $2.5 billion of unsecured bonds at varying maturities, bolstered by a $3.5 billion revolving credit facility, which we expect to be undrawn at close.
The expected cash balance at close will be approximately $1 billion.
We're also actively seeking to obtain our first investment grade credit rating and feel confident regarding the outcome.
As many of you are familiar with, SYNNEX has a long track record of diligently deleveraging post acquisitions.
We expect the same results with this transaction.
The expected leverage ratio of approximately 2.7 times at transaction close is expected to decline to approximately 2 times within 12 months.
With the combined entity generating LTM pro forma adjusted EBITDA of approximately $1.5 billion, this will provide us with ample ability to de-lever quickly while also remaining focused on optimizing the core and driving organic growth.
Now moving to Q1 fiscal results.
Our team delivered strong results ahead of internal expectations to start off the fiscal year, driven by continued robust broad-based demand.
Total revenue for Q1 was $4.9 billion, up 21% year-over-year.
Gross profit totaled $305 million, up 19% or $49 million compared to the prior year; and gross margin was 6.2%, consistent with the prior year.
Total adjusted SG&A expense was $149 million or 3% of revenue, up $9 million compared to the year-ago quarter and primarily due to COVID-19 related expenses.
We continue to expect incremental quarterly costs at a minimum of $5 million in 2021, and we did a good job of scaling SG&A to the growth of the business.
Non-GAAP operating income was $156 million, up $40 million or 35% versus the prior year; and non-GAAP operating margin was 3.2%, up 33 basis points over the prior year.
Q1 interest expense and finance charges were approximately $23 million and the effective tax rate was 25%.
Total non-GAAP income from continuing operations was $99 million, up $25 million or 34% over the prior year; and non-GAAP diluted earnings per share from continuing operations was $1.89, up from $1.42 in the prior year.
Now turning to the balance sheet.
Total debt of approximately $1.6 billion and net debt was less than $200 million.
Accounts receivable totaled $2.4 billion and inventories totaled $2.6 billion as of the end of Q1.
Our cash conversion cycle for the first quarter was 32 days, 25 days lower than the prior year and the decrease was driven by DSO improvements and better inventory turns.
Cash generated from operations was approximately $25 million in the quarter; and including our cash and credit facilities, we had approximately $2.8 billion of available liquidity.
We are pleased to report that our Board of Directors have approved a quarterly cash dividend of $0.20 per common share for the quarter.
The dividend is expected to be paid on April 30, 2021 to stockholders of record as of the close of business on April 16, 2021.
Now moving to our outlook for fiscal Q2.
We expect revenue in the range of $4.7 billion to $5 billion.
Non-GAAP net income is expected to be in the range of $94.9 million to $105 million and non-GAAP diluted earnings per share is expected to be in the range of a $1.80 to $2.00 per diluted share based on weighted average shares outstanding of approximately 51.8 million.
Our non-GAAP net income and non-GAAP diluted earnings per share guidance excludes the after-tax cost of $7.3 million or $0.14 per share related to the amortization of intangibles and $4.8 million or $0.09 per share related to share-based compensation.
For the full fiscal year, we continue to expect a healthy IT spending environment, driven by gradually increasing investments in technology enablement.
We expect full year fiscal 2021 non-GAAP diluted earnings per share of approximately $8 per share.
I'm very proud of our associates and the excellent first quarter results that we have delivered.
In Q1, we continued to navigate an unpredictable environment; but through it all, the team again showed flexibility, creativity and dedication to find innovative ways to support our customers and partners with exceptional service.
Our results above our internal expectations were driven by healthy broad-based demand across all our businesses as remote capability and digital transformation investments continued.
Similar to the past few quarters, we saw strong demand for client devices like notebooks and Chromebooks, as well as continued demand for security, cloud, collaboration solutions and related services.
We also saw improvements in areas like enterprise solutions, including server and networking.
Our performance came from across all our customer segments with really no exception in the contribution to the growth in the quarter.
From a geographical perspective, all regions performed well, with Canada and Japan exceeding expectations by the most.
Turning to our Q2 outlook.
Our priority remains on the health and safety of our associates.
Overall, we are encouraged about the IT and spending environment so far in 2021.
As we move closer to a sense of normalcy, it appears investment, especially in IT, is following.
For our Q2, with ongoing execution, we anticipate our business will continue to grow better than the market as our guidance implied a mid to upper single digit year-over-year growth rate.
Perhaps we're being a bit cautious with our expectations for the second quarter given the demand environment is fairly strong currently, evident by our ongoing high backlog and that on-premise purchasing activity is picking up each quarter.
However, given how much we over performed in Q1 and how early we are in Q2, we will start with the current range we have provided.
Overall, we are pleased with the trajectory of our business, evident by Marshall calling out our earnings per share expectations for the year.
As I wrap up, and touching again on the Tech Data merger announcement, those who have followed our space for many years know that M&A has been an important part of this industry.
We and Tech Data have both participated in many transactions over the years and have built up a wealth of knowledge and experience on how to have a successful outcome ensuring that value creation is delivered.
I believe we are very well situated given the strong cultural fit, knowledge of the industry, customers and partners and a strong and talented combined workforce.
We are developing a robust integration plan, and we'll share more with you as we get closer to the transaction close.
We are very excited by the possibilities that this deal creates for our combined company and look forward to realizing the significant value that should produce for our customers, partners, associates and shareholders.
In closing, we remain very focused on our core business.
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q4 adjusted earnings per share $1.35.
q4 earnings per share $1.31.
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To follow along with slides, please visit jabil.com with our -- within our investor relations section.
At the conclusion of today's call, the entire call will be posted for audio playback on our website.
These statements are based on current expectations, forecasts, and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially.
An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2020, and other filings.
I appreciate everyone taking the time to join our call today.
At Jabil, it's people that drive our success.
And it's these same people that truly make us who we are.
Each day, they carry our culture and they cement our values.
The quarter came in ahead of expectations, driven by solid execution and a moderate uptick in demand.
Said differently, we saw well-balanced contributions across the company.
Altogether, the team delivered core operating income of $277 million on revenue of $7.2 billion, creating a core operating margin of 3.8% for the quarter.
For sure, I'm pleased with these results.
Although, what's most interesting to me is the current construct of the business and the improvements we've made to our balance sheet.
This powerful combination has us feeling confident as we look toward fiscal '22.
Moving to Slide 6, you'll see a pie chart.
A colorful chart that represents our commercial portfolio and underscores the effectiveness of our team.
Today, our business is diversified and is diversified at scale, providing more resiliency than ever before.
And in my opinion, it offers Jabil a real competitive advantage, especially when we consider our performance and the sustainability of the business.
Furthermore, each individual piece of the pie harbors specific domain expertise and deep technical knowledge, all of which make up our library of essential and valuable capabilities.
Add to this the method in which our team weaved together these capabilities.
It elevates the way in which we serve our customers, particularly when we move with speed and precision.
This approach is enabled by our structure and open collaboration across the enterprise.
And when it's done correctly, it yields a proven formula that allows us to simplify the complex for many of the world's most remarkable brands.
And looking at the slide, you can see the earnings power of the company and imagine our potential as we look to FY '22 and beyond.
For this year, we now anticipate core earnings per share to be in the range of $5.50 on revenue of $29.5 billion.
But most importantly, we're maintaining our outlook of 4.2% for core operating margin and increasing our outlook for free cash flow by 5% to $630 million.
For me, a positive testament on how the team is managing the business.
In wrapping up our forecast for FY '21, I'd like to note, when we communicate inside the company, our strategy is understood and our path is clear.
During these internal discussions, the thing that stands out to me is our team's obsession with how we produce outcomes.
And when we think about the how, we think about our behaviors.
Behaviors such as keeping our people safe, servant leadership, ensuring a fully inclusive work environment, and giving back to our communities.
I'm proud that our teams dialed in on all of these areas.
In fact, their conduct is exceptional.
Consistent with the past few years, we're looking forward to hosting our annual investor briefing.
We'll open the session by reporting our fourth-quarter and full-year results.
We'll then follow with a complete review of our priorities.
And we'll connect the dots on how these priorities will guide us throughout fiscal '22.
Add to this, a discussion on end markets and our observations specific to the macro environment.
Our management team will also share how we plan to expand core operating margin year on year.
In addition, we'll also describe the hard work put forth that reinforces our goal to deliver double-digit growth in core earnings per share and free cash flow for fiscal '22.
In wrapping up the September session, Mike will break down the shape of the year and share our capital return framework for the coming one to two years ahead.
We have lots to share and we have a good story to tell.
Their efforts over the past two to three years have allowed us to reshape the business as we've targeted growth in select markets.
A few examples of these markets are areas of 5G infrastructure, electric vehicles, personalized healthcare, cloud computing, clean energy, and eco-friendly packaging.
I really like the decisions we're making, and we're doing so while ensuring each employee can be their true self while respecting the environment in which we work.
In closing, we've made tremendous progress financially, operationally, and commercially.
At Jabil, we solve problems over and over again.
As Mark just highlighted, our third-quarter results were very strong, driven higher by the combination of continued end-market strength and excellent operational execution by the entire Jabil team.
In Q3, we saw continued strength with notable revenue upside during the quarter in mobility, cloud-connected devices, and semi-cap relative to our plan 90 days ago.
Given the additional revenue, I'm particularly pleased with the strong leverage we achieved during the quarter, which enabled us to deliver a solid core operating margin of 3.8%, approximately 30 basis points higher than expected.
In Q3, our interest and tax expense also came in better than expected.
The compounding effects of higher revenue and the associated leverage, along with lower interest and tax expense, allowed us to deliver strong quarter diluted earnings per share in Q3.
Putting it all together on the next slide.
Net revenue for the third quarter was $7.2 billion, approximately $300 million above the midpoint of our guidance range.
On a year-over-year basis, revenue increased 14%.
GAAP operating income was $240 million and our GAAP diluted earnings per share was $1.12.
Core operating income during the quarter was $277 million, an increase of 61% year over year, representing a core operating margin of 3.8%, a 110-basis-point improvement over the prior year.
Net interest expense in Q3 was $36 million and core tax rate came in at approximately 18%.
Core diluted earnings per share was $1.30, a 251% improvement over the prior-year quarter.
Now, turning to our third-quarter segment results in the next slide.
Revenue for our DMS segment was $3.6 billion, an increase of 21% on a year-over-year basis.
The strong year-over-year performance in our DMS segment was broad-based, with strength across our connected devices, healthcare, automotive, and mobility businesses.
Core margins for the segment came in at 3.9%, 140 basis points higher than the previous year.
An incredible performance by the team.
Revenue for our EMS segment also came in at $3.6 billion, reflecting strong year-over-year growth in our cloud and semi-cap businesses.
Core margins for the segment were 3.8%, up 90 basis points over the prior year, reflecting solid execution by the team.
Turning now to our cash flows and balance sheet.
Cash flows provided by operations were $585 million in Q3 and capital expenditures net of customer co-investments total $197 million.
We exited the quarter with cash balances of $1.2 billion.
We ended Q3 with committed capacity under the global credit facilities of $3.8 billion.
With this available capacity, along with our quarter-end cash balance, Jabil ended Q3 with access to more than $5 billion of available liquidity, which we believe provides us ample flexibility.
During Q3, we repurchased approximately 2.5 million shares for $130 million.
At the end of the quarter, $124 million remain outstanding in our current stock repurchase authorization and we intend to complete this authorization during Q4 as we remain committed to returning capital to shareholders in FY '21 and beyond.
Turning now to our fourth-quarter guidance.
DMS segment revenue is expected to increase 11% on a year-over-year basis to $3.95 billion.
This is mainly due to strong end-market outlook.
EMS segment revenue is expected to be $3.65 billion, a decrease of 2% on a year-over-year basis.
It's worth noting, our EMS business remains strong and healthy.
The modest decrease is reflective of our previously announced transition to a consignment model, offset by higher server volumes in the cloud business.
We expect total company revenue in the fourth quarter of fiscal 2021 to be in the range of $7.3 billion to $7.9 billion for an increase of 4% on a year-over-year basis at the midpoint of the range.
Core operating income is estimated to be in the range of $280 million to $340 million for a margin range of approximately 3.8% to 4.3%.
Core diluted earnings per share is estimated to be in the range of $1.25 to $1.45.
GAAP diluted earnings per share is expected to be in the range of $1 to $1.20.
Next, I'd like to take a few moments to highlight our balanced portfolio of businesses by end market.
Today, both segments are in incredibly good shape.
Last quarter, I highlighted some long-term sustainable secular trends in strategically important end markets such as healthcare, automotive, connected devices, 5G, cloud, and semi-cap, all of which continue to show strong performance for the balance of FY '21 and beyond.
In tandem with this, in more foundational areas of businesses like print, retail, mobility, networking, and storage, we've retooled, reoptimized, and reimagined our long-standing partnerships with some of the best brands in the world by leveraging Jabil's differentiated capabilities to deliver successful solutions to our customers.
The resiliency in our portfolio, coupled with the long-term secular trends under way across our businesses, we believe, will continue to drive sustainable growth across the enterprise in FY '21 and beyond.
Putting it all together for the year on the next slide.
For FY '21, we expect core operating margins to be 4.2% on revenue of approximately $29.5 billion.
This improved outlook translates to core earnings per share of approximately $5.50.
And importantly, we now expect to deliver more than $630 million in free cash flow despite the stronger growth.
In summary, I'm extremely pleased with the sustainable broad-based momentum under way across the business, which has allowed us to deliver much better-than-expected results through the first nine months of fiscal '21.
As we enter Q4 and look beyond, we fully expect the long-term secular tailwinds that are driving our business to continue.
This, coupled with our improved portfolio mix and lower interest and tax expenses, gives me confidence around continued margin accretion and strong earnings growth in FY '22.
We've been working extremely hard as a team to grow margins, cash flows, and positively impact our interest and tax.
Seeing this hard work manifest in strong financial results is a testament to the exceptional execution by our teams on all fronts.
As we begin the Q&A session, I'd like to remind our call participants that per our customer agreements, we will not address any customer- or product-specific questions.
We appreciate your understanding.
Operator, we are now ready for Q&A.
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q2 non-gaap core earnings per share $1.68.
q2 gaap earnings per share $1.51.
q2 revenue $7.6 billion.
raises financial outlook for fiscal year 2022.
now expect fy22 to deliver revenue in range of $32.6 billion and core earnings per share of approximately $7.25.
sees q3 net revenue $7.9 billion to $8.5 billion.
sees q3 u.s. gaap diluted earnings per share $1.24 to $1.64 per diluted share.
sees q3 core diluted earnings per share (non-gaap) $1.40 to $1.80 per diluted share.
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Today is important and transformative day for the technology distribution industry as SYNNEX and Tech Data come together.
For over four decades we have each worked to help our customers and partners grow and achieve their strategic priorities.
We have both been leaders in the space and I and the entire SYNNEX management team have the utmost respect for the team at Tech Data and what they have created.
Like us, Tech Data has established a reputation for excellence and we are thrilled to partner with its 14,000 plus talented colleagues.
For SYNNEX, this combination is beneficial as it accelerates our strategic growth initiatives by multiple years versus what we could have done by acquiring several smaller, geographically diverse companies.
Thus, the combined company will be able to bring additional services and capabilities to our respective partners.
Even with a well planned and executed strategy, I'm not sure we could have achieved -- over time -- all that is accomplished with this merger.
For our investors, we have the opportunity to create value by accelerated revenue growth, scaled efficiencies, increased cash flow and greater earnings power.
I am pleased to be able to partner with Rich Hume and the go-forward combined entity.
Rich is a talented leader with significant industry expertise and we're fortunate to have him as the CEO of the business going forward.
[Technical Issues] the transformative transaction we are about [Technical Issues] I along with our shareholder Apollo, believe combining our business with SYNNEX accelerates the momentum that was already under way to create growth opportunity that neither company could achieve independently.
The combined company will deliver superior value for shareholders, offer our customers and vendors exceptional reach, efficiency and expertise across the entire technology ecosystem and be an employer of choice in the IT industry.
Importantly, together, we have the portfolio, the financial strength and the talent to enable us to achieve these objectives.
We will have premier, best-in-class, end-to-end offerings through a broad diversified portfolio of more than 200,000 products and solutions.
The combined company will be positioned to transform value creation from the linear model to the multi-point model, enabling collaboration among all of the ecosystem participants.
This will enable us to drive effective go-to-market strategies that our vendors can capitalize on and help to deliver optimal business-oriented solutions for their customers.
Our ability to orchestrate the access, interaction, delivery and services required to solve business challenges at scale is the foundation of how we will continue to grow.
As you know, change is constant in our business and this is a pivotal time in our industry.
Technologies such as cloud, analytics, IoT and security are changing our customers and their end user customers' buy, sell, consume and finance technology solutions causing the IT ecosystem to evolve faster than ever before.
This evolution has accelerated further due to the work-from-home and return to office trends which are contributing to explosive growth in these areas in which we are ideally positioned to serve.
The combined company will have a solid financial foundation, including an investment grade profile and strong free cash flows to support investments in our core growth platforms as well as investments in these next generation technologies.
The breadth and diversification of the combined company extends well beyond our products and solutions.
Together, SYNNEX and Tech Data will have a global footprint that serves more than 100 countries across the Americas, Europe and Asia Pacific.
This combination brings new market opportunities for both companies.
For example, SYNNEX has a well-established presence in Japan, where Tech Data does not.
Similarly, Tech Data is a well-established business across Europe, where SYNNEX has a more limited access.
This meaningful reach across products, services, geographies will also provide increased value and purchasing efficiencies to the combined companies' customers and vendors.
Both SYNNEX and Tech Data have excelled at driving top and bottom-line growth and has successfully acquired and integrated companies in the past.
I have full confidence that our combined team will deliver on the exciting growth underpinning this transformational merger, especially given the complementary values of our organization.
Very well said, and I'm looking forward to working with you to achieve all these benefits and also to continue to drive and support the great cultures each of the company's bring to this transaction.
Over to you, Marshall.
This transaction is valued at $7.2 billion, including net debt; and at close, SYNNEX will issue 44 million shares.
Pro forma ownership will be 55% SYNNEX shareholders and 45% Tech Data shareholders.
We expect the transaction to close in the second half of 2021, subject to customary closing conditions, including approval by SYNNEX shareholders and regulatory approvals.
From a financial perspective, the combined company will be on very solid footing with pro forma revenue of $57 billion, healthy EPS, EBITDA and cash flow generation.
We expect the transaction to be accretive to our non-GAAP diluted earnings per share by more than 25% in year one.
Given the complementary customer set and geographic footprints, we see the opportunity to generate revenue synergies as a combined company.
There is little overlap among our top customers and partners, and we believe SYNNEX's deep and narrow strategy combined with Tech Data's broad customer base minimizes risk regarding diversification.
From a cost perspective, we expect to realize $100 million of net synergies in year one, and $200 million in year two.
This transaction will be facilitated by a new capital structure that we will use to refinance debt at both Tech Data and SYNNEX.
It will consist of a $1.5 billion term loan A and $2.5 billion of unsecured bonds at varying maturities, bolstered by a $3.5 billion revolving credit facility, which we expect to be undrawn at close.
The expected cash balance at close will be approximately $1 billion.
We're also actively seeking to obtain our first investment grade credit rating and feel confident regarding the outcome.
As many of you are familiar with, SYNNEX has a long track record of diligently deleveraging post acquisitions.
We expect the same results with this transaction.
The expected leverage ratio of approximately 2.7 times at transaction close is expected to decline to approximately 2 times within 12 months.
With the combined entity generating LTM pro forma adjusted EBITDA of approximately $1.5 billion, this will provide us with ample ability to de-lever quickly while also remaining focused on optimizing the core and driving organic growth.
Now moving to Q1 fiscal results.
Our team delivered strong results ahead of internal expectations to start off the fiscal year, driven by continued robust broad-based demand.
Total revenue for Q1 was $4.9 billion, up 21% year-over-year.
Gross profit totaled $305 million, up 19% or $49 million compared to the prior year; and gross margin was 6.2%, consistent with the prior year.
Total adjusted SG&A expense was $149 million or 3% of revenue, up $9 million compared to the year-ago quarter and primarily due to COVID-19 related expenses.
We continue to expect incremental quarterly costs at a minimum of $5 million in 2021, and we did a good job of scaling SG&A to the growth of the business.
Non-GAAP operating income was $156 million, up $40 million or 35% versus the prior year; and non-GAAP operating margin was 3.2%, up 33 basis points over the prior year.
Q1 interest expense and finance charges were approximately $23 million and the effective tax rate was 25%.
Total non-GAAP income from continuing operations was $99 million, up $25 million or 34% over the prior year; and non-GAAP diluted earnings per share from continuing operations was $1.89, up from $1.42 in the prior year.
Now turning to the balance sheet.
Total debt of approximately $1.6 billion and net debt was less than $200 million.
Accounts receivable totaled $2.4 billion and inventories totaled $2.6 billion as of the end of Q1.
Our cash conversion cycle for the first quarter was 32 days, 25 days lower than the prior year and the decrease was driven by DSO improvements and better inventory turns.
Cash generated from operations was approximately $25 million in the quarter; and including our cash and credit facilities, we had approximately $2.8 billion of available liquidity.
We are pleased to report that our Board of Directors have approved a quarterly cash dividend of $0.20 per common share for the quarter.
The dividend is expected to be paid on April 30, 2021 to stockholders of record as of the close of business on April 16, 2021.
Now moving to our outlook for fiscal Q2.
We expect revenue in the range of $4.7 billion to $5 billion.
Non-GAAP net income is expected to be in the range of $94.9 million to $105 million and non-GAAP diluted earnings per share is expected to be in the range of a $1.80 to $2.00 per diluted share based on weighted average shares outstanding of approximately 51.8 million.
Our non-GAAP net income and non-GAAP diluted earnings per share guidance excludes the after-tax cost of $7.3 million or $0.14 per share related to the amortization of intangibles and $4.8 million or $0.09 per share related to share-based compensation.
For the full fiscal year, we continue to expect a healthy IT spending environment, driven by gradually increasing investments in technology enablement.
We expect full year fiscal 2021 non-GAAP diluted earnings per share of approximately $8 per share.
I'm very proud of our associates and the excellent first quarter results that we have delivered.
In Q1, we continued to navigate an unpredictable environment; but through it all, the team again showed flexibility, creativity and dedication to find innovative ways to support our customers and partners with exceptional service.
Our results above our internal expectations were driven by healthy broad-based demand across all our businesses as remote capability and digital transformation investments continued.
Similar to the past few quarters, we saw strong demand for client devices like notebooks and Chromebooks, as well as continued demand for security, cloud, collaboration solutions and related services.
We also saw improvements in areas like enterprise solutions, including server and networking.
Our performance came from across all our customer segments with really no exception in the contribution to the growth in the quarter.
From a geographical perspective, all regions performed well, with Canada and Japan exceeding expectations by the most.
Turning to our Q2 outlook.
Our priority remains on the health and safety of our associates.
Overall, we are encouraged about the IT and spending environment so far in 2021.
As we move closer to a sense of normalcy, it appears investment, especially in IT, is following.
For our Q2, with ongoing execution, we anticipate our business will continue to grow better than the market as our guidance implied a mid to upper single digit year-over-year growth rate.
Perhaps we're being a bit cautious with our expectations for the second quarter given the demand environment is fairly strong currently, evident by our ongoing high backlog and that on-premise purchasing activity is picking up each quarter.
However, given how much we over performed in Q1 and how early we are in Q2, we will start with the current range we have provided.
Overall, we are pleased with the trajectory of our business, evident by Marshall calling out our earnings per share expectations for the year.
As I wrap up, and touching again on the Tech Data merger announcement, those who have followed our space for many years know that M&A has been an important part of this industry.
We and Tech Data have both participated in many transactions over the years and have built up a wealth of knowledge and experience on how to have a successful outcome ensuring that value creation is delivered.
I believe we are very well situated given the strong cultural fit, knowledge of the industry, customers and partners and a strong and talented combined workforce.
We are developing a robust integration plan, and we'll share more with you as we get closer to the transaction close.
We are very excited by the possibilities that this deal creates for our combined company and look forward to realizing the significant value that should produce for our customers, partners, associates and shareholders.
In closing, we remain very focused on our core business.
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sees q2 non-gaap earnings per share $1.80 to $2.00.
sees q2 revenue $4.7 billion to $5.0 billion.
qtrly non-gaap diluted earnings per share from continuing operations $1.89.
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Today, we will follow our customary format with Tony Petrello, our chairman, president, and chief executive officer; and William Restrepo, our chief financial officer, providing their perspectives on the quarter's results along with insights into our markets and how we expect Nabors to perform in these markets.
Also, during the call, we may discuss certain non-GAAP financial measures, such as net debt, adjusted operating income, adjusted EBITDA and free cash flow.
We have posted to the investor relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures.
I will begin my remarks with some overview comments.
Then I will detail the progress we made on our five keys to excellence and follow with the discussion of the markets.
William will discuss our financial results.
Our operating performance in the third quarter was strong.
All of our segments met or exceeded the outlook we gave a quarter ago.
On top of that, we completed several milestones across our strategic initiatives.
Adjusted EBITDA in the third quarter reached $125 million.
We maintained our execution at a high level while we grew the overall business.
Our global average rig count for the third quarter increased by two rigs, excluding the impact of the sale of our Canadian drilling assets.
Volumes in our Drilling Solutions and Rig Tech segments both grew quarter-on-quarter.
That drove sequential increases in both revenue and EBITDA in those operations.
The third quarter again marked progress on our twin priorities to generate free cash flow and reduce net debt.
Free cash flow in the quarter exceeded $130 million, including the Canada sales proceeds.
Without those proceeds and the funding for our geothermal investments, we generated free cash flow of $55 million.
This result was significantly above our expectations.
In line with the cash generation, net debt decreased to $2.3 billion in the third quarter, driven by the combination of our strong operating performance, disciplined capital spending, improved working capital and our strategic capital allocation evidenced by the Canadian sale.
I am pleased with our financial performance both in the third quarter and year to date.
Last quarter, I highlighted five key themes that we believe support the Nabors' investment thesis.
These drivers include our leading performance in the U.S., the upturn in our international business, improving results and the outlook for our technology and innovation, our commitment to sustainability and the energy transition and our progress on our commitment to delever.
Our margin performance in the Lower 48 remains strong.
As we expected, for the third quarter, we held daily margins above the $7,000 mark.
This accomplishment was in line with our second quarter and with the outlook we gave last quarter.
We believe our value proposition leads the industry, specifically in operational excellence, advanced technology, top safety performance and sustainability.
Our financial results validate this.
Next, our international business.
We bring the same elements to support our Lower 48 business to our International segment.
Our financial results are benefiting from outstanding performance in the field and highly disciplined capital spending.
Daily drilling margin in this segment remains robust.
As you look through the end of the year and into next, we have visibility to reactivations of three more rigs in Saudi Arabia.
This is in addition to the two restarts that recently occurred.
Currently, we have 40 rigs working in Saudi Arabia.
The in-Kingdom rig new build program is progressing.
Based on the manufacturer's delivery schedule, we expect to deploy the first of SANAD's five awards in the first quarter of 2022.
The balance should come at approximately one per quarter.
We expect each of these rigs to contribute annual EBITDA of approximately $10 million.
SANAD's long-term plans call for a total of 15 new builds over 10 years.
Each successive generation of five rigs today at $50 million annually.
Through the end of 2022, we have excellent visibility to growth at SANAD from expected rig activations and new builds.
With that expected growth, our International EBITDA could increase by 20% versus the third quarter just reported.
Let me next turn to technology and innovation.
Our advanced technology is one of the key drivers of our industry-leading performance.
Our portfolio continues to gain traction in the market.
Quarterly EBITDA in our Drilling Solutions segment increased sequentially by 22%.
This business has scale and is an earnings multiplier on top of our drilling business.
Beyond this performance, our technology pipeline remains full.
Penetration on Nabors' Lower 48 rigs and on third-party rigs increased.
Revenue on third-party rigs improved sequentially by more than 20%.
We continue investing in apps and products that are deployable on third-party rigs.
Notwithstanding that feature, the full potential of this portfolio is maximized on Nabors rigs.
In the third quarter, 74% of our rigs in the Lower 48 ran five or more NDS services.
This compares to 62% in the second quarter.
For NDS in total, we are committed to expanding our digital portfolio further.
Over time, we expect to see greater penetration of these products across the market.
Next, I would like to highlight a significant technology breakthrough.
During the quarter, we deployed the industry's first fully automated land rig, the PACE-R801.
Earlier this month, Rig 801 reached total depth of 20,000 feet on its initial well.
This rig incorporates a number of innovations.
Features our fully automated robotic drilling package.
It also incorporates leading edge controls and smart suite drilling software.
The rig runs casing automatically with a high degree of precision and without the need for a separate casing crew and equipment.
With this design, we have removed the rig hands from the rig floor.
With less physical labor required, Rig 801 has the potential to greatly expand the pool of talent available to work on our rigs.
By removing people out of harm's way, we are confident this rig will experience a step change improvement in safety performance.
With all this rig has to offer, we've already seen interest from other operators.
Now, let's discuss delevering.
The third quarter marked significant progress to improve our capital structure.
Free cash flow in the quarter was strong.
We remain committed to a multifaceted approach to delever.
The primary focus is to continue delivering free cash flow.
I think our results thus far this year demonstrate our commitment and illustrate our success, but we're not finished.
We look forward to reporting additional progress in the future.
I'll now finish this discussion of our themes with sustainability and the energy transition.
We continue to refine and enhance our focus on sustainability.
We made additional progress on our environmental and social scores from ISS.
We remain on track for an additional 5% reduction in greenhouse gas emissions in the U.S. in 2021.
Our employee safety record measured by TRIR has improved each quarter this year.
This TRIR performance leads our industry.
We also made progress in our energy transition initiatives.
We are currently testing prototypes of our carbon capture and hydrogen technologies.
These results have been encouraging.
We have several more projects underway.
As these proceed, we'll be reporting the results.
During the third quarter, we completed investments in three early stage geothermal companies.
We now have a portfolio that covers the spectrum of innovative geothermal technologies.
We view geothermal as immediately adjacent to our existing business.
Each of these companies will benefit from our asset platform as well as our engineering and manufacturing expertise.
We are excited to help drive the widespread development of this source of renewable baseload energy.
We will help these companies cut down the time required to reach their respective commercial stages.
Our global presence, technology and scale will be applied to drive these and other initiatives in the transition space.
We are taking a three-pronged approach to the transition.
We reduced our own carbon footprint by applying new technologies.
We expand these technologies to other verticals.
And we can take advantage of the opportunities in areas adjacent to our activity by investing in these companies and helping them to reach scale.
Now, I will spend a few moments on the macro environment.
The quarter began with WTI above $70.
But at the end of September, WTI was in the mid-70s.
Since then, it has reached the $80 mark where it remains recently.
This range should be conducive to increases in drilling activity across markets.
Next, I'll review the rig count.
Comparing the averages of the third quarter to the second quarter, the Baker Lower 48 land rig count increased by 11%.
According to Inverness, from the beginning of the third quarter through the end, the Lower 48 rig count increased by 47 or approximately 9%.
Smaller clients accounted for nearly all of this growth.
Once again, we surveyed the largest Lower 48 clients at the end of the third quarter.
This survey group accounts for approximately a third of the working rig count.
Our survey indicates an increase in activity approaching 10% for this group by the end of the year.
This outlook is consistent with E&P spending increasing going into the end of the year.
It is very encouraging as we look into 2022.
We also see potential activity increases in our international markets.
In particular, we have visibility to reactivation of suspended rigs in Saudi Arabia.
We recently added an additional rig in Latin America and we are optimistic for additional rigs beginning early next year.
I'll wrap up this macro discussion with an update on our labor availability and the global supply chain.
For labor, we have been successful at recruiting and staffing to support our increases in activity.
Recently, this has become more difficult, particularly in Lower 48.
As a consequence, we raised compensation in this market during the last quarter.
This increase has helped and we are monitoring whether additional steps will be necessary.
Now, let me address the supply chain.
We continue to see moderate cost inflation and lead times have stretched significantly.
With our global systems, we are able to maintain operational continuity.
I would also like to point out that we have delivered on our margins.
The cost increases we have experienced have been offset by similar increases in our day rates for the fleet.
To sum up, commodity prices have continued to rise as global economic activity has increased.
In their current range, oil prices generate favorable operator economics in virtually all areas where we operate.
Natural gas prices have increased to levels not seen in more than 10 years.
We have observed early signs of increased interest from operators, which can benefit from these higher prices.
With that in mind, we remain vigilant to potential disruptions from the virus and challenges in the economy.
Those risks, notwithstanding the current commodity environment supports an increase in the level of drilling activity.
The net loss from continuing operations was $122 million or $15.79 per share.
The third quarter included a $13 million after-tax nonrecurring expense or $1.63 per share related to the purchase of technology in the energy transition space.
This compares to a loss of $196 million or $26.59 per share in the second quarter.
The second quarter results included charges of $81 million after taxes, mainly for an impairment of assets on the sale of our Canada drilling rigs and a tax reserve for contingencies in our International segment.
Revenue from operations for the third quarter was $524 million, a 7% improvement compared to the second quarter.
Excluding Canada, revenue increased by 9% with all of our segments providing strong contributions both in the U.S. and internationally.
rig technologies and Drilling Solutions were particularly strong, growing by 22% and 17%, respectively.
The constructive commodity price environment has continued to drive additional rig awards throughout our markets.
In the Lower 48, we are seeing increased rig demand from larger public customers in addition to continued expansion for private operators.
Internationally, we expect continued expansion in Latin America and the Middle East.
Total adjusted EBITDA of $125 million increased by $8 million or 7%.
Early termination revenue in international and improved activity in the U.S. more than offset lower rig count in Latin America and lower margins in Mexico.
Drilling EBITDA of $62.1 million was up by $2.3 million or 4% sequentially.
Our Lower 48 rig count increased by 4.1 from 63.5 in the second quarter to 67.6 in the third quarter.
Daily rig margins came in at $7,025, in line with the prior quarter.
As utilization for high-spec rigs continues to improve, increases in leading-edge day rates have accelerated significantly.
Although this price momentum has translated into higher average revenue for our fleet, the resulting quarterly improvement was offset by wage increases for rig crews.
For the fourth quarter, we expect average daily rig margin to remain in line with the third quarter.
Market day rates should continue to move upward as the market tightens, but we expect further wage adjustments for our rig crews.
Although these wage increases are largely recovered from our customers, the compensatory day rate increases normally come with a lag.
Currently, our rig count stands at 72.
We forecast an increase of five to six rigs in the fourth quarter versus the third-quarter average.
Drilling segment remained in line with the second quarter.
For the fourth quarter, we expect to add one rig in Alaska.
However, the EBITDA impact of this increased activity will be offset by expected downtime related to recertifications on our largest offshore rig.
International EBITDA gained almost $5 million in the third quarter or 7% sequentially at $7 million in early termination revenue more than compensated for a move-related decrease in Mexico.
Daily gross margins for International increased by almost $1,000 to $14,375.
Early termination revenue added $1,100 per day to our margins but the Mexico moves offset some of the improvement.
Mexico performance should improve in the fourth quarter, but we expect rig moves and idle time between contract exploration and renewal to still affect their fourth-quarter margins.
Without the early termination revenue and with the anticipated improvement in Mexico, the fourth-quarter daily margin should come in between $13,000 and $13,500 per day.
International average rig count came in at 67 rigs, a one rig reduction as compared to the second quarter.
The lower rig count reflected incremental rig count in Saudi Arabia, offset by idle time between contracts in Latin America.
Current rig count in the International segment stands at 69.
Turning to the fourth quarter, we expect International rig count to increase by four rigs as additional rigs are reactivated in Saudi Arabia and Latin America.
Drilling Solutions EBITDA of $15.6 million was up $2.8 million or 22% in the third quarter.
Penetration improved across all of our product lines, with the largest contributions coming from performance software in the U.S. and casing running services globally.
Activity in the Lower 48 generally improved, taking our combined drilling rig and Drilling Solutions daily gross margin to $8,900.
This translates into a $1,900 per day contribution from our rapidly growing solutions segment.
We expect adjusted fourth-quarter EBITDA for this segment to further improve on the strong third-quarter results.
Rig technologies generated adjusted EBITDA of $3 million in the third quarter, a $1 million improvement.
The growth was primarily related to higher equipment sales.
In addition to the already increase in spare parts, repairs and certification revenue, we're starting to see additional sales for rig components.
We believe that rig upgrades as well as upgrade cycles for specific components like top drives and catwalks should drive higher capital equipment sales going forward.
For the fourth quarter, EBITDA should continue to improve on higher capital equipment sales and repairs.
In line with the stronger results, liquidity and cash generation exceeded our expectations.
In the third quarter, total free cash flow reached $133 million.
This compares to free cash flow of $68 million in the second quarter.
The third quarter included a net benefit of $78 million from strategic transactions, namely the sale of our Canadian business for $94 million, partly offset by several investments in geothermal and other energy transition initiatives.
Outside of these transactions, our free cash generation of $55 million reflected the strong operational results, disciplined capital spending and continued progress on working capital reductions.
Free cash flow for the fourth quarter should reach $80 million to $90 million.
This translates into a total 2021 free cash flow of around $350 million.
Capital expenses in the third quarter of $62 million, including $19 million for SANAD newbuilds were down from $77 million in the second quarter.
The $15 million reduction reflected $13 million lower spend for the SANAD newbuilds.
In the fourth quarter, we now forecast roughly $80 million in capital expenditures, including $30 million for the SANAD newbuilds.
Our forecast capital spending for 2021 is approximately $270 million, including $90 million for Saudi newbuilds.
Our net debt on September 30 was $2.3 billion, a reduction of $120 million in the quarter.
At the start of the pandemic, our net debt stood at $2.9 billion.
We have reduced our net debt materially despite the challenging environment.
The third quarter was a further demonstration of Nabors leading operational performance both in the U.S. and internationally, with a potential for meaningful growth in the year ahead.
Our strong operational performance is also translating into robust free cash generation, allowing us to reduce our debt materially.
We expect further net debt reductions in the fourth quarter and in 2022.
With a rapid progress in technology introduction, our modern industry-leading fleet and our close relationships with customers across the globe, Nabors has never been stronger operationally.
And with our deleveraging efforts over the last five years, our capital structure and debt profile are considerably stronger than they have been in a long time.
We believe we are much better positioned to reach our leverage targets while taking advantage of the numerous opportunities presented by the improving industry environment.
These third-quarter results on top of performance in the second quarter reinforced our conviction that we have the right strategies to reach our goals.
We made significant progress to improve our capital structure.
At the same time, we advanced both the development and deployment of multiple impactful technology solutions.
We are committed to responsible hydrocarbon production as we pursue initiatives to support the energy transition.
In the face of the challenge brought on by the pandemic, Nabors has demonstrated material progress along both fronts.
As well, our financial results have proved resilient, demonstrating the value embedded in our global portfolio of businesses.
With all that we've achieved so far, I am confident the best is yet to come.
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q3 revenue $524 million.
q3 loss per share $15.79 from continuing operations.
q4 international quarterly average rig count is expected to increase by about 4 rigs over q3 average.
nabors industries - q4 international daily drilling margin is expected to decline to $13,000 - $13,500, reflecting non-recurring early termination revenue in q3.
q4 u.s. drilling quarterly average lower 48 rig count is expected to increase by approximately five rigs over q3 average.
capital expenditures for full year are expected to total approximately $270 million.
q3 included a $13 million after tax expense, or $1.63 per share, related to purchase of technology in energy transition space.
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What we will say today is based on the current plans and expectations of Comfort Systems USA.
Those plans and expectations include risks and uncertainties that might cause actual future activities and results of our operations to be materially different from those set forth in our comments.
Joining me on the call today are Brian Lane, President and Chief Executive Officer; and Bill George, Chief Financial Officer.
Brian will open our remarks.
Due to the commitment and resilience of our people, we were able to overcome unprecedented challenges during 2020 to achieve record earnings and cash flow.
In addition to the ongoing challenges from the pandemic, our people and organizations also experienced and overcame significant adversity in Texas just last week.
In 2020, we earned more than 20% of our revenue in Texas, where we have multiple strong mechanical capabilities in many markets, and Texas is also the home to our largest electrical team.
Virtually, all of our operations were closed for at least three full days with loss of productivity throughout last week.
We are now back to full capacity.
I am deeply grateful for the courage and perseverance that our field employees demonstrated, last week, in Texas and in many other markets that experienced terrible weather.
And I am in awe of our field workforce's grit and perseverance through COVID as every day our essential workers overcame the challenges they faced.
We continue to work hard to keep our workforce and our community safe and healthy every day.
2020 was a record year for Comfort Systems USA.
We finished the year with strong fourth quarter earnings per share of $1.17, and for the full year, we earned $4.09.
This marks the highest annual earnings per share in the history of our company, even without our tax and valuation gain.
Revenue for full year 2020 was also a record at $2.9 billion.
Our backlog is up slightly since September, and we have very good ongoing bidding activity as we start 2021.
Our 2020 free cash flow was an unprecedented $265 million.
And yesterday, we again announced an increase in our dividend.
At the end of 2020, we acquired a Tennessee Electric Company headquartered in Kingsport, Tennessee, and we expect they will contribute $90 million to $100 million of revenues in 2021.
This acquisition was closed on December 31, 2020.
So their balance sheet and backlog are included as of the last day of December.
TEC is a strong electrical and mechanical contractor, but TEC also brings unique industrial construction and plant service expertise and relationships with complex industrial clients.
Their results will be reported in our electrical segment starting in 2021.
In December, we promoted Trent McKenna to Chief Operating Officer.
Trent has been with Comfort Systems USA for 16 years, and I believe he will be a valuable leader, as we continue to grow and improve our operations.
By the way, I am not going anywhere, but this added depth will provide much-needed bandwidth to our senior team.
Before I review our operating results and prospects, I want to ask Bill to review our financial performance.
So as Brian said, our results were again very strong.
I'm going to just briefly point out some things for most of the line items of our P&L.
So fourth quarter revenue was $699 million, a decrease of $21 million compared to the same quarter last year.
Our same-store revenue declined by a larger $68 million.
However, our recent acquisitions of TAS and Starr offset that decline somewhat as they added $48 million in revenue this quarter.
You may recall that last year, at this time, we had large data center work in Texas that created very high revenue in the comparable period.
We will continue to face tough revenue comparisons through the first half of this year, especially in electrical, as a result of last year's big deployments.
Revenue for the full year was $2.9 billion, an increase of $241 million or 9% compared to 2019.
Full year same-store revenue in 2020 was 2% lower than in 2019 due to the factors I just mentioned.
Gross profit was $137 million for the fourth quarter of 2020, an increase of $4 million.
And gross profit as a percentage of revenue rose to 19.6% in the fourth quarter of 2020 compared to 18.4% for the fourth quarter of 2019.
For the full year, gross profit increased $45 million, and our gross profit margin was approximately flat at 19.1%.
SG&A expense was $89 million or 12.7% of revenue for the fourth quarter of 2020 compared to $87 million or 12% of revenue for the fourth quarter of 2019.
The prior year fourth quarter benefited from insurance proceeds associated with the cyber incident of approximately $1.6 million, and that reduced SG&A last year.
For the full year, SG&A as a percentage of revenue was 12.5% for 2020 compared to 13% for 2019.
On a same-store basis, for the full year, SG&A declined $6 million, and that decrease was primarily due to austerity relating to COVID, such as reductions in travel-related expenses.
During the fourth quarter of 2020, we revalued estimates relating to our earn-out liabilities, and as a result, we reported an overall gain of $7 million or $0.18 per share.
For the full year, the gain associated with acquisition earn-out valuation changes was $0.20 per share.
These gains were due to lower-than-forecasted earnings associated with our recent acquisitions, especially at Walker, which was more affected by COVID than our other operations.
Our 2020 tax rate was 21.6% compared to 24.7% in 2019.
During the third quarter of 2020, we finalized advantageous settlements with the IRS from their examination of our amended federal tax returns for 2014 and 2015.
On a go-forward basis, we now expect our normalized effective tax rate will be between 25% and 30%.
Although 2014 and 2015 are now settled, we have open audits relating to refunds we are claiming for the 2016, 2017 and 2018 tax years.
But we believe that any benefits that arise from those years would most likely be recognized in 2022 or beyond.
So after giving effect to all these items, we achieved record net income.
Specifically, net income for the fourth quarter of 2020 was $43 million or $1.17 per share as compared to $34 million or $0.92 per share in 2019.
Earnings per share for the current quarter included that $0.18 gain associated with earn-out revaluations.
Our full year earnings per share was $4.09 per share compared to $3.08 per share in the prior year.
The current year also included a tax benefit of $0.17 that we reported in the third quarter of 2020 from a discrete tax item.
The gains associated with earn-out revaluations, which for the full year was $0.20.
For the fourth quarter, EBITDA was $63 million, which is 6% higher than the fourth quarter of last year.
Our annual 2020 EBITDA was a milestone achievement for us, as our full year EBITDA was $250 million.
Cash flow for 2020 was extraordinary.
Our full year free cash flow was $255 million compared to $112 million in 2019.
Our 2020 cash flow includes roughly $32 million of benefit, that's a direct result of the Federal Stimulus Bill, which allowed us to defer payroll tax payments in the last nine months of 2020.
These tax deferrals will be repaid in two equal installments in the fourth quarters of 2021 and 2022.
Even with our acquisition expenditures, we were able to reduce our debt to less than one turn of trailing 12-month EBITDA.
2020 was our largest year for share repurchases in quite some time, as we reduced our overall shares outstanding by repurchasing 685,000 of our shares at an average price of $43.99.
Since we began our repurchase program in 2007, we have bought back over 9.3 million shares at an average price under $20.
That's all I have, Brian.
I'm going to spend a few minutes discussing our backlog and markets.
I will also comment on our outlook for 2021.
Our backlog level at the end of the fourth quarter of 2020 was $1.51 billion.
Sequentially, our same-store backlog increased by $10 million, with particular strength in our modular backlog.
Same-store backlog compared to one year ago has decreased by $375 million, of which approximately, 1/3 related to an expected decline in our electrical segment.
We are also experiencing delays in bookings and in project starts at certain of our large private companies.
Overall, we are comfortable -- we are very comfortable with the backlog we have across our operating locations as our booked work at the end of 2019 included some live beta projects and that comparison represented an unusually high level of backlog.
Most of our sectors continued to have strong quotation activity, even the sectors where bookings have been delayed.
That is particularly true on our industrial business, which includes technology, manufacturing, pharmaceuticals and food processing.
Our industrial revenue has grown to 39% of total revenue in 2020 compared to 34% a year ago.
We expect this sector to continue to be strong, and the majority of TAS and TEC revenues are industrial.
Institutional markets, which includes education, healthcare and government, were 36% of our revenue, and that is roughly consistent with what we saw in 2019.
The commercial sector was 25% of our revenue.
For 2020, construction was 79% of our revenue with 47% from construction projects for new buildings and 32% from construction projects in existing buildings.
Both of our construction and service businesses achieved record operating income margin.
Service was 21% of our 2020 revenue with service projects providing 8% of revenue and pure service, including hourly work, providing 13% of revenue.
Beginning in late March, our service business experienced the first and most pronounced negative impacts associated with COVID-19, largely as a result of building closures and decisions by customers to limit facility access.
We are seeing good opportunities in internal air quality, which has helped many of our service departments return to pre-pandemic volumes.
The most important element of IAQ is this -- is not just the immediate revenue, but also the opportunity to use our unmatched expertise to create new relationships.
This really plays to our strength of solving problems for our customers, and it is not just a service story.
As air quality considerations really add to our ability to differentiate and add value in construction and at times will increase the size and complexity of even large projects.
Overall, our service operations ended the year with improved profitability, and thus, today, they are back to prior volumes.
Despite pandemic-related challenges, our mechanical segment performed incredibly well during the quarter.
We are grateful for our performance this year, and our prospects are much better than we would have expected this past spring.
Our electrical segment had a tougher 2020 than we would have liked, but we currently expect good margin improvement in electrical in 2021.
Our backlog strengthened this quarter, but our near-term business continues to reflect some delays in bookings and starts that will result in same-store revenue headwinds in the first half of 2021.
At the same time, we have really strong project development and planning activity with our customers.
We are increasingly optimistic about 2021 and beyond because of that strong pipeline.
We currently expect full year 2021 results that are similar to, but lower than, the record results that we achieved in 2020.
We continue to prepare for a wide range of potential circumstances in nonresidential construction in the coming quarters.
However, we perceived strong trends, especially in industrial, technology and manufacturing.
And we think our geographic markets are favorably positioned with comparatively strong prospects.
We look forward to good profits and cash flow in 2021.
We have an unmatched workforce and a great and essential business, and we will continue to invest our reliable cash flows to make the most of these advantages and opportunities.
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compname reports q3 earnings per share $1.27.
q3 earnings per share $1.27.
backlog as of september 30, 2021 was $1.94 billion.
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A couple of items before we get started.
I'll now hand it off to Brent for his highlights.
I'd like to start by mentioning how pleased we were with our first quarter results.
The broader operating environment has been unusual to say the least.
But we'll touch more on that in a minute.
I'd like to highlight the dedication and intense focus our team demonstrated in delivering solid quarterly performance.
First quarter operating profit and earnings per share came in above our expectations as we executed on the manufacturing side, while continuing to tightly manage our overall cost structure.
Indicators for our core transportation, logistics and distribution markets continue to be remarkably strong.
Record spot rates and expectations for continued increases in contract rates are indicative of a robust consumer demand and capital spending paired with already strained industry capacity.
All types of transportation solutions are in high demand as we begin 2021, and I'll call it our final mile truck body business because of core correction in FMP's markets during 2020 was more severe than we would have expected during non-pandemic circumstances, and we're optimistic that the bounce back is going to be summerly strong.
Indications from our large leasing customers is that demand has returned from small and medium-sized business segments of the market that they serve so effectively.
Their rental businesses have also benefited as fleets scramble for equipment as well.
We believe these trends have staying power as the pandemic has clearly accelerated changes that were already under way in transportation, logistics and distribution, and we feel good about the demand environment as we look forward to this year and beyond.
We'll now talk about the labor and supply chain situation.
Robust industrial and consumer demand across the broader manufacturing landscape has created imbalances throughout an array of manufacturing supply chains, leading to aggressive increases in the price of materials as well as further compounding labor availability across the country.
I'm not aware of any manufacturer that's been immune to these issues.
And although we have introduced effective countermeasures to mitigate the impact within Wabash, we also feel the result in headwinds rising from those labor availability and material cost increases.
Hiring remains a challenge.
And after a relatively successful fourth quarter, our intake of new team members was less than desired during the first quarter and reflected of the general reality of the U.S., labor market.
We will continue to pursue additional manufacturing talent throughout 2021 as we work to meet our 2021 customer demand and prepare for our 2022 market reality.
And our guidance is the reality that integrating additional manufacturing talent impacts overall productivity in the near term.
This is just a simple reality of the situation.
The other reality is that the bulk of this impact will not carry over into 2022.
It is fair to say that supply chains were already stressed heading into this year, and we had some unique Quarter one weather events to say the least, that compounded supply chain issues and heavy winter storms impacted production; both with ourselves and our suppliers.
This did impact our final mile manufacturing in Texas, disrupted basic flow of commerce for an extended period of time and significantly impacted chemical related production across many industries; all adding to the stressed supply chain, which we feel in terms of increased disruption and further increases in material costs.
The cost of commodities and semi-finish components has reacted strongly to the current manufacturing environment, constraints in basic feedstock and lack of labor availability, already elevating -- already elevated heading into the year, cost of un-hedged inputs have continued to rise which is why despite our earnings per share beat in Q1, we have maintained our prior earnings per share guidance.
As I mentioned when referencing market conditions, our products remain high in demand with our customers.
In particular, our molded structural composite technology is entering a new phase of market adoption, and we're moving into our next phase of modest MSC, molded structural composite technology capacity additions for 2022.
As we mentioned on a prior call, continued high demand for our current dry and refrigerated products, coupled with product innovation opportunities being brought forward by the structural changes made to our product innovation and technology team means that we are in need of manufacturing capacity to capture the full value of innovation in these traditional product markets.
In support, we will be committing new and additional resources into our product development and launch team to further scale and accelerate the introduction of new engineered solutions and our entry into new product and customer markets.
As we have now organized our commercial organization around our dynamic customer base, we're in the early stages of creating the appropriate conditions to leverage new technologies across our industry, leading first the final mile product portfolio to extend our competitive advantage with key customers.
With this evolving landscape, we see real opportunity to grow in our markets and grow the shared value created with our employees, our customers and our shareholders.
Given the opportunity ahead of us, being facilitated by strategic changes to our organizational structure and the ability to leverage flexible manufacturing across product lines, I can think of few opportunities more beneficial to our long-term shareholders than reinvesting in our business to support our future organic growth.
Case in point is our backlog through the first quarter.
It's typical for Q1 backlog to decline sequentially after we booked large deals in the fourth quarter of the previous year.
This year, new orders get paced with our shipment activity during the quarter as we saw strong demand for our non van business, which, again, is sold out for 2021 and obviously unable to book new orders for the year.
This level of demand for diversified products and final mile was expected given our customer conversations heading into the year.
But it's always nice to see the committed customer orders come through.
As we look to the future, demand for Wabash engineered solutions continues to grow in a manner that requires us to act on our ability to satisfy them.
As I previously mentioned, we are maintaining our prior guidance.
We are very pleased with how our demand environment has taken shape in 2021 and its extension into 2022 and beyond.
We expected labor to be a challenge, and we were not disappointed on that.
We remain on track to ramp our total man capacity to enter 2022 in a very strong manner.
However, I would say the rise of material cost has been greater than anything we could have reasonably expected, given that we are in uncharted territory with all-time highs in a number of commodities.
What I'm pleased to see is that we have taken immediate decisive action to recover a large portion of those costs and manage in other ways to mitigate the impact far beyond Wabash's performance of the past.
As the world begins to return to something that resembles normalcy, we are optimistic that the labor and supply chain challenges of 2021 will normalize over time and leave us with a less challenging operating environment in 2022, while freight growth remains strong and customer demand continues to be robust.
We are, therefore, excited about what the future holds as many of the structural and process-based changes that we've made to our organization and having the intended outcome of synergistically furthering our ability to execute on our strategy.
Our improved ability to operate and the growing reality of the established vision of enabling our customers to succeed with breakthrough ideas and solutions that help them move everything in the first to final mile is now an active play.
We are executing the plan.
And with that, I'll hand it over to Mike for his comments.
I'd like to start off by giving some color on our first quarter financial results.
On a consolidated basis, first quarter revenue was $392 million, with consolidated new trailer shipments of 9670 units during the quarter.
Gross margin was 12% of sales during the quarter, while operating margin came in at nine -- at 2.9%.
As Brent mentioned, these margins were somewhat above our expectations for the quarter as a result of continued strong cost control.
Additionally, I'd like to reference the 2020 initiatives to lower our cost structure by $20 million, of which $15 million was SG&A.
Because after the first quarter, we lose clean SG&A comparisons from last year as furloughs and other temporary cost control measures were implemented beginning in the second quarter of 2020.
SG&A was lower year-over-year in Q1 by $4.7 million.
Additionally, about 25% of our savings initiatives are being realized as reductions in cost of goods sold.
So we are pleased that these structural savings are more than holding driving a significant ramp in volumes.
Operating EBITDA for the first quarter was $26 million or 6.7% of sales.
Finally, for the quarter, net income was $3.2 million or $0.06 per diluted share.
From a segment perspective, commercial trailer products generated revenue of $248 million and operating income of $20.9 million.
Average selling price for new trailers within CTP was roughly $26,000, which represents a 7.5% decrease versus Q1 of 2020 as a result of meaningfully higher mix of pump trailers, where prices tend to be significantly lower than 53-foot driving trailers.
Diversified Products Group generated $74 million of revenue in the quarter with operating income of $6.1 million and segment EBITDA margin that hit 14.3%; which was the best level since 2016.
Average selling price for new trailers within DPG was roughly $72,000, which represents a 4% increase versus Q1 of 2020.
Final mile products generated $77 million of revenue as this business ramps to meet stronger market demand.
FMP experienced an operating loss of $4 million, which was expected in our prior quarterly guidance.
Because of FMP's heavy and increasing amortization burden, EBITDA provides a more stable measure of progress and more relevant measure of impact on operating cash generation.
We are encouraged that FMP's EBITDA moved back to positive territory during the first quarter with a gain of $621,000 as improved volumes allowed us to better leverage our fixed cost during the quarter.
We expect FMP EBITDA generation to improve in the second half of 2021 as the business installs additional capacity to continue meeting customer demand through the on-boarding of new employees.
Year-to-date operating cash flow was negative $22 million.
We invested roughly $4 million via capital expenditures, leaving negative $27 million of free cash flow.
Although our payables widened out considerably, receivables and inventory combined to have a meaningful impact on working capital as we expected during the quarter.
We continued to show working capital efficiency in Q1 as part of our One Wabash transformation, and we are well on our way to achieving a capital-efficient ramp in 2021.
We continue to target $35 million to $40 million in capital spending for 2021.
With regard to our balance sheet, our liquidity or cash plus available borrowings as of March 31 was $337 million of $169 million of cash and $168 million of availability on our revolving credit facility; which is fully untapped.
For capital allocation during the first quarter, we utilized $18.2 million to repurchase shares, pay our quarterly dividend of $4.3 million and invested $4.2 million in capital projects.
Furthermore, in April, we made a voluntary $15 million payment on our term loan.
Our capital allocation focus continues to prioritize reinvestment in the business through growth capex while also maintaining our dividend and evaluating opportunities for debt reduction and share repurchases.
Moving on to the outlook for 2021.
We expect revenue of approximately $1.95 to $2.05 billion.
CTP is right back to bumping up against capacity constraints, while FMP is fielding plenty of demand with labor being the primary gating factor.
SG&A as a percent of revenue is expected to be in the lower six range for the full year, and we remain on track to sustain the reduction in our cost structure by $20 million relative to 2019, with around $15 million of that cost out, residing within SG&A.
Operating margins are expected to be in the high 3% range at the midpoint.
Turning to the second quarter.
We expect revenue in the range of $450 million to $480 million, up 17% at the midpoint sequentially versus Q1, with new trailer shipments of 10,500 to 11,500 as we look to keep increasing production throughout the year.
Given our expectations for operating margins in the low 3% range in Q2, this implies earnings per share in the range of $0.10 to $0.15 for the quarter.
In closing, I'm pleased with our results to start the year.
Ramping manufacturing is never easy, and this year certainly comes with unique challenges for ourselves and other manufacturers.
But we see it as a great opportunity to scale up and ensure that we're firing on all cylinders as customers increasingly become focused on 2022 and what we expect to be a smoother operating environment that will allow us to return the company revenues to levels approaching what was recorded in 2018 and 2019.
The company is just beginning to enter into these exciting times as the structure of our organization is in the early days of achieving its intended purpose of advancing our strategy, which emphasizes organic growth, leveraging our industry-leading first to final mile portfolio.
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wabash national q1 non-gaap loss per share $0.04.
q1 non-gaap loss per share $0.04.
q1 gaap loss per share $2.01.
q1 sales $387 million versus refinitiv ibes estimate of $418.5 million.
total company backlog ending march 2020 was about $1.0 billion compared to backlog of $1.1 billion ending december 2019.
liquidity as of end of q1 was $277 million with cash of $155 million and available borrowings of $122 million.
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I'm pleased to report another very strong quarter with record revenues at CooperVision and CooperSurgical, driving record earnings and robust free cash flow.
CooperVision's growth was broad-based and led by our daily silicone hydrogel portfolio of lenses and a solid rebound in EMEA.
While our myopia management products also performed really well, and of course, we received the exciting news about regulatory approvals for MiSight in China.
CooperSurgical continued posting great results led by fertility and a nice bump in PARAGARD, helped by buying activity from a price increase.
Moving forward, we expect core operational strength to continue driving strong performance even with challenges from COVID and currency.
With this expectation and the opportunities we're seeing in myopia management, daily silicones, and fertility, we've increased our constant currency revenue guidance for both CooperVision and CooperSurgical and we'll maintain our investment activity to capitalize on the potential for incremental share gains as we move toward fiscal 2022.
Moving to third-quarter results and reporting all percentages on a constant currency basis, Consolidated revenues were $763 million, with CooperVision at $558 million, up 20%, and CooperSurgical at $206 million, up 58%.
Non-GAAP earnings per share were $3.41.
For CooperVision, our daily silicone hydrogel portfolio led the way with all 3 regions posting strong growth.
Particular strength was noted in our daily toric franchises, but daily spheres and multifocals also performed well.
And in a great sign, we've seen a nice uptick in fit data for MyDay and clariti, which bodes well for share gains and future growth.
Within the regions, the Americas grew 16%, led by MyDay and clariti and continued improvement in patient flow.
EMEA grew a healthy 24% as consumer activity returned in the region, and we took share.
1 in EMEA, and we're seeing the benefits of increasing patient flow, So, we'll continue investing to support the reopening activity happening in many of the European markets.
Asia Pac grew 18%, led by a slow but steady improvement in consumer activity.
For us, a significant portion of Asia Pac is driven by Japan.
And although consumer activity remains somewhat muted, we're performing well and taking share, and we're well-positioned to capitalize on future opportunities given our recent product launches.
Moving to category details.
Silicone hydrogel dailies grew 31% and with MyDay and clariti both performing well.
MyDay, in particular, continues taking share, led by strength in MyDay toric in all regions.
For our FRP portfolio, Biofinity continued its solid performance led by Biofinity Energys and Biofinity toric multifocal.
Regarding product expansions and launches, we remain very active.
We're finishing the launch of clariti, sphere, and the MyDay second base curve sphere in Japan.
We're rolling out Biofinity toric multifocal in additional markets.
We're rolling out an expanded toric range for MyDay, giving it the broadest range of any daily toric in the world.
And we're also completing the rollout of extended toric ranges for clariti and Biofinity.
We've also started prelaunching activity for MyDay multifocal with the launch -- with a full launch on target for the U.S. and other select markets in November.
Feedback on this lens remains extremely positive, including from fitters commenting that our OptiExpert fitting app has the highest fit success rate of any multifocal on the market.
Recent data shows that over 90% of contact lens wearers over the age of 40 expect to continue wearing lenses with the biggest challenge being finding a good multifocal.
Given the feedback we've been receiving, we believe MyDay will be the best multifocal on the market and combined with the fact that it's joining an already highly successful MyDay sphere and toric, we're very optimistic about its success.
Moving to myopia management.
Our portfolio grew a robust 90% this quarter to $18 million, with MiSight up 187% to $5 million and ortho-k products up 68%.
As a global leader in the myopia management space, our portfolio is the broadest in the industry, comprised of MiSight, the only FDA-approved myopia control product, our broad range of market-leading ortho-k lenses, and our innovative SightGlass Vision glasses.
We continue targeting $65 million in myopia management sales this year, including MiSight reaching $20 million.
Regarding MiSight, there was a lot of positive activity this quarter as we continue capitalizing on our first-mover advantage.
We received regulatory approval in China, and we're extremely excited about that opportunity.
The approval requires lenses to be manufactured post-approval.
So, we've quickly initiated production and packaging, and plan to seed the market starting in early fiscal Q1 with a full launch in fiscal Q2 of next year.
As part of this, we're immediately ramping up marketing efforts and working quickly to ensure the product is positioned for success.
Myopia rates are very high in China, So, the market potential is significant.
As an example, it's estimated that over 80% of high school kids are myopic, So, treating children at a younger age is of high importance in the country.
Outside of China, we continue making great progress with our large retailers and buying groups.
Our pilot programs are live and expanding, and we've finally been able to resume in-person training in many markets, including in the U.S.
We now have over 40,000 children wearing MiSight worldwide, and that number is growing quickly.
Additionally, the average age of a new MiSight wearer remains 11, So, this treatment is bringing children into contact lenses at a much younger age.
Lastly, on MiSight, we did see momentum pick up even more in August, including here in the U.S., So, we're bullish for a strong Q4.
Regarding our other myopia management products, we had a solid quarter for ortho-k driven by our broad product portfolio and from the halo effect we're seeing with MiSight.
And we continue making progress with our SightGlass myopia management glasses, preparing for several upcoming launches later this calendar year.
We've also submitted our application to the FDA for approval for MiSight as a myopia management treatment and expect to receive initial feedback within a couple of months.
In the meantime, as the myopia management market continues developing, we're definitely seeing the value of offering multiple options to eye care professionals, So, we look forward to expanding our offerings and availability.
To wrap up on myopia management, our innovation pipeline is very healthy with eight focused pipeline products.
Our sales and marketing efforts are proving successful and our focus on leading with clinical data and providing the best and broadest portfolio in the market, has us in an excellent position for continued success.
To conclude on vision, our business is doing really well.
The back-to-school season is healthy, new fits are doing well, and we're excited about our existing products and upcoming launches.
On a longer-term basis, the macro growth trends remained solid, with roughly 33% of the world being myopic today, and that number is expected to increase to 50% by 2050.
Given our robust product portfolio, new product launches, myopia management momentum, and strong fit data, we're in great shape for long-term sustainable growth.
This was an outstanding quarter with record revenues of $206 million.
Fertility, in particular, continued to perform exceptionally well, growing 72% year over year to $83 million.
Strike was seen around the world and throughout the product portfolio, including from consumables, capital equipment, and genetic testing.
Some areas of strength included growth in media, for pets, needles, incubators, and embryo transfer catheters, along with another very strong quarter from RI Witness, our proprietary automated lab-based management system that clinics implement to maximize safety and security by optimizing their lab practices.
We're also benefiting from increased utilization of our artificial intelligence-based genetic testing platform, which increases the doctor's ability to select the best embryos for transfer.
Similar to last quarter, we're continuing to see COVID impact the market, but share gains and improving patient flow in most countries are driving our results.
Regarding the broader fertility market, the global landscape remains fragmented with significant geographic diversity.
And with an addressable market opportunity of well over $1 billion and mid- to upper-single-digit growth, this is a great market for us.
It's estimated that one in eight couples in the U.S. has trouble getting pregnant due to a variety of factors, including increasing maternal age.
And that more than 100 million individuals worldwide suffer from infertility.
Given the improving access to fertility treatments, increasing patient awareness, greater comfort discussing IVF and increasing global disposable income, this industry should grow nicely for many years to come.
So, overall, in fertility, our portfolio and market positioning are excellent.
We remain in a great spot for future share gains with improving traction in key accounts.
We're seeing continued reopening activity around the world, and the industry has great long-term macro growth drivers.
For all these reasons, we remain very bullish on this part of our business.
Within our office and surgical unit, we grew 50% with PARAGARD up 51% and office and surgical medical devices up 49%.
For PARAGARD, we implemented a roughly 6% price increase toward the end of the quarter, which resulted in a buy-in of roughly $4 million.
This will impact our Q4 performance, but the price increases are long-term positive noting with contracts and reimbursement timing, the price increase rolls in over the next couple of years.
Within medical devices, several products performed well, including EndoSee Advance, our direct visualization system, for evaluation of the endometrium and our portfolio of uterine manipulators.
To wrap up on CooperSurgical, this was another excellent quarter, and it was great to exceed $200 million in sales for the first time ever.
Similar to CooperVision, we have powerful macro trends supporting our underlying growth and remain confident in our ability to continue delivering strong results.
Third-quarter consolidated revenues increased 32% year over year or 28% in constant currency to $763 million.
Consolidated gross margin increased year over year to 68.3%, up from 66.3% with CooperVision posting higher margins driven by product mix and currency, and CooperSurgical posting higher margins from product mix tied to the significant year-over-year growth in fertility and PARAGARD.
Opex grew 28% as sales increased with a rebound in revenues, along with higher sales and marketing expenses associated with investments in areas such as myopia management.
Consolidated operating margins were strong at 26.6%, up from 23.2% last year.
Interest expense was $5.6 million and the effective tax rate was 13.5%.
Non-GAAP earnings per share was $3.41 with roughly 49.8 million average shares outstanding.
Free cash flow was very strong at $180 million, comprised of $224 million of operating cash flow, offset by $44 million of capex.
Net debt decreased to $1.5 billion and our adjusted leverage ratio improved to one and a half times.
Overall, this was a very strong quarter, and we exceeded our financial performance expectations.
We continue monitoring and evaluating the scope, duration, and impact of COVID-19 and its variants.
And while this remains a risk factor, our visibility is sufficient to provide the following update to our guidance.
For the full fiscal year, we're increasing our constant currency guidance for both CooperVision and CooperSurgical and maintaining our non-GAAP earnings per share guidance.
Specific to Q4, consolidated revenues are expected to range from $730 million to $760 million, up 7% to 11% in constant currency, with CooperVision revenues between $540 million and $560 million up 6% to 10% in constant currency, and CooperSurgical revenues between $190 million and $200 million, up 8.5% to 14% in constant currency.
Non-GAAP earnings per share is expected to range from $3.24 to $3.44.
To provide color on this guidance, currency moves since last quarter have reduced the benefit of the full-year FX tailwind from 3% to 2.5% for revenues, and 7% to 5% for EPS.
With respect to Q4, this equates to reducing revenues by $10 million in CooperVision and $2 million at CooperSurgical, and reducing earnings per share by $0.14.
CooperVision is offsetting some of the impact with expected strength in daily silicone and myopia management sales, while CooperSurgical is expecting continued strength, although incorporating the Q3 PARAGARD buy-in of $4 million and hopefully some conservatism regarding COVID's impact on elective procedures.
Consolidated gross margins for the fiscal year are expected to be around 68%, with fiscal Q4 gross margins expected to be around 67.5%, driven primarily by currency.
Operating expenses are expected to be slightly lower sequentially, but similar to fiscal Q3 on a percentage of sales basis, as we continue investing in multiple areas such as myopia management and fertility.
Our Q4 tax rate is expected to be around 11%.
And lastly, our free cash flow continues to improve, and we're now expecting roughly $550 million for the full year.
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compname reports fourth quarter 2021 net income of $2.4 billion.
q4 revenue rose 4% to $8.1 billion.
qtrly net interest margin of 6.60%, up 25 basis points versus q3.
compname reports fourth quarter 2021 net income of $2.4 billion, or $5.41 per share.
compname says common equity tier 1 capital ratio under basel iii standardized approach of 13.1 percent at december 31, 2021.
qtrly earnings per share $5.41.
qtrly provision for credit losses increased $723 million to $381 million versus q3 2021.
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This is Jim Koch, Founder and Chairman and I'm pleased to kick off the 2021 first quarter earnings call for the Boston Beer Company.
Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO.
As the world slowly reopens and the COVID pandemic winds down, our primary focus continues to be on operating our breweries and our business safely and working hard to continue to innovate and meet customer demand.
Before I turn to our key first quarter operational achievements, I want to note that working with the Greg Hill Foundation, our Sam Adams Restaurant Strong Fund has raised over $7.5 million dollars thus far to support bar and restaurant workers who were experiencing hardships in wake over COVID-19 and it committed to continue to distribute 100% of its proceeds through grants to bars and restaurant workers across the country.
The company's depletions increased 48% in the first quarter and we achieved double-digit volume growth for the 12th consecutive quarter.
This just would not have been possible without the outstanding coworkers in our breweries and our sales force and the frontline workers and our distributors and retailers.
Early in 2021, we launched Truly ice tea Hard Seltzer and during the second quarter, we plan to launch Truly Punch hard seltzer, both buying refreshing hard seltzer and bold flavors, and we believe these new launches continue to demonstrate our innovation leadership within the hard seltzer category.
We are also making steady progress in improving our brand support and messaging for a beer and cider brands to position them for long-term sustainable growth in the face of the difficult on-premise environment.
We're optimistic that our on-premise business will significantly improve in 2021 as restrictions are lifted.
We're excited about the response, the introduction in early '21 of several new Sam Adams beer including Sam Adams Wicked Hazy, Sam Adams Wicked Easy and Samuel Adams Just The Haze, our first non-alcoholic beer as well as the positive reaction to our Samuel Adams Your Cousin from Boston advertising campaign.
We are confident in our ability to innovate and build strong brands that complement our current portfolio and help support our mission of long-term profitable growth.
I will now pass over to Dave for a more detailed overview of our business.
Before I review our business results, I'll start with our disclaimer.
Okay, now let me share a deeper look at our business performance.
We are happy with our strong start to the year and our record first quarter shipment and depletion volumes.
Our depletions growth in the first quarter was the result of increases in our Truly Hard Seltzer and Twisted Tea brands, partly offset by decreases in our Samuel Adams, Angry Orchard and Dogfish Head brands.
The recently launched Truly Iced Tea Hard Seltzer has accelerated Truly brand growth, which has more than doubled since last year.
In the first quarter in measured off-premise channels, the Truly brand outgrew the hard seltzer category by nearly 2 times or 50 percentage points, resulting in a share increase of 6.5 percentage points.
The Truly brand has now reached a market share of over 28%, accounting for approximately 40% of all growth cases in the hard seltzer category year-to-date, which is two times greater than the next largest growth brand.
Truly Iced Tea Hard Seltzer has achieved a 4.3 percentage point market share in measured off-premise channels, well ahead of all other new entrants to the entire beer category.
We expect the launch of Truly Punch Hard Seltzer during the second quarter to continue this positive momentum.
Brand, evolve our brand communications, and further improve our position in the hard seltzer category as more competitors enter.
Truly Tea continues to generate double-digit volume growth rates that is significantly above full year 2020 trends.
In the first quarter in measured off-premise channels, case growth in Twisted Tea brand products was almost three times higher than its closest competitor and we believe, Twisted Tea is on its way to becoming the number one flavored malt beverage by year's end.
We see significant distribution and volume growth opportunities for our Truly and Twisted Tea brands and are looking to continue to expand distribution of our Dogfish Head brand.
Pursuing these opportunities in 2021 remains a top priority.
Our Samuel Adams, Angry Orchard and Dogfish Head brands were hit the most by COVID-19 and the related on-premise closures.
We continue to work hard on returning these brands to growth and are optimistic that they will return to growth in 2021.
Overall, given the trends for the first three months and our current view of the remainder of the year, we've adjusted our expectations for higher 2021 full year volume and earnings growth, which is primarily driven by the strong performance of our Truly and Twisted Tea brands.
During the quarter, we have taken various steps to ensure we have capacity to support this accelerating growth.
We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix changes, and allow us to scale up more efficiently.
We expect to complete this transformation over the next two to three years.
We will continue to invest in capacity to take advantage of the fast-growing hard seltzer category and deliver against the increased demand through a combination of internal capacity increases and higher usage of third-party breweries, although meeting these higher volumes through increased usage of third-party breweries has a negative impact on our gross margins.
Margin improvements in 2021, our gross margins and gross margin expectations will continue to be impacted negatively until our volume growth stabilizes.
Brand portfolio and innovations, and we remain prepared to forsake short-term earnings as we invest to sustain long-term profitable growth, in line with the opportunities that we see.
Based on information in-hand, year-to-date depletions reported in the company through the 15 weeks ended April 10, 2021, our estimated depletion is approximately 49% from the comparable weeks in 2020.
Now Frank's going to provide the financial details.
For the first quarter, we reported net income of $65.6 million or $5.26 per diluted share, an increase of $3.77 per diluted share in the first quarter of last year.
This increase was primarily due to increased net revenue, partially offset by higher operating expenses.
In the first quarter of 2020, we recorded pre-tax COVID-19-related reduction in net revenue and increases in costs, that total $10 million or $0.60 per diluted share.
In 2021 going forward, we've chosen not to report COVID-19-related direct costs separately as they have used to be a normal part of operation.
For the first quarter of 2021, shipment volume was approximately 2.3 million barrels, a 60.1% increase from the first quarter of 2020.
Shipment volume for the quarter was significantly higher than depletions volume and resulted in significantly higher distributor inventory as of March 27, 2021 when compared to March, 28 2020.
We believe distributor inventory as of March 27, 2021 average approximately seven weeks on-hand, and was an appropriate level based on the supply chain capacity constraints and inventory requirements to support the forecasted growth of our Truly and Twisted brands over the summer.
We expect wholesaler inventory levels in terms of weeks on-hand to be between three and seven weeks for the remainder of the year.
Our first quarter 2021 gross margin of 45.8% increase in the 44.8% margin realized in the first quarter of last year.
The increase was primarily a result of price increases, the absence of the COVID-19-related direct cost incurred in the first quarter of 2020 and cost saving initiatives company-owned breweries, partially offset by higher processing costs due to increased production at third-party breweries.
First quarter advertising, promotional and selling expenses increased by $43 million in the first quarter of 2020, primarily due to increased brand investment of $21 million, mainly driven by higher media and production costs.
Higher salaries and benefits costs and increased freight to distributors of $21.9 million due to a higher volume and rate.
General and administrative expenses increased by $4.9 million from the first quarter of 2020, primarily due to increases in salaries and benefits costs.
During the first quarter, we recorded an income tax expense of $11 million, which consists of income tax expenses of $19.6 million partially offset by $8.6 million fixed benefit related to stock option exercises in accordance with ASU 2016-09.
The effective tax rate for the first quarter, excluding the impact of ASU 2016-09 increased to 25.6% and was 23.6% in the first quarter of 2020.
Based on information of which we are currently aware, we are targeting 2021 earnings per diluted share of between $22 and $26, an increase from the previously communicated range of between $20 and $24, excluding the impact of ASU 2016-09, but actual results could vary significantly from our target.
We are currently planning increases in shipments and depletions of between 40% and 50%, an increase from the previously communicated range of between 35% and 45%.
We're targeting national price increases per barrel of between 1% and 3%, an increase from the previously communicated range of between 1% and 2%.
Full year 2021 gross margins are currently expected to be between 45% and 47%.
We plan increased investments in advertising, promotional and selling expenses of between $130 million to $150 million for the full year 2021, an increase from the previously communicated range of between $120 million and $130 million.
These amounts do not include any increases in freight costs for the shipment of products to our distributors.
We estimate our full year 2021 effective tax rate to be approximately 26.5% excluding the impact of a ASU 2016-09.
We're not able to provide forward guidance on the impact of ASU 2016-09 [Indecipherable] 2021 financial statements and full year effective tax rate as this will mainly depend upon unpredictable future events, including the timing and value realized upon the exercise of stock options versus the fair value with those options were granted.
We're continuing to evaluate 2021capital expenditures and currently estimate investments of between $250 million and $350 million, a decrease in our previously communicated range of between $300 million and $400 million.
The capital will be mostly spent on continued investments in capacity to supply chain efficiency improvement.
We expect that our March 27, 2021 cash balance of $144.7 million together with the future operating cash flows and the $150 million remaining under the line of credit, will be sufficient to fund future cash requirements.
Before we go there, similar to the last couple of calls, Dave will be the MC on our side and coordinate the answers when needed since we are in different locations.
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q1 earnings per share $1.49.
withdrawing its full-year fiscal 2020 financial guidance.
direct impact of pandemic has primarily shown in significantly reduced keg demand from on-premise channel.
boston beer company - depletions through 9-week period ended february 29 estimated to have increased about 32%.
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The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its Annual Report on Form 10-K and quarterly report on Form 10-Q.
Additionally, in our discussion today we will reference certain non-GAAP financial measures.
Today I'm joined by Ed Pesicka, our President and Chief Executive Officer, who will provide commentary on the third quarter and an update on our ongoing efforts to help those on the frontlines of the COVID-19 pandemic.
And Andy Long, our Executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and provide additional insight into our outlook for the remainder of the year.
I'm extremely pleased to be here today and report another strong quarter.
The strength of this quarter has been driven by our exceptional operating performance supported by our dedicated teammates.
It is our ability to support the complete value chain which makes us different.
The value chain starts with our America's owned and operated manufacturing facilities, combined with our broad external supplier base, and finally integrated with our robust distribution network.
This approach allows us to operate at the highest levels of performance and provide an enhanced customer experience, enabling us to best serve our customers and fulfill our mission to empower our customers to advance healthcare.
While the performance in the third quarter was strong, it doesn't stand alone.
In the past 18 months, we have significantly repositioned our organization by focusing on the customer, investing in the business and delivering on productivity and operational improvements.
This strategy has delivered compelling results for the third quarter, as well as accelerating performance during the past year plus.
Let me start by sharing a few examples from Q3 that demonstrate the strong performance.
First, we achieved an increase of more than 250% in adjusted net income per share compared to the third quarter in 2019.
Two, we expanded adjusted operating margin by 240 basis points versus prior year.
Three, we generated operating cash flow $118 million as a result of increased earnings and working capital improvements.
Fourth, we continue to make investments in infrastructure, service and technology.
Fifth, we reduced total debt by $70 million in the quarter.
And six, we launched a $200 million follow-on equity offering, which has since closed.
Specifically related to the global solutions segment, we grew revenue $317 million sequentially from Q2 to Q3.
The segment returned to profitability and we maintained our industry leading service levels.
Next, related to our global products segment, we achieved record profit levels, and we manufactured record levels of PPE.
And finally, we reached a milestone in the COVID fight, with nearly 11 billion units of PPE delivered, of which approximately 4 billion units were produced with materials manufactured in our American factories or Owens & Minor owned facilities, all of that being done since the beginning of this year.
While the third quarter was strong, this is just a continuation of our demonstrated track record of strong performance.
Here are a few examples of our consistency.
One, we achieve year-over-year gross margin expansion for the sixth consecutive quarter.
Two, we generated positive operating cash flow, again, for the sixth consecutive quarter.
We paid down debt by $231 million year-to-date and by $402 million in the last six quarters.
In addition to that, we have another $130 million in cash on hand that is specifically earmarked to pay down additional debts.
Next, we delivered a fourth consecutive quarter of year-over-year adjusted earnings per share growth on a constant currency basis.
And finally, today we are pleased to raise our 2020 full year adjusted earnings per share guidance to a range of $1.90 to $2.
And we are reconfirming double digit adjusted earnings per share growth in 2021.
It is clear that a robust operational execution combined with strategic investments have fueled increased output and improved efficiency across the entire business, thus enabling us to better serve our customers.
Continuing with this approach as a foundation of our strategy, we are well positioned to address the current and future needs of healthcare.
I will now talk about our focus areas that will shape the remainder of 2020 and the future of Owens & Minor.
These areas of focus are investments, operational improvements, and continued financial strengths.
Let's begin with our investments.
Our disciplined investment strategy has been and will continue to focus on infrastructure, technology and operational effectiveness into the future.
Let me start with investments in our global products segments.
During the third quarter, we continue to expand our manufacturing output through capital investment, operational improvement, and long-term partnerships with our customers.
Here are just a few examples of these investments.
One, we completed the installation of new N95 production line in our US based manufacturing facilities.
Next, we continue to invest in nonwoven fabric manufacturing in our Lexington, North Carolina facility.
And we continue to expand our isolation and surgical gown production capacity.
These investments in our America's based locations enable us to continue to be a leader in the manufacturing of PPE across the broad continuum of PPE products.
It should be noted that we also expect the PPE supply demand imbalance to continue into the future.
Moving now to investments in our global solutions segment, where we expanded our low unit of measure warehouse infrastructure system, we improved our inventory planning process and algorithms, we enhanced our data management services offering through myOM and QSight and improved our B2B and B2C offerings in our home healthcare business.
These investments differentiate Owens & Minor in supporting our customers across the value chain.
Again, this starts with products, products that are manufactured in our factories, most of which are in the America's, with our teammates, with our technology, with our patents, with our processes, with our quality control, with our regulatory affair.
I think you get the picture.
We know how to manufacture products and seamlessly get them into the hands of the healthcare providers through our distribution channels.
As you can tell, we are in a strong position to meet the demands of the changing landscape in the healthcare industry, as regulations and protocols call for increased usage of PPE and as more patients return to care and also as more patients rely on home healthcare.
Let me now discuss operational improvements.
In the past several quarters we have significantly transformed the operational landscape to deliver an improve customer experience and do it more efficiently.
We are doing this by focusing on operational effectiveness and continuous improvement.
Let me give you a few examples.
One, we invested in technological process improvements to increase accuracies within our distribution centers.
Next, we continue to partner with our suppliers using data to better manage demand planning and supply chain efficiency.
While doing these, we continue to emphasize on the safety of our teammates so we can retain our skilled workforce.
Finally, we are enhancing our business system approach to ensure that continuous improvement will be at the core of our organizational culture.
All of these will allow us to remain at the forefront with our industry leading service levels.
Finally, let's talk about our financial position.
As noted in the beginning of my comments today, our financial profile is strong.
We are deleveraging the balance sheet and investing in our future.
Based on the achievements I've walked you through, we have created a track record of delivering on our commitments.
The midpoint of our guidance represents a threefold increase improvement over 2019 results, and we continue to expect double digit earnings per share growth in 2021.
The long-term outlook is based on our improved companywide operating performance from operating efficiency initiatives combined with investment.
Here are a few reasons for the expected continued positive momentum.
First, we expect the demand for PPE to continue to remain high.
With changes in healthcare protocols, stockpiling requirements, new win markets we believe higher demand for PPE is here to stay.
As a result, we continue to invest and ramp up our production to help service this demand.
Secondly, as elective procedures continue to recover toward pre-pandemic levels, we are able to leverage our distribution infrastructure to service our customers.
And finally, our home healthcare business continues to see an increase in demand in one of the fastest growing healthcare markets.
As I've just discussed, we had a solid third quarter and I'm immensely proud of our accomplishments over the past several quarters.
But we recognize we're not done yet.
And good evening, everyone.
Today, I'll review our third quarter financial results and the key drivers of our better than expected quarterly performance.
And then I'll discuss our expectations and assumptions for the rest of 2020.
We are pleased to report a strong third quarter and we're excited about our recent equity issuance and continued deleveraging of the balance sheet.
Our Q3 performance is a testament to our ability to adapt and execute during challenging times.
Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhance our financial position despite the challenging business environment.
Earlier today, we announced our revised full year adjusted net income guidance, which has been increased to $1.90 to $2 per share with a continued expectation of double digit growth in 2021.
Later in my remarks, I'll cover the details of the factors that gave us confidence in raising our guidance.
Let's start with the highlights of our Q3 performance.
Beginning with the top line, net revenue in the third quarter was $2.2 billion, compared to $2.3 billion for the prior year.
This change was primarily driven by the impact of past account non-renewals from 2019 and to a lesser extent by the COVID-19 pandemic related reductions in elective procedures.
This was partially offset by greater sales of PPE coupled with growth in sales from existing customers in our home healthcare business lines within global solutions.
Although the revenue impact of elective procedures was better than expected, we continue to trail pre-pandemic levels.
Gross Margin in the third quarter was 15.7%, an improvement of 350 basis points over prior year, as a greater portion of sales came from the higher margin global products segment and is evidence of the increasing level of operating efficiencies, productivity and fixed cost leverage we've achieved.
This represents the sixth consecutive quarter of year-over-year gross margin expansion, illustrating our improving performance.
Distribution, selling and administrative expense of $263 million in the quarter increased $14 million compared to the third quarter of 2019, primarily as a result of continued investments in the business, partially offset by ongoing productivity gains.
Interest expense of $21 million in the third quarter was $3 million lower than the prior year as a result of lower debt levels due to improved operating cash flows and working capital.
In addition, lower base rates and utilization of our accounts receivable securitization program have contributed to the reduction in interest expense.
The combined impact from the strong operational performance and execution resulted in income from continuing operations for the quarter of $46 million, an improvement of $43 million compared to prior year.
GAAP income from continuing operations per share for the quarter was $0.76, an increase of $0.70 versus the same period last year.
The resulting adjusted earnings per share for the quarter was $0.81, which represents a year-over-year increase of over 250% and a fourfold improvement sequentially versus Q2.
The foreign currency impact in the quarter was $0.06 favorable.
Now let me review results by segment for the third quarter.
Revenue for the global solutions segment was $1.9 billion, compared to $2 billion for the same period in the prior year.
The change comes from a decline in our medical distribution business due to the previously mentioned impact of customer non-renewals from 2019 and the impact that the COVID-19 pandemic has had on elective procedures, partially offset by another quarter of solid growth in the home healthcare business.
Relative to the second quarter, global solutions revenue grew by $317 million attributable to the increase in elective procedures.
To help put this in perspective, revenue improved from about 80% of pre-COVID levels in Q2 to the mid 90s in Q3.
Global solutions posted operating income of $11 million for the third quarter compared to income of $25 million last year, driven by lower volume.
Sequentially, global solutions operating income increased by $21 million or 7% of incremental revenue as volumes improved against our largely stable cost base.
Now turning to the global products segment, revenue was $474 million, compared to $360 million in the third quarter of last year, driven by growth in PPE sales net of the impact of lower elective procedures.
Sequentially, global products revenue increased by $103 million.
As new America's based PPE production capacity expanded, and elective procedures began to ramp up.
Global products reported operating income of $90 million, which increased by $73 million over last year.
The increase is attributable to higher revenue of PPE products, favorable product mix, productivity initiatives, improved cost leverage, operating expense discipline, and favorable foreign exchange.
We continue to operate at very high levels of efficiency, and these factors should continue for the remainder of 2020 and are reflected in our revised projections for the year.
Let's turn our focus to cash flow, the balance sheet and capital structure.
In the third quarter, we generated operating cash flow of $118 million and $268 million year-to-date on a consolidated basis as a result of improved profitability and stringent working capital management.
Looking ahead to Q4, we expect a number of factors to weigh on cash flow.
First, we anticipate carrying higher levels of inventory in preparation for the traditional flu and holiday seasons, and an expectation of a slight increase in elective procedures above our previous forecast.
These inventory changes will help ensure that we are prepared to meet customer requirements in a very dynamic environment.
Also, the fourth quarter will experience a higher level of capex spend compared to earlier in the year.
These actions demonstrate our continued commitment to invest in the business to help ensure long term profitable growth and to provide customers with the highest level of service.
Total debt was $1.3 billion at September 30, representing a sequential reduction of $70 million since the second quarter, and $231 million decline since year-end.
Recently, we executed the next step in our financial strategy to further strengthen our balance sheet with a successful equity raise netting $190 million, closing on October 6.
This offering resulted in the issuance of 9.7 million additional shares, which is expected to negatively impact earnings per share by $0.05 for 2020.
The impact of dilution is reflected on our revised annual guidance.
We've already used the net proceeds from our equity offering to reduce debt early in the fourth quarter.
In addition, we have recently issued a redemption notice for our outstanding 2021 notes to be completed by the end of the year.
We plan to utilize $134 million held as restricted cash at the end of September, plus other available funds to retire these notes.
Our leverage profile is well enhanced.
And as we continue to strengthen our balance sheet, we are very well positioned financially to execute our growth strategy by continuing to invest across our businesses.
Finally, let me provide some color on our outlook for the remainder of 2020.
As I mentioned earlier in my remarks, we revised our full year adjusted net income guidance upwards to a range of $1.90 to $2 per share, inclusive of the dilution from our recent equity raise.
The midpoint of our current guidance represents a threefold improvement over 2019 results, and we continue to expect double digit earnings per share growth in 2021.
Let me walk through the assumptions that went into developing the revised guidance.
First of all, we expect the demand for PPE products to remain strong.
And our America's based manufacturing capacity expansion programs will remain on schedule for the rest of the year and into 2021.
We also expect strong performance in Byram, our home healthcare business to continue.
The level of elective procedures across the nation continues to influence our performance.
In Q3, we experienced a faster than expected recovery in this area contributing to our over performance in both segments in the quarter.
Q3 revenue associated with elective procedures increased to the mid 90% of pre-COVID levels.
And our expectation for the fourth quarter is that these volumes will remain at Q3 levels.
We do not expect to see elective procedures return to pre-COVID levels until the middle of 2021 at the earliest.
Furthermore, our outlook on the strong demand for PPE going forward, along with our ability to leverage our captive North American centric supply chain for raw material input through distribution gives us confidence in achieving double digit earnings growth in 2021.
We are seeing increasingly strong indications of sustainable PPE demand for the many reasons we have previously cited.
Please note that key modeling assumptions for the full year 2020 have been updated on supplemental slides filed with the SEC on form 8-K earlier today, and posted to the investor relations section of our website.
We are moving forward with sustainable operational and financial improvements that will provide the roadmap for years to come.
While improving Owens & Minor's financial profile remains a top priority, our core focus continues to be on our customers.
We put our commitment to serving clinicians and caregivers at the center of everything we do.
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sees fy adjusted earnings per share $3.75 to $4.25.
q2 gaap earnings per share $0.87.
qtrly adjusted earnings per share $1.06.
affirms previously announced 2021 and 2022 guidance.
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I'll start today with a review of guest cruise operations, along with a summary of our first quarter cash flows.
Then I'll provide an update on booking trends and finish up with adjusted EBITDA and net income expectations.
Turning to guest cruise operations.
During the first quarter 2022, we restarted 10 additional ships, resulting in 60% of our fleet capacity in guest cruise operations for the whole of the first quarter.
This was a substantial increase from 47% during the fourth quarter 2021.
As of today, 75% of our fleet capacity has resumed guest cruise operations.
Agility to continuously adapt to the ever changing landscape has been one of our greatest strengths during the pandemic.
In the first quarter, we continued to demonstrate this scale as we adjusted restart dates to optimize our guest cruise operations.
And we now expect each brand's full fleet to be back in guest cruise operations for its respective summer season where we historically generate the largest share of our operating income.
I am happy to report that just last week, we announced plans for our Australia restart, commencing at the end of May after the government advised that cruising would be permitted beginning in April.
For the first quarter, occupancy was 54% across the ships in service.
We never expected to achieve our historical 100-plus percent occupancies for the first quarter since many of these sailings were confirmed just a number of months before departure, which resulted in less than the normal booking lead time.
However, we had anticipated first quarter occupancy would exceed the 58% achieved in the fourth quarter of 2021.
We started the quarter with over 55% cabin occupancy booked for the first quarter and expected to improve upon that during the quarter.
However, during the first quarter 2022, as a result of the omicron variant, we experienced an impact on bookings for near-term sailings, including higher cancellations resulting from an increase in pretravel positive test results, challenges in the availability of timely pretravel tests and disruption than omicron caused on society during this time.
All of this inhibited our ability to build on our cabin occupancy book position for the first quarter 2022 during the first quarter, resulting in occupancy for the first quarter 2022 at 54% being lower than the 58% occupancy we achieved in the fourth quarter of 2021.
Despite all that, during the first quarter, we carried over one million guests, which was nearly a 20% increase from the fourth quarter 2021.
Once again, our brands executed extremely well with Net Promoter Scores continuing at elevated levels compared to pre-COVID scores.
Revenue per passenger day for the first quarter 2022 increased approximately 7.5% compared to a strong 2019 despite our lucrative world cruises and exotic voyages being shelved this year.
Our revenue management teams held on price when we experienced an impact on bookings for near-term sailings, optimizing our longer-term prospects for future revenue and pricing.
Once again, our onboard and other revenue per diems were up significantly in the first quarter 2022 versus the first quarter 2019, in part due to the bundled packages as well as onboard credits utilized by guests from cruises canceled during the pause.
We had great growth in onboard and other per diems on both sides of the Atlantic.
Increases in bar, casino, shops, spa and Internet led the way onboard.
Over the past 2.5 years, we have offered and our guests have chosen more and more bundled package options.
In the end, we will see the benefit of these bundled packages in onboard and other revenue.
As a result of these bundled packages, the line between passenger ticket and onboard revenue is blurred.
For accounting purposes, we allocate the total price paid by the guests between the two categories.
Therefore, the best way to judge our performance is by reference to our total cruise revenue metrics.
On the cost side, our adjusted cruise cost without fuel per available lower berth day, or ALBD as it is more commonly called, for the first quarter 2022 was up 25%.
I did say adjusted cruise costs and not net cruise costs, a term we had previously used.
The calculation of adjusted cruise costs and net cruise costs are the same.
The increase in adjusted cruise costs without fuel per ALBD is driven essentially by five things: first, the cost of a portion of the fleet being in pause status; second, restart related expenses; third, 15 ships being in dry dock during the quarter, which resulted in nearly double the number of dry dock days during the first quarter versus the first quarter 2019; fourth, the cost of maintaining enhanced health and safety protocols; and finally, inflation.
Remember, that because a portion of the fleet was in pause status during the first quarter and the higher number of dry dock days, we spread costs over less ALBDs.
This will again result in a doubling of the dry dock days during the quarter compared to 2019, which will impact adjusted cruise cost without fuel per ALBD during the second quarter.
We anticipate that many of these costs and expenses driving adjusted cruise costs without fuel per ALBD higher will end during 2022 and will not reoccur in 2023.
As a result of all of the above, we expect to see a significant improvement in adjusted cruise costs, excluding fuel per ALBD, from the first half of 2022 to the second half of 2022 with a low double-digit increase expected for the full year 2022 compared to 2019.
Next, I'll provide a summary of our first quarter cash flows.
We ended the first quarter 2022 with $7.2 billion in liquidity versus $9.4 million at the end of the fourth quarter.
Looking forward, we believe we remain well positioned given our liquidity.
The change in liquidity during the quarter was driven essentially by four things: first, an improved negative adjusted EBITDA of $1 billion due to our ongoing resumption of guest cruise operations despite the impact of the omicron variant.
We had thought adjusted EBITDA was going to improve more.
But as I said before, the omicron variant inhibited our ability to grow occupancy during the quarter, which limited the improvement in adjusted EBITDA.
Second, our investment of $400 million in capital expenditures net of export credits.
Third, $500 million of debt principal payments.
And fourth, $400 million of interest expense during the quarter.
Now let's look at booking trends.
Since the middle of January, we have seen an improving trend in booking volumes for future sailings.
Recent weekly booking volumes have been higher than at any point since the restart of guest cruise operations.
During the first quarter, we increased our booked occupancy position for the second half of 2022, albeit not at the same pace as a typical wave season due to the omicron variant.
As a result, the cumulative advanced book position for the second half of 2022 is at the lower end of the historical range.
However, we believe we are well situated with our current second half 2022 book position given the recent improvement in booking volumes, coupled with closer in booking patterns and our expectation for an extended wave season.
We continue to expect that occupancy will build throughout 2022 and return to historical levels in 2023.
And importantly, I am happy to report that prices on these bookings for the second half of 2022 continue to be higher with or without future cruise credits, or more commonly called FCCs, normalized for bundled packages as compared to 2019 sailings.
Our cumulative advanced book position for the first half of 2023 continues to be at the higher end of the historical range, also at higher prices with or without FCCs normalized for bundled packages as compared to 2019 sailings.
This is a great achievement given pricing on bookings for 2019 sailings is a tough comparison as that was a high watermark for historical yields.
I will finish up with our adjusted EBITDA and net income expectations.
We all know that booking trends are a leading indicator of the health of our business.
With improved recent booking trends leading the way, driving customer deposits higher, positive adjusted EBITDA is clearly within our sights.
Over the next few months, we expect ship level cash contribution to grow as more ships return to service and as we build on our occupancy percentages.
However, as I've already said, adjusted EBITDA over the first half of 2022 has been or will be impacted by the restart-related spending and dry dock expenses as 39 ships, over 40% of our fleet, will have been in dry dock during the first half of fiscal 2022.
Given all these factors combined, we expect monthly adjusted EBITDA to continue to improve and turn consistently positive at the beginning of our summer season.
We continue to expect a net loss for the second quarter of 2022 on both a U.S. GAAP and adjusted basis.
However, we expect the profit for the third quarter of 2022.
For the full year, we do expect a net loss.
Looking to brighter days ahead in 2023, with the full fleet back in service all year, 8% more capacity than 2019 and improved fleet profile with nearly a quarter of our capacity consisting of newly delivered ships, continuing momentum on our outstanding Net Promoter Scores and occupancy returning to historical levels, we are looking forward to providing memorable vacation experiences to nearly 14 million guests and generating potentially greater adjusted EBITDA than 2019.
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q1 2022 ended with $7.2 billion of liquidity, including cash, short-term investments and borrowings.
for cruise segments, revenue per passenger cruise day ("pcd") for q1 of 2022 increased approximately 7.5% compared to a strong 2019.
as of march 22, 2022, 75% of company's capacity had resumed guest cruise operations.
since middle of january, company has seen an improving trend in weekly booking volumes for future sailings.
recent weekly booking volumes have been higher than at any point since restart of guest cruise operations.
occupancy in q1 of 2022 was 54%, a 20% increase in guests carried over prior quarter.
expects to have each brand's full fleet back in guest cruise operations for its respective summer season.
believes monthly adjusted ebitda will turn positive at beginning of its summer season.
expect improvement in occupancy throughout 2022 until it returns to historical levels in 2023.
expects adjusted cruise costs excluding fuel per albd for full year 2022, to be significantly higher than 2019.
anticipates that many of costs and expenses will end in 2022 and will not reoccur in 2023.
expects to see a significant improvement in adjusted cruise costs excluding fuel per albd from first half of 2022 to second half of 2022.
company continues to expect a net loss for q2 of 2022 on both a u.s. gaap and adjusted basis.
expects a profit for q3 of 2022.
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They involve risks, uncertainties and assumptions and there can be no assurance that actual results will not materially different from our expectations.
For a discussion of these risks and uncertainties, please see the risks described in our most recent Annual Report on Form 10-K and subsequent filings with the SEC.
We may also discuss non-GAAP financial measures during today's call.
I will give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris to discuss the current portfolio in more detail.
Also joining us on the call to participate in the Q&A are our President, Kevin Collins; our CFO, Lee Phegley; and our COO, Dave Lyle.
I'm pleased to announce that core earnings came in at $0.10 per share for the quarter, exceeding our recently increased dividend of $0.08 per share.
Book value was $3.86 at quarter end, which represents an increase of 11.2% for the quarter.
The combination of the increased dividend and our book value appreciation produced an economic return of 13.5% for the quarter.
The improvement in book value has continued since quarter-end, as we estimate that book value was up approximately 5% through last Friday, with those gains concentrated in January and relatively flat performance so far during February.
During the fourth quarter, financial markets continued to recover as the impact of stimulus programs and optimism around the rollout of vaccinations began to take hold.
Risk assets across fixed income continue to benefit from strong investor interest, agency mortgages in particular had a strong quarter.
Consistent demand for current coupon agency mortgages from the Federal Reserve and commercial banks outweighed elevated issuance, leading to a strong performance for the sector.
At IVR, we have largely completed our reallocation to Agency MBS, ending the year with 98% of our assets in agencies.
We continue to take advantage of the strong demand for credit assets by further reducing our credit book by $336 million, resulting in a credit portfolio of $161 million at quarter end.
Our liquidity position remains strong as we ended December with a $745 million balance in cash and unencumbered assets.
Earlier this month, we successfully completed a common stock offering with net proceeds of approximately $103 million that was deployed into additional agency mortgages.
This will allow us to build upon our success in restoring core earnings, while adding scale and helping to balance our capital structure.
As we look out over the next several quarters, our outlook remains relatively constructive.
We remain positive on agency mortgages, as we expect demand from the Federal Reserve and commercial banks remains strong by the steeper curve and recent underperformance keeps the ROE and new investments attractive.
Funding cost should remain attractive, as well as we expect the Fed to keep short-term interest rates low for the foreseeable future.
Despite the recent widening, agency mortgage valuations remain rich and along with increased levels of prepayments present some potential headwinds for the basis.
However, our focus on active management and security selection purchasing specified pool collateral helps to mitigate these risks.
I'll stop here and let Brian go through the portfolio.
I'll begin on slide four, which details the changes in the US Treasury yield curve over the past 12 months in the upper left hand chart.
Positive developments in regards to the COVID-19 vaccine and an improving economic recovery, led to a bare steepening move in interest rates.
As the short-end remained anchored, while the 10-year and 30-year both increased approximately 20 basis points during the quarter.
The upper right-hand chart indicates the impact monetary policy has had on short-term funding rates, which remain subdued during the quarter and continue to be attractive for borrowers in the short end of the yield curve.
Financial market volatility in the bottom left was also impacted substantially by monetary policy and continued to diminish into year-end, despite a modest uptick as we approach the November elections in the US.
Lastly in the bottom right chart, we detailed the growth in both US Bank and Federal Reserve Holdings of Agency RMBS, which had a significant impact on Agency RMBS valuations, as we entered 2021, despite net issuance close to an all-time record at $210 billion in the quarter.
The combination of the Federal Reserve with the prescribed $120 billion of net purchases and commercial banks with over $200 billion of net demand during the quarter, produced impressive hedged returns in the asset class.
Particularly in lower coupon 30 years, as the primary beneficiary of the demand from both entities.
These totals resulted a net demand for the year of over $600 billion for the Fed and $500 billion from banks, overwhelming the historically high $500 billion of net supply.
Moving on to Slide 5, where we provide more detail on the Agency RMBS market.
You can see the impact, strong supply and demand technicals had on lower coupon valuations during the quarter, driving treasury spread significantly tighter in the upper left hand chart.
Specified pool pay-ups, as shown in the upper right were modestly weaker and lower coupons, as interest rates rose, diminishing the need for prepayment protection, while higher coupon pay-ups stayed well supported as prepayments remained elevated for borrowers that continue to have significant incentive to refinance at current low mortgage rates.
The chart in the lower left shows the significant increase in prepayment speeds for lower coupon mortgages during the year, as historically low mortgage rates and increasingly efficient refinancing drove speeds near all time highs.
Finally, the lower right-hand chart shows the implied financing rate for dollar roll transactions and 30-year, 2%, 2.5% and 3% TBAs.
The implied financing rate is the reinvestment rate for which an investors in different between taking delivery of a mortgage pool or rolling the TBA contract forward one month and investing the cash elsewhere.
As indicated in the chart, volatility in dollar roll attractiveness increased during the quarter, as implied financing rates improved for higher coupon 30 year, 2.5% and 3%'s and were weaker for 30 year 2%'s.
Dollar rolls trading with implied financing rates below 0% indicate a particularly attractive environment for investors and while lower coupon TBAs are not rolling quite as well as they were late in the third and early in the fourth quarters, they still provide investors with improved funding levels for Agency RMBS relative to short-term repo in a highly liquid securities.
Slide 6 provides detail on our Agency RMBS investments.
As indicated in the upper left hand chart, in addition to the 18% allocation to Agency TBA, our Agency RMBS portfolio is well diversified across specified pool collateral types.
We remain focused on lower price collateral stories, mitigating our exposure to elevated payoffs, at historically tight spreads, as our specified pool holdings had a weighted average pay up of 0.8 points as of 12/31.
We purchased $3.1 billion of lower coupon 30 year specified pools during the quarter, while rotating out of $491 million of underperforming pools, underscoring our active management strategy within the portfolio and the superior liquidity of the asset class.
In addition, we added $800 million notional of lower coupon 30 year TBA, increasing our allocation from 14% at the end of the third quarter to 18%, and dollar rolls remain an attractive and highly liquid alternative to holding specified pools in financing them via short-term repo.
Our specified pool holdings paid 3.9% CPR, during the quarter, as our relatively newly issued pools at a weighted average loan age of five months at quarter end.
We anticipate prepayment speeds on our holdings will increase as our holdings to move up the seasoning ramp.
But the increase in speed should be mitigated by the recent move higher in interest rates and wider spreads in Agency RMBS.
We remain focused primarily in 30-year, 2% and 2.5% coupons, and those coupons provide the most attractive combination of lower prepayment speeds and strong support via consistent, Federal Reserve and commercial bank demand.
While we anticipate the elevated net issuance experienced in 2020 to continue into 2021, we expect the Fed demand to absorb the net issuance while bank demand though unlikely to match the total in 2020 should provide sufficient support, as bank deposits continue to outweigh loan growth.
Our remaining credit investments are detailed on Slide 7 with non-Agency CMBS representing nearly 70% of the $161 million portfolio.
As John referenced on Slide 3, we sold $336 million of credit investments during the quarter, a strong demand for our assets provided attractive exit opportunities.
The continued reduction of our credit portfolio allowed us to increase the allocation to Agency RMBS, which increased the earnings power of the company, while increasing the liquidity and reducing the credit risk within the portfolio.
Our $121 million of remaining credit securities are high quality, with 72% rated single A or higher and we remain comfortable with the credit profile of our remaining holdings.
Although, we anticipate limited near term price appreciation, given the significant improvements experienced inflows we reached in the second quarter of 2020, we believe these assets are attractive holdings as 100% are held on an unlevered basis and provide attractive unlevered yields.
Lastly, Slide 8 details the growth of our funding and hedge book during the fourth quarter, as shown in the chart on the upper left.
After paying off our secured loans at the FHLB in August, all of our remaining credit holdings are held on an unlevered basis, eliminating the mark to market funding risk on that portion of our book.
Repurchase agreements collateralized by Agency RMBS grew to $7.2 billion as of December 31 and hedges associated with those borrowings also grew during the quarter to $6.3 billion notional of fixed to floating rate interest rate swaps.
We continue to take advantage of low interest rates further out, the yield curve to lock in lower funding costs, via longer maturity hedges with a weighted average life of 6.7 years at year-end.
Given the potential for a steepening yield curve, as the Federal Reserve keeps short-term rates anchored for the foreseeable future.
The modest increase in interest rates on our hedge book represents the growth of our portfolio and the rising interest rate environment experienced in the fourth quarter.
While rates on our repo borrowings continue to drift lower during the quarter and into 2021, with one month repo rates for our Agency RMBS holdings averaging 21 basis points at year-end.
Our economic leverage, when including TBA exposure increased from 5.1 times debt-to-equity on September 30 to 6.6 times debt-to-equity as of December 31, indicating further progress toward the transition to an agency focused strategy.
Economic leverage since year end is modestly higher, estimated 7.1 times as of Friday and deployment of proceeds from our February capital raise into Agency RMBS investments financed via short-term repo, increased company leverage to our current target.
The Agency RMBS market continues to be well supported by the Federal Reserve purchase program, as well as commercial bank demand and robust demand for our credit assets has provided us with opportunities to reallocate equity into Agency RMBS.
While the prepayment environment in Agency RMBS, remains challenging we believe our careful selection of prepayment protection, active management and higher mortgage rates will mitigate the potential for faster prepayments speeds, and their negative impact on yields.
In addition, while Agency RMBS spread appear tight, recent underperformance and bear steepening of the yield curve will benefit reinvestment opportunities.
Lastly, monetary policy remains very supportive and we expect that to continue throughout 2021 at the Federal Reserve communicates a desire to maintain an accommodative stance over the medium term.
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q4 core earnings per share $0.10.
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We look forward to discussing our first quarter 2021 results with you today.
Joining me for Assurant's conference call are Alan Colberg, our President and Chief Executive Officer; and Richard Dziadzio, our Chief Financial Officer.
Yesterday after the market closed, we issued a news release announcing our results for the first quarter 2021.
The release and corresponding financial supplement are available on assurant.com.
We'll start today's call with brief remarks from Alan and Richard before moving into a Q&A session.
During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the Company's performance.
As we continue to shift to a more fee income capital-light business mix, we introduced adjusted EBITDA as part of our restated financial statements in April.
This is another important financial metrics for the Company, reflective of our go-forward Global Lifestyle and Global Housing business.
We're very pleased with our results for the first quarter.
We delivered double-digit earnings growth, driven by favorable non-catastrophe loss experience, including improved underwriting in Global Housing as well as continued profitable growth in our Global Automotive, Multifamily Housing and Connected Living businesses.
Once again results demonstrated the attractiveness of our market leading Specialty P&C and Lifestyle offerings distributed across multiple channels.
This is in addition to the compelling growth opportunities emerging across mobile, auto, and renters.
Together, these businesses represent what we refer to as the connected world.
In 2020, our Connected World offerings represented two-thirds of our net operating income excluding catastrophes and in combination with our Specialty P&C businesses will enable us to continue to expand our innovative offerings and deliver a superior and seamless customer experience.
Generating over $1 billion of adjusted EBITDA in 2020, our business portfolio is well positioned to sustain above market growth and strong cash flows over time.
And as we look ahead, we are continuously investing to bring innovation to market to build a more sustainable future for all of our stakeholders.
To that end, we recently published our 2021 Social Responsibility Report highlighting the many ways we are delivering on our commitment as a purpose-driven company.
We are continuing to advance our ESG efforts, specifically within our strategic focus areas of talent, products, and climate.
Further integrating ESG within our business operations will be critical as we look to create an even more diverse, equitable, and inclusive culture that promotes innovation enhances sustainability and minimizes our carbon footprint for the benefit of all stakeholders.
Recent notable examples include, we are increasing all US hourly wages to at least $15 per hour by July, which supports the financial well-being of our employees.
We've launched in assessment of our carbon footprint, including our investment portfolio and supply chain as a critical step to setting a future long-term carbon emissions reduction goal.
And we further integrated sustainability into our offerings such as rolling out electric vehicle products globally and extending the mobile device lifecycle through trading services.
With HYLA, we recently passed a significant milestone repurposing our 100 million device.
This has extended the life of devices, put billions of dollars back into consumers hands and prevented additional e-waste from ending up in our landfills supporting Global Sustainability.
We are pleased with our progress and are proud of the recognitions we have received, including our inclusion in the Bloomberg Gender Equality Index and America's Best Employers for Diversity by Forbes.
As well as being awarded the Best Place to Work in several of the key markets we operate.
Sustainability and innovation go hand-in-hand.
Recently, we surpassed $100 million invested through Assurant Ventures, our venture capital arm.
This quarter several high-quality investments in our portfolio announced back transactions, including Cazoo, a fully digital UK car sales company and smart rent, a smart home automation provider.
Given current attractive valuations, these investments have the potential to generate strong returns while also providing strategic insight that support our connected world businesses, creating value-added partnerships, and piloting new innovations.
Now, let me share some first quarter highlights for each of our operating segments.
We continue to see strong growth in Global Lifestyle, increasing earnings by 7% year-over-year.
Over the years, we continuously invested in mobile capabilities such as same day local repair or come-to-you to repair for mobile devices, which provide another opportunity to drive value for our clients and the end consumer.
Most recently in Connected Living, we further strengthened our product capabilities and customer experience through the acquisition of TRYGLE in Japan.
TRYGLE develops and operates a mobile phone app that allows consumers to manage the lifecycle of their devices and centrally organizes digital product manuals for all connected products.
Collectively, all of our investments have helped lead the 15 new client program launches in 2015.
This includes partnerships with several US cable providers including Xfinity and Spectrum as well as large mobile carriers in Japan like KDDI and Rakuten.
Recently, we've expanded our global partnership with Samsung through the launch of Samsung Care+, a smartphone protection program in Brazil and Mexico.
We expect to further extend this partnership globally.
We will continue to build on the strong momentum we have with our global multi-product and multi-channel strategy bolstered by the additional investments we are making.
As an example HYLA Mobile added scale and technology capabilities to our global trade-in and upgrade business and has been performing even better than our initial expectations.
We're now providing over 30 trading programs around the world.
The acquisition positions us to benefit from favorable tailwinds in the global mobile market, including the upcoming 5G smartphone upgrade cycle and new client relationships.
In Global Automotive, we continue to benefit from our scale and expertise as we now cover over 50 million vehicles.
Already this year, we've seen a significant increase in auto production versus pre-pandemic first quarter levels.
In the year since acquiring AFAS, we've combined our award winning training programs to create the Automotive Training Academy by Assurant.
These expanded in-person and virtual programs will allow us to scale faster and adapt to the changing needs of dealers and automotive professionals.
Within Global Financial Services, we've added a number of embedded card benefit clients recently, including the previously announced partnership with American Express.
We look forward to enhancing these partnerships and building on our existing suite of products.
Moving to Global Housing.
Net operating income excluding reportable catastrophes grew 17% as we benefited from favorable non-GAAP loss experience, including improved underwriting results.
Within our Lender-placed business, we continue to play a vital role in supporting the mortgage industry as we track over 31 million loans.
The business remains well positioned and we expect to benefit from investments in our superior customer platform over the long-term.
Multifamily housing increased policies by 9% year-over-year to almost $2.5 million as we continue to grow through our affinity partnerships and PMC channel, including seven of the top 10 largest PMCs in the US.
We've also continued to grow our sharing economy offerings, which include car sharing, on-demand delivery, and vacation rental.
Over the last two years through our partnership with market leaders and on-demand delivery, we tripled the number of deliveries we protect over 1 billion deliveries.
While it is too early to gauge whether the pandemic has fundamentally changed consumer demand for these services.
We're encouraged by our momentum and the potential for future products and services in the gig economy.
Now let's move to our first quarter results and our 2021 outlook.
Net operating income excluding cats grew by 13% to $182 million and earnings per share increased 16% to $3.03, demonstrating improved results in Global Housing and continued momentum in Global Lifestyle.
Given our strong performance in the first quarter and current business trends, we are increasing our full-year outlook for 2021.
We now expect 10% to 14% growth in operating earnings per share excluding catastrophes versus our initial expectation of 9% earnings per share growth.
EPS expansion from the $9.88 in 2020 will be driven by high single-digit earnings growth mainly from Global Lifestyle and the lower corporate loss.
Results will also benefit from share repurchases, including the completion of our three-year $1.35 billion objective in the initial return of net proceeds from the Global Preneed sale.
Our increased outlook largely reflects Global Housing's favorable non-catastrophe loss experienced in the first quarter.
As such Housing's earnings are expected to be down only modestly year-over-year from what was a strong 2020.
Looking at adjusted EBITDA, excluding catastrophes, the first quarter generated $302 million, an increase of 15% year-over-year.
We expect adjusted EBITDA will grow at a modestly higher rate than net operating income in 2021.
We ended March with $332 million of holding company liquidity, after returning $80 million to shareholders through common stock dividends and buybacks during the quarter.
And we expect to deliver on all of our commitments, sustaining our strong track record of capital return.
In addition, throughout the year, we will continue to make strategic investments in our portfolio to position us well for sustained long-term growth.
As Alan noted, we are pleased with our first quarter performance as our results across Global Lifestyle and Global Housing remains strong.
Before getting into our first quarter performance, I want to provide a quick update on the sale of our Preneed business.
In March, we announced our plan to sell the business for $1.3 billion to CUNA Mutual Group.
Since signing, we have completed the necessary regulatory filings and we remain on track to close the transaction by the end of the third quarter.
Now let's move to segment results for Global Lifestyle.
This segment reported net operating income of $129 million in the first quarter, an increase of 7% driven by Global Automotive and Connected Living.
In Global Automotive, earnings increased $7 million or 18%, results included a $4 million one-time benefit as well as a gain on investment income related to a specialty asset class from our TWG acquisition, which we don't expect to recur.
Year-over-year, underlying performance was driven by another quarter of global organic growth from US CPA and international OEMs as well as some favorable loss experience.
Connected Living grew earnings by 3%.
However, this was muted by a $7 million favorable client recoverable with an extended service contracts in the prior year period.
Underlying performance was driven by mobile subscriber growth in Asia Pacific and North America.
Higher trading results from increases in volume and contributions from our HYLA acquisition.
For the quarter Lifestyle's adjusted EBITDA increased 11% to $193 million, four points above net operating income growth.
This reflects this segment increased amortization related to higher deal related intangibles for more recent acquisitions in Global Automotive and Connected Living.
IT depreciation expense also increased, stemming from higher investment.
Lifestyle revenue decreased by $85 million.
This was driven mainly by a $98 million reduction in mobile trade-in revenue, primarily due to the contract change we disclosed last year.
Excluding this change, revenue for this segment was flat.
For the full year, we continue to expect Lifestyle revenues to be in line with last year at approximately $7.3 billion.
As expected overall trade-in volumes, which flow through fee income increased year-over-year and sequentially.
This was driven by four elements.
New phone introductions last year, greater device availability, carrier promotions and contributions from HYLA.
While the first quarter did benefit from strong mobile trade-in volumes, we do expect it to be a high watermark for the year, given historical seasonal patterns.
Since year-end, we've increased covered mobile devices by 600,000 subs driven by continued growth in North America and Asia-Pacific.
This year, we continue to expect covered mobile devices to grow mid single-digits compared to 2020, as we go subscribers in key geographies like the US and Japan.
As a reminder, we expect the growth rate of earnings to exceed the growth rate of covered mobile devices over time.
As we benefit from offering additional products and services to our clients and their end consumers.
For 2021, we still expect Global Lifestyle's net operating income to grow in the high single-digits compared to the $437 million reported in 2020.
Growth will come from all lines of business particularly Connected Living.
Adjusted EBITDA for this segment is expected to grow double-digits year-over-year.
Moving now to Global Housing.
Net operating income for the first quarter totaled $67 million compared to $74 million in the first quarter of 2020.
The decrease was largely due to $22 million of higher reportable catastrophes mainly related to the extreme winter weather particularly from areas like Texas.
Excluding catastrophe losses, earnings increased $50 million or 17%.
More than two-thirds of the increase was from favorable non-cat loss experience mainly in our specialty offerings, including sharing economy products.
We estimate that approximately half of the favorable loss experience in the first quarter was from underwriting improvements, with the remainder of the benefit, driven by favorable loss experience, which we don't expect to recur.
In addition, we saw continued growth in multifamily housing.
Lender-placed results were up modestly, higher premium rates, and favorable non-Cat loss experience were mostly offset by declining REO volumes from ongoing foreclosure moratoriums.
Looking at the placement rate, the modest sequential increase to 1.6% was attributable to a shift in business mix and is not an indication of a broader macro housing market shifts.
Revenue decreased 2% related to a reduction in our specialty product offerings, which included the impact from the exit of small commercial as well as lower REO volume.
This decrease was partially offset by growth in multifamily housing, which grew 8% year-over-year, driven mainly by our affinity partners.
We now expect Global Housing's net operating income excluding Cat to be down modestly compared to 2020.
This reflects our stronger first quarter and the assumption of a modest increase in our expected non-Cat loss ratio to more normalized levels for the remainder of the year.
We are also monitoring the REO foreclosure moratoriums in any additional extensions that may be announced.
As we position for the future, we will continue to invest in some of the business to sustain and enhance our competitive position.
At Corporate, the net operating loss was $22 million, which was flat year-over-year.
For the full year, we continue to expect the Corporate net operating loss to improve to approximately $90 million as we eliminate enterprise support costs associated with Global Preneed.
As we think about the remainder of the year for all of the Assurant, we are beginning to plan for a phase reentry of our workforce post-COVID and we are evaluating our real estate footprint to align with new business and employee need as we adapt to the future of work.
This may result in additional expenses throughout the year.
I also wanted to provide a quick comment on our investment portfolio.
With Preneed moving to discontinued operations, our investment portfolio is now approximately $7.9 billion, excluding cash and cash equivalent.
Given Preneed's relatively longer average duration of around 10 years compared to the rest of our business, following the sale of Preneed, our go-forward duration will drop to between 4.5 years to 5 years.
As a result our interest rate sensitivity will be reduced by approximately two-thirds.
Turning to holding company liquidity, we ended the first quarter with $332 million, which is $107 million above our current minimum target level.
In the first quarter, dividends from our operating segments totaled $183 million.
In addition to our quarterly corporate and interest expenses, we also had outflows from three main items.
$42 million of share repurchases, $43 million in common and preferred stock dividends, and $10 million mainly related to the acquisition of TRYGLE and Assurant Venture Investments.
Also in January, we redeemed the remaining $50 million of our March 2021 note.
And our mandatory convertible shares converted to approximately 2.7 million common shares during the quarter.
For the year overall, we continue to expect dividends to approximate segment earnings subject to the growth of the businesses and rating agency and regulatory capital considerations.
We've now completed over 70% of our $1.35 billion capital return objective from 2019 to 2021 and remain confident that we will meet this objective by the end of this year.
In addition, we expect to begin incremental buybacks prior to closing the Preneed transaction in the third quarter.
The total buybacks associated with the net proceeds from the sale are expected to be returned within one year of the transaction closed.
In the second quarter through April 30, we repurchased an additional 95,000 shares for $14 million.
In summary, our first quarter results demonstrate the strength of our business and our capital liquidity position.
We remain focused on completing the sale of Global Preneed and delivering on our 2021 financial objectives.
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increases 2021 outlook to deliver double-digit earnings per share growth.
reportable catastrophes, per diluted share $3.03.
assurant - for fy 2021, expects net operating income, excluding reportable catastrophes, per diluted share, to increase about 10% to 14%.
qtrly total revenues $2,432.6 million versus $2,448.7 million.
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With me on the call today are ResMed's chief executive officer, Mick Farrell; and chief financial officer, Brett Sandercock.
During the Q&A portion of our call, Mick and Brett will be joined by Rob Douglas, our president and chief operating officer; Jim Hollingshead, the president of our sleep & respiratory care business; and David Pendarvis, chief administrative officer and global general counsel.
During today's call, we will discuss some non-GAAP measures.
We believe these statements are based on reasonable assumptions, however, our actual results may differ.
Our first quarter results demonstrate strong performance across our business, void by extremely high demand for our sleep and respiratory care devices as well as continuing recovery of many markets from COVID-19.
We achieved double-digit growth at both the top and bottom line metrics of our business.
I want to be clear that achieving these results has not been that easy in this quarter.
We are dealing with an unprecedented, what I would call, perfect storm of elements, including the COVID recovery but also including a competitor recall that's ten-fold higher than any in the industry to date, and supply chain constraints that are impacting not only our industry but multiple industries worldwide.
I'm incredibly proud of ResMedians across our global teams, many of whom are working 24/7 to get our products and solutions into the hands of patients who need them most.
Despite these extraordinary efforts, we know that we have not been able to meet all of the demand.
As such, the market leader, our competitor, that is in the not No.
2 market share position, announced a recall mid-June that has created unprecedented dislocations in the market.
In effect, we are facing the challenge of providing the volume for our own No.
1 market share position and also trying to meet as much of the No.
2 market share position as possible around the world.
Given the supply chain crisis, our suppliers have been allocating components to us on the inbound side.
We have, in turn, been forced to allocate our products on the outbound side to our customers.
We have been clear on the guiding principles for that allocation of our products.
Namely that we are giving priority for production and delivery of these devices to meet the needs of the highest acuity patients first.
The allocation conversations that I have with our customers are the same ones that I am having with my suppliers and their suppliers and so on up the supply chain.
As an example, during the quarter, I was on a Zoom call with one of our suppliers, suppliers, suppliers, suppliers, suppliers, suppliers, and I'm not kidding.
We have achieved the goal with that manufacturer and we received increased allocation from that manufacturer.
But then we face the challenge, and are still facing it, of working with the five customers of theirs.
All the way down that chain to get to us to ensure that the agreed upon increased allocation of that component actually gets to ResMed, gets manufactured into ResMed products, and then sent to ResMed customers and ultimately to patients.
That's just one example of a high degree of difficulty dive for our supply chain team.
The supply chain analyses and negotiations are ongoing, and the situation is very, very fluid, and changing day by day, week by week and month by month.
We have an incredible Six Sigma Black Belt laden team of supply chain specialists working on these issues 24/7.
In short, supply bottlenecks continue to restrict our access to critical electronic components, especially semiconductor chips, that ultimately limit our net production output.
In addition to component supply issues, the ongoing challenges of seafreight and airfreight from manufacturing facilities to the distribution warehouses, and ultimately, the customers are increasing our costs and further impacting our ability to respond as rapidly as we want to the huge demand for ResMed products.
The combination of component shortages and transportation bottlenecks makes providing steady and smooth flow of products to the market very difficult.
We are working incredibly closely with our global supply chain partners, doing everything we can to gain access to additional supply of the critical components that we need further increase production of our medical devices.
We will continue to coordinate with all stakeholders as the situation develops.
We understand that this is a difficult situation for all of our customer groups, including physicians, home medical equipment providers, payers, and the most important customer, the patient.
1 priority will always be patients, doing our best to help those who need treatment for sleep apnea, for COPD, for the asthma and for other chronic respiratory diseases as well as critical out-of-hospital care.
Our goal is to ensure that patients get the therapy that they need, where they need it and when they need it.
Let's now discuss the overall market conditions in our industry.
We are also seeing a steady ongoing recovery of demand in the countries that we operate in.
They remain at various stages of the post-COVID peak recovery process in terms of patient flow.
We are still seeing a divergence in total patient flow and sleep lab capacity from 75% to 95% of pre-COVID levels in some countries, up to 100% plus of pre-COVID levels in others.
These metrics will now continue to ebb and flow as vaccines and boosters roll out globally and as new variants of the coronavirus arise and cause temporary perturbations.
Our global ResMed team remains committed to working with national, state, and city governments, as well as the local health systems, hospitals and healthcare providers to supply the ventilators, the masks and the training for acute care and the transition home for affected patients.
Let me now update you on our three strategic priorities as we pivot back to grow our core business.
These three are, one, to grow and differentiate our core sleep apnea, COPD, and asthma businesses; two, to design, develop, and deliver world-leading medical devices as well as digital health solutions that can be scaled globally; and three, to innovate and then grow in the world's best software solutions for care delivered outside the hospital and especially in the home.
In August, we launched our next-generation device platform that we call AirSense 11 into the United States market.
In short, that launch has been very successful.
We will be introducing the AirSense 11 into additional countries very soon.
Our market-leading R&D team accelerated the launch of this amazing innovation.
So, first, by expanding the controlled product launch to additional customers and then accelerating to an earlier full product launch date to bring this product to market faster.
Globally, we continue to sell our market-leading legacy platform, the AirSense 10, to be able to maximize the total volume of CPAP, APAP, and bi-levels available for customers.
Clearly, the ongoing adoption of both the AirSense 10 and the AirSense 11 platforms remains very, very strong.
It's still early into the SirSense 11 launch but initial customer feedback, combined with the detailed responses to our controlled product launch, tells me that the AirSense 11 is also another success for ResMed.
Physician, provider, and patient feedback are all very positive.
I was able to attend the California Sleep Society meeting in person actually during the quarter, and I was able to observe this firsthand the responses to the latest innovations on the AirSense 11, such as personal therapy assistant, care check-in, and the incredible rate of uptake of the patient-centric app called myAir, which has been upgraded for AirSense 11.
And the uptake on that is almost double what it was for the myAir app than AirSense 10.
What's clear to me is that this platform, the AirSense 11, benefits not only patients and their bed partners.
In addition, the device and software combination benefits physicians, it benefits providers, and it benefits payers as well as entire healthcare systems with more data, more insights, and better outcomes.
As a two-way digital health comms platform with many technical features of -- that represent significant therapeutic advances, AirSense 11 is not only easy to set up and use, it also offers a very rich patient-centric experience.
All AirSense 11 devices are 100% cloud connectable with upgraded digital health technology that is able to increase patient adherence to improve clinical outcomes and to deliver proven cost reductions within healthcare providers and physician's own health systems.
We are engaging with patients in their therapy digitally like never before in the industry.
This is a critical part of the ResMed 2025 strategy as presented at Investor Day, which we held virtually during this last quarter.
Another key aspect of our long-term growth is linked to the awareness and the increasing flow of sleep apnea patients.
With 936 million sleep apnea sufferers worldwide, this work is critical to our mission.
COVID-19 has advanced awareness, adoption, and your acceptance of digital health and remote care, including home-based sleep apnea tests.
We want to support seamless and cost-effective approaches to sleep diagnostics.
We want to scale technology that in our consumer markets enables an easy-to-use device experience and technology that in our reimbursed markets, can be a low-cost, clinically reliable, screening tool for sleep apnea.
In this vein, on October 1st, we then closed a transaction to acquire Ectosense, a leader in cloud connected home sleep apnea testing technology from Belgium.
We believe Ectosense's digital and easy-to-use solutions in the hands of both physicians and sleep lab technicians, as well as consumers, can help significantly increase sleep apnea diagnosis rates, as well as general sleep awareness.
Ectosense will operate within our sleep and respiratory care business unit, we're excited to bring this innovative technology to more global markets as we move forward.
Let me now turn to a discussion of our respiratory care business, focusing on our strategy to better serve the 380 million COPD patients and the 330 million asthma patients worldwide.
Our long-term goal is to reach hundreds of millions of patients with our respiratory care solutions, such as noninvasive ventilation and life support ventilation as well as newer therapeutic areas such as cloud-connected pharmaceutical delivery solutions and high-flow therapy offerings.
Demand for our core noninvasive ventilation and life support ventilation solutions for COPD and the -- beyond was strong throughout the quarter, especially in markets outside the United States, where physicians and providers shifted focus to support the most severe, highest acuity patients.
This demand is aligned with our strategy to ensure priority for manufacturing and delivery of the devices that meets the needs for patients, specifically those that need life support ventilation or noninvasive ventilation, including bi-level support, first.
We are balancing the growth in the respiratory care demand with the supply of ventilators that made it to market throughout the coronavirus pandemic as well as customers as they balance their inventory with ongoing acute and chronic ventilation patient needs.
We continue to see rapid adoption of the AirView for ventilation software solution that we launched in Europe a little over a year ago, and then we continue to really expand this technology to regions around the world.
The value being provided through AirView for ventilation has been very helpful to physicians not only during COVID, but it is increasingly valuable on an ongoing basis for them and the healthcare systems that they operate in.
In the not-too-distant future, I can see that AirView becoming standard of care for patients on home-based ventilation protocols in many healthcare systems.
Let me now review our Software-as-a-Service business for out-of-hospital care.
During the quarter, our SaaS business grew in the mid-single digits year-on-year across our portfolio of markets, including home medical equipment, as well as facility-based and home-based care settings.
The continued growth of home-based care is providing tailwinds for our home medical equipment and our home health products, and we continue to grow with customers as they utilize our software and data solutions, including Brightree and Snap ReSupply to improve and optimize business efficiencies and patient care.
The COVID-19 pandemic has also been challenging for some verticals in our SaaS business, particularly skilled nursing facilities.
However, we are seeing positive trends as census rates of patients improve across SNFs and other facility-based care settings.
We will continue to watch this closely as COVID cases ebb and flow at a really slower and slower rates around the country.
We expect there to be pent-up demand for technology investments in these SaaS verticals, which provides opportunities for us to increase our new customer pipeline that the COVID restrictions continue to ease.
As we look at our portfolio of software solutions, we expect SaaS revenue to accelerate, increasing from mid single-digit growth to high single-digit growth by the back end of this fiscal year.
As always, our goal is to meet or beat these market growth rates as we continue to innovate and take market share.
We are the leading strategic provider of SaaS solutions for out-of-hospital care, and we provide mission-critical software across a broad set of very attractive markets.
We are uniquely positioned, and we have created this differentiated value for ResMed with our SaaS portfolio.
We are set up for sustainable growth through ongoing innovation investments, commercial excellence partnerships and future acceleration through strategic M&A as well as selective tuck-in M&A opportunities.
Looking at the portfolio of ResMed's business across sleep and respiratory care as well as our SaaS solutions, and we remain confident in our long-term strategy and our pipeline of innovative solutions.
Our patient-centric, physician-centric, and provider-centric approach, combined with our unique ResMed culture means that we are well positioned to continue winning in the vastly underserved respiratory medical markets of sleep apnea, COPD, asthma, and other chronic diseases.
We are transforming the out-of-hospital care at scale.
We are leading the market in digital health technology.
With over 10 billion nights now, 10 billion nights of medical data in the cloud and over 15.5 million, 100% cloud connectable medical devices on bedside tables in 140 countries worldwide, we are unlocking value from these data to help patients, providers, physicians, payers, and entire healthcare systems.
Our mission and goal to improve 250 million lives through better healthcare in 2025, drives and motivates me and ResMedians every day.
We again made excellent progress toward that goal this quarter.
You, our ResMed team, have helped save the lives of many hundreds if not thousands of people around the world with COVID-19 with those emergency needs these last 18 months.
And you are now, and you have now already, pivoted back to provide ongoing support for all our customers during some of the most challenging industry dynamics that we've seen in the industry.
With that, I'll hand the call over to Brett in Sydney, and then we'll open the call up for Q&A.
In my remarks today, I will provide an overview of our results for the first quarter of fiscal year 2022.
As noted, all comparisons are to the prior year quarter.
Group revenue for the September quarter was $904 million, an increase of 20%.
In constant currency terms, revenue increased by 19%.
Revenue growth reflected increased demand for our sleep and respiratory care devices, driven by both sleep patient flow recovering from COVID-19 impacted reduced levels experienced in the prior year quarter and by increased demand in response to the recent product recall by one of our competitors.
In the September quarter, we estimate the incremental revenue from COVID-19-related demand was approximately $4 million, compared to $40 million estimated incremental revenue from the COVID-19-related demand in the prior year quarter.
And excluding the impact of COVID-19-related revenue in both the September 2021 and September 2020 quarters, our global revenue increased by 25% on a constant currency basis.
Looking forward, we expect negligible revenue from COVID-19-related demand.
In relation to the impact of our competitors' recall, we estimate that we generated incremental device revenue in the range of $80 million to $90 million in the September quarter.
So, taking a look at our geographic revenue distribution and excluding revenue from our Software-as-a-Service business, our sales in U.S., Canada and Latin America countries were $491 million, an increase of 22%.
Sales in Europe, Asia, and other markets totaled $315 million, an increase of 23% and or an increase of 21% in constant currency terms.
By product segment, U.S., Canada and Latin America device sales were $276 million, an increase of 40%.
Masks and then other sales were $215 million, an increase of 5%.
In Europe, Asia and other markets, device sales totaled $218 million, an increase of 24% or in constant currency terms, a 22% increase.
Masks and other sales in Europe, Asia, and other markets were $97 million, an increase of 21%, or in constant currency terms, an 18% increase.
Globally, in constant currency terms, device sales increased by 31% while masks and other sales increased by 8%.
Excluding the impact of COVID-19-related sales in both the current quarter and the prior year quarter, global device sales increased by 44% in constant currency terms while masks and other sales increased by 10% in constant currency terms.
Software-as-a-Service revenue for the September quarter was $98 million, an increase of 6% over the prior year quarter.
For the balance of fiscal year '22, we expect several factors will drive demand, including the general recovery of the global sleep market from COVID-19 impacts, the ongoing launch of our next-generation AirSense 11 platform into markets and geographies, and share gains during our competitors' recall.
However, as reported last quarter, while we are working hard to increase manufacturing output, we will not be able to meet the expected demand resulting from our competitors' recall, primarily because of significant and ongoing supply constraints for electronic components.
And so as Mick discussed earlier, we're operating a very dynamic supply chain environment.
Based on the latest information available, we continue to expect component supply constraints will limit the incremental device revenue resulting from competitor's recall to somewhere between $300 million and $350 million for fiscal year 2022.
This includes the device revenue we were able to generate in Q1.
In particular, we now do not see any improvement in our component supply position until our fourth quarter of FY '22.
During my commentary today, I will be referring to non-GAAP numbers.
Our non-GAAP gross margin decreased by 270 basis points to 57.2% in the September quarter, compared to 59.9% here in the same quarter last year.
The decrease is predominantly attributable to higher manufacturing and freight costs, ASP declines, and unfavorable currency movements, which has been partially offset by a positive product mix, particularly in relation to this strong growth of our higher acuity devices.
Moving on to operating expenses.
Our SG&A expenses for the first quarter were $177 million, an increase of 11%, or in constant currency terms, SG&A expenses increased by 10% compared to the prior year period.
The increase was predominantly attributable to an increase in employee-related expenses.
SG&A expenses as a percentage of revenue have improved to 19.5%, compared to the 21.1% we reported in the prior year quarter.
Looking forward and subject to currency movements, we expect SG&A as a percentage of revenue to be in the range of 20% to 22% for this balance of the fiscal year '22.
R&D expenses for the quarter were $60 million, an increase of 10%, or on a constant currency basis, an increase of 9%.
R&D expenses as a percentage of revenue was 6.6%, compared to 7.3% in the prior year quarter.
We continue to make significant investments in innovation because we believe our long-term commitment to technology, product, and solutions development will deliver a sustained competitive advantage.
Looking forward and subject to currency movements, we expect R&D expenses as a percentage of revenue to be in the vicinity of 7% for the balance of fiscal year '22.
Total amortization of acquired intangibles was $19 million for the quarter, and stock-based compensation expense for the quarter was around $17 million.
Our non-GAAP operating profit for the quarter was $281 million, an increase of 18%, underpinned by strong revenue growth.
During the quarter, we finalized the deed of settlement with the Australian Taxation Office, or ATO, covering transit pricing audits for the years 2009 through 2018, and also agreed on transfer pricing principles for the future.
And in anticipation of this settlement, we had previously estimated and recorded an accounting tax reserve of $249 million, net of credits and deductions in our FY '21 financial results.
In relation to the conclusion of the settlement in the current quarter, we recorded an additional GAAP tax expense of $4 million associated with lower tax credits, which were driven by foreign currency movements.
So, on a GAAP basis, our effective tax rate for the September quarter was 21.3% while on a non-GAAP basis, our effective tax rate for the quarter was 20%.
Looking forward, we estimate our non-GAAP effective tax rate for the fiscal year '22 will be in the range of 19% to 20%.
Non-GAAP net income for the quarter was $222 million, and an increase of 20%.
Non-GAAP diluted earnings per share for the quarter were $1.51, an increase of 19%.
Our GAAP net income for the quarter was $204 million, and our GAAP diluted earnings per share for the quarter was $1.39.
We had negative cash flow from operations for the quarter of $66 million due to the payment of about $285 million to the Australian Taxation Office associated with the deed of settlement.
After adjusting for this payment, our operating cash flow for the quarter was $219 million, reflecting robust underlying earnings, partially offset by increases in working capital.
Capital expenditure for the quarter was $27 million.
Depreciation and amortization for the quarter September totaled $39 million.
During the quarter, we paid dividends of $61.2 million.
We recorded equity losses of $1.4 million in our income statement in the September quarter associated with the Primasun joint venture with Verily.
We expect to then report equity losses of approximately $2 million per quarter through the balance of fiscal year '22 associated with the joint venture operations.
We ended the first quarter with a cash balance of $276 million.
At September 30, we had $806 million of gross debt and $530 million in net debt.
Our debt levels remained modest, and at September 30, we had almost $1.5 billion available for drawdown under our existing revolver facility.
In summary, our liquidity position remains strong.
Our board of directors today declare our quarterly dividend of $0.42 per share, reflecting the board's confidence in our operating performance.
Our solid cash flow and low leverage provides flexibility in how we allocate capital.
And going forward, we plan to continue to reinvest for growth through R&D.
We will also likely continue to deploy capital for tuck-in acquisitions such as Citus Health and Ectosense, an acquisition we made on October 1.
And with that, I will hand the call back to Amy.
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q1 earnings per share $1.39.
q1 revenue rose 20 percent to $904 million.
qtrly non-gaap diluted earnings per share $1.51.
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Joining the call today are Tom Ferguson, Chief Executive Officer; Philip Schlom, Chief Financial Officer; and David Nark, Senior Vice President, Marketing Communications and IR.
Those risks and uncertainties include, but are not limited to, changes in customer demand and response to products and services offered by the company, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets and the metal coatings markets; prices and raw material costs, including zinc and natural gas, which are used in the hot-dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic; customer-requested delays of shipments; acquisition opportunities; currency exchange rates; adequate financing; and availability of experienced management and employees to implement the Company's growth strategies.
In addition, AZZ's customers and its operations could potentially be adversely impacted by the ongoing COVID-19 pandemic.
First, I need to express my great appreciation for the way our AZZ employees, their families and our partner stepped up during the COVID pandemic and also during the winter storm that impacted a significant portion of our production just two weeks before the end of our fiscal year.
Due to the concerted and in some cases extraordinary efforts of our employees, we were able to quickly respond and finish out a profitable fourth quarter.
Overall annual sales declined 21% versus the prior-year record, reaching $839 million, with Metal Coatings down 8% to $458 million and Infrastructure Solutions declining by 32% to $381 million.
The lower volumes were driven primarily by the impact on our customers caused by the COVID pandemic as well as the divestitures we made during the year.
I will get into the details of this as we go along.
We're pleased to have completed our 34th consecutive year of profitability and while COVID negatively impacted our results, we were able to take several actions to better position AZZ for the future.
We continue to generate strong cash flow during the year with $92 million of net cash provided by operating activities.
We generated adjusted net income of $55 million and adjusted earnings per share of $2.11 per diluted share.
We were successful in completing the divestiture of our SMS and GalvaBar Businesses during the year.
We closed a couple of galvanizing plants due to both local market conditions and the proximity of our other plants that could efficiently absorb the majority of their business.
We also closed the Surface Technology plant in [indecipherable] and coating lines, two of which were recently brought back online.
In line with our strategic commitment to value creation, we repurchased over 1.2 million shares for $48.3 million and distributed $7.6 million in dividends.
In Metal Coatings, we posted sales of $458 million while achieving operating margins of 23.3% on an adjusted basis, up nicely from the previous year.
The margin improvement was primarily due to driving operating efficiencies and productivity in the face of rising labor and energy costs.
The team completed the acquisition of Acme Galvanizing in Milwaukee near the end of the fiscal year.
We remain committed to delivering on the investments made in our Surface Technology business, but it is important to note that customers for this business were more severely impacted by COVID than on the galvanizing sites.
Our Infrastructure Solutions segment was severely impacted by the COVID pandemic, particularly in the early part of the year.
Sales declined over 32% to $381 million, with adjusted operating income down 52% generating adjusted margins of 4.1%.
We divested the SMS business since it was deemed to be non-core to our long-term strategy.
Restructuring and impairment charges for Infrastructure Solutions totaled $9.2 million for the year.
For fiscal 2022, COVID continues to generate some uncertainty, but our folks are managing disruptions well and keeping our employees safe.
So we are reaffirming our previously issued guidance.
We anticipate sales to be in the range of $835 million to $935 million and earnings per share of $2.45 to $2.95.
Metal Coatings is continuing to focus on sales growth, including leveraging our spin galvanizing operations at several sites.
They are also focused on operational execution and customer service, as labor and operating expenses due to material cost inflation are increasing.
Our Infrastructure Solutions segment has seen a gradual return to more normalized business activity and entered Q1 with some momentum.
Our Industrial business is seeing good results from our expanded Poland facility, although globally the business continues to experience some intermittent project delays due to COVID outbreaks at certain customer sites.
The electrical platform is focused on operational execution and growing it's e-House and switchgear businesses.
For fiscal year 2022, AZZ will continue to execute on strategic growth objectives that drive shareholder value.
At our core, we are a metal coatings company and a manufacturer of products and provider of services that are critical to sustaining infrastructure.
Our commitment to superior customer service is unwavering.
Our ability to generate strong cash flow is based on initiatives to drive operational excellence, manage costs, ensure pricing discipline and emphasis on receivables collection within our operating platforms.
We are confident that our businesses remain vital to improving and sustaining infrastructure, so we are actively working to position our core businesses to provide sustainable profitability long into the future.
For the fourth quarter of fiscal year 2021, we reported sales of $195.6 million, $49.7 million or 20.3% lower than the fourth quarter of fiscal year 2020.
Gross margin of $45.8 million for the quarter was $5.3 million or 10.4% below prior year.
However, gross margins rose to 23.4% of sales compared to 20.8% in the prior year fourth quarter, a 260 basis point improvement year-over-year.
Net income for the quarter was $16.2 million compared to a loss of $10.6 million in the comparable prior year fourth quarter, where the company had recorded a loss on sale of our Nuclear Logistics business and recorded charges related to the impairment of assets within the Infrastructure Solutions segment.
Reported diluted earnings per share for the quarter was $0.63 per share.
As Tom had earlier indicated, full year fiscal 2021 sales of $838.9 million were down 21% compared to the prior-year sales of $1.06 billion, largely as a result of the impact to the business from the pandemic, divestitures and lower revenues in China as we continue to execute on our existing China backlog.
Gross margins as reported improved to 22.5% from 22.3% on a year-over-year basis on stronger Metal Coatings performance, partially offset by the impacts of the pandemic within our Industrial and Electrical platforms, which are part of our Infrastructure Solutions segment.
Reported operating profit for the year of $61.6 million was $17.7 million or 22.3% lower than the prior year.
Operating profit in the current year was reduced $20 million as a result of our second quarter restructuring and impairment charges as well as losses recorded on the divestitures of Metal Coatings GalvaBar business and Infrastructure Solutions SMS business during the year.
Reported operating margins of 7.3% were down 20 basis points from the prior year.
Full-year operating profit as adjusted was $81.6 million, $25.5 million or 23.8% lower than the prior year's adjusted operating profit of $107 million, mostly as a result of the impact on the Infrastructure Solutions business, where they were impacted more strongly by the Energy market downturn in the pandemic.
EBITDA for fiscal year '21 was $105.2 million compared with $128.5 million in the prior year due to the lower current year earnings, partially offset by a reduction in tax expense in the current year as compared to the prior year.
Full year EBITDA as adjusted for impairment and restructuring charges was $125.2 million or 19.9% decrease from prior year's adjusted EBITDA of $156.3 million.
Cash flows from operations in the current year of $92 million were $50 million -- $50.3 million or 35.3% lower compared to the prior year, on lower net income, higher non-cash charges in the prior year and fluctuations in working capital during the year.
During the year, we continued to invest in the business.
In regards to capital allocation, we were successfully able to navigate tougher market conditions and accomplished the following.
We repurchased $48.3 million in outstanding shares.
We refinanced our $125 million 5.42% senior notes with an upsize offering of $150 million over 7-year and 12-year periods bearing interest under 3%, resulting in $2.5 million of lower annual interest expense.
Even with the pandemic, we were able to reduce debt $24 million, ending our fiscal year with $170 million -- $179 million of borrowings, compared to $203 million in borrowings at the end of last year.
We continue to support growth initiative by internally investing $37.1 million in capital projects during the year.
We completed our Houston spin plant as well as the expansion and modernization of our Poland manufacturing and operations facility.
We acquired one galvanizing and plating operation in January 2021.
We divested as had Tom noted and closed underperforming operations during the year and we continue to pay quarterly dividends.
We maintain a strong balance sheet with plenty of liquidity and continue to evaluate capital allocation strategies as we progress further on our strategic alternatives.
Lastly, we improved our internal controls over financial reporting and successfully remediated our previously reported material weakness related to our tax accounting.
Here are some key indicators that we are paying particular attention to.
For the Metal Coatings segment's galvanizing business, we are carefully tracking fabrication and construction activity, material and labor cost inflation and progress of infrastructure legislation.
For Surface Technologies, we are primarily focused on expanding our customer base and some of our customers may take considerable time in getting back to normal production.
For Infrastructure Solutions, we are off to a decent start with turnaround and outage activity having returned to a normal level and the fall season is currently looking to be quite good.
The Electrical platform is benefiting from transmission, distribution and utility spending and increasing data center and battery energy storage activity.
Finally for Corporate, we are focused on completing the strategic review of Infrastructure Solutions and replacing our credit facility.
We remain committed to our growth strategy around Metal Coatings and achieving 21% operating margins with galvanizing performance being quite steady as we continue to improve Surface Technologies.
We will remain acquisitive, particularly in galvanizing.
For Infrastructure Solutions, we will continue to focus on profitable growth in our core businesses.
Our Infrastructure Solutions business unit should benefit from more normal turnaround and outage seasons and a solid market for T&D, utility and data center, e-houses and switchgear.
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azz inc reaffirms fiscal year 2022 guidance.
azz inc - reaffirms fiscal year 2022 guidance.
azz inc - sales for the fourth quarter of fiscal year 2021 were $195.6 million, compared to $245.4 million for the prior year.
azz inc - net income for the quarter was $16.2 million, or $0.63 per share on a diluted basis.
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And the company undertakes no obligation to update or revise these statements.
In addition, on the call we will discuss non-GAAP financial measures.
Investors can find both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's annual reports, quarterly reports, and other forms filed or furnished with the SEC.
Over the past few weeks, I have been energized by visiting our parks and spending time with so many of our team members.
It has been great to witness firsthand our team's resilience and their dedication to serving our guests.
We have divided our call today into three parts.
First, I will provide an overview of our operating performance and the strong demand trends we are seeing.
Second, Sandeep will go into more detail about our financial results.
Finally, I will return to provide some comments about the progress we've made on our three long-term strategic focus areas.
Despite the challenging environment in the third quarter, we continue to experience strong consumer demand at all of our parks.
We benefited from delivering exactly what consumers are looking for thrilling and affordable entertainment for the whole family that is outdoors, and only a short drive from home.
Attendance during the quarter indexed 92% of 2019 levels excluding pre-booked group sales our parks index 95% in the third quarter compared to the same period in 2019.
Fourth quarter to-date trends through this past weekend, ending October 24 have accelerated versus the 92% index.
We also continue to make steady progress with our revenue management initiatives.
During the third quarter, guest spending per capita was up 23% versus 2019.
In addition, season pass sales trends have accelerated.
As of October 3, 2021, our Active Pass Base was up 3% compared to the third quarter 2019.
While demand trends are encouraging, we continue to face a tight labor market, and we continue to incur additional costs while operating in this unprecedented environment.
Looking back on the past two quarters, the speed and magnitude of the resurgence of demand was even stronger than we expected which exasperated the stress on our costs and operations.
We are working on several initiatives to alleviate some of these cost pressures.
Sandeep will discuss this in more detail.
Overall, we are encouraged by our continued progress yet, we are still in the early stages of transforming our operating model.
We are confident that our efforts to improve all aspects of the guest experience will fundamentally reshape the future earnings power of our business.
I would like to start by reminding you that results for the third quarter and year-to-date trends are not comparable to prior year because we closed all of our parks in mid-March last year and several of our parks remained closed or had curtailed operations through third quarter 2020.
For that reason, I will provide comparisons to 2019.
Total attendance for the third quarter was 12 million guests, a 14% decline from 2019.
Reflecting capacity restrictions at some of the parks that were open, the loss of a significant portion of our pre-booked group sales and an unfavorable calendar shift due to our fiscal year change which benefited the second quarter at the expense of the third quarter.
Group sales, which includes school groups and company buyouts continued to experience downward pressure.
As Mike stated attendance at open parks in the third quarter index at 92% of 2019.
Excluding pre-booked group sales, our parks indexed 95%.
During the months of the quarter, our attendance indexed 97% in July, 89% in August and 86% in September.
Concerns about the delta variants increased over the summer, and we experienced a decline in group sales in the second half of August through September.
However as Mike stated, fourth quarter to-date trends have accelerated versus the 92% index we achieved in the third quarter.
Looking ahead, we don't plan to share monthly attendance trends.
However, because of the extraordinary environment, we thought it would be helpful to share this detail.
Attendance from our single day guests in the third quarter represented 39% of the attendance mix, the same as in the third quarter of 2019 despite the negative impact of lower pre-book sales on single day attendance.
Excluding pre-booked group sales, our mix of single day guests increased by three percentage points.
Because of our reporting calendar change, our third quarter fiscal quarter 2021 ended on October 3, instead of September 30 as it did in 2019.
As a result, third quarter 2021 includes three calendar days in October.
This was more than offset by four days in July, which shifted out of the third quarter and into the second quarter of this year including most of the July 4th weekend.
The net reduction due to these calendar shifts in third quarter 2021 was 437,000 of attendance and approximately $24 million of revenue.
We expect group sales to have less of an impact in the fourth quarter, when groups typically represent a smaller portion of our attendance than in the second and third quarters.
However, our new fiscal calendar will continue to create attendance shifts in the fourth quarter, which will include an extra weekend in January compared to 2019.
We expect this reporting calendar change to shift approximately 200,000 of attendance out of first quarter 2022 into fourth quarter 2021.
When netted against the shift of the October weekend out of the fourth quarter into the third quarter, we expect the changes in our fiscal operating calendar to negatively impact the fourth quarter's attendance compared to 2019 by approximately 270,000 guests.
Total guest spending per capita increased 23% in the third quarter versus 2019.
Admissions spending per capita increased 20% and in-park spending per capita increased 26%.
The increase in admissions spending per capita compared to 2019 was primarily driven by our new approach to revenue management as we saw double-digit growth in admissions per capita for both our Active Pass Base and single day tickets.
Our new approach includes pricing our tickets based on a demand curve.
It also includes a new pricing architecture that allows us to optimize relative pricing among our various ticket types and to significantly reduce the debt of discounted promotions.
In addition, as much of our season pass sales are occurring later in the season than the historical pattern, we recognize season pass revenue over fewer visits which boosted our admissions per capita in the third quarter.
As expected, admissions per capita growth versus 2019 moderated in the third quarter.
We expect to continue growing our admissions per capita over time, but we expect the growth rate to continue to moderate.
The increase in in-park spending per capita compared to 2019 was due to early progress on several of our transformation initiatives, as well as a stronger overall consumer spending environment.
Highlights from our in-park initiatives include our new food and beverage strategy featuring a new food pricing architecture and the introduction of more premium offerings, our QR code-enabled FLASH Pass program, which has increased FLASH Pass adoption, our improved merchandise mix resulting in higher retail sales, and a higher mix of single day ticket visitors whose tickets, do not include parking.
The acceleration of our in-park per capita spending during our highest attendance quarter gives us confidence that our transformation initiatives are providing a sustainable lift.
Revenue in the quarter were $638 million, up $17 million or 3% compared to 2019.
Excluding the impact of the fiscal calendar change and the impact of reduced sponsorship international agreements and accommodations revenue, our base business revenue increased by $55 million or 9% compared to the third quarter 2019.
On the cost side, cash operating and SG&A expenses increased by $45 million or 19% in the third quarter compared to 2019.
The increase was driven by several factors.
First higher wage rates and incentive costs to attract and retain teams members.
Second, an increase in litigation reserves primarily related to an increased estimate of the probable outcome of the settlement of legacy class action lawsuit.
Third, increase security in our parks, and finally, a shift in the timing of our repair and maintenance costs based on our parks leader opening dates.
As we sit here today, the operating environment remains challenging with the tight labor market and ongoing supply chain constraints.
We believe that approximately half of the additional costs we are incurring are transitory and will normalize over time.
However some of these costs, particularly wage inflation may prove to be more permanent.
In terms of labor if current wage rates were to persist, we would incur additional labor expenses of $40 million annually compared to 2019 inclusive of the $20 million we called out in the EBITDA baseline we gave during our fourth quarter 2019 earnings call.
This $40 million is consistent with what we called out in our previous earnings call.
Our team is working on potential opportunities to alleviate many of these cost pressures in case they persist over time.
Adjusted EBITDA for the third quarter was $279 million, down $28 million or 9% versus third quarter 2019.
This included the negative impact of the fiscal quarter change which shifted attendance out of the quarter, the reduction of international sponsorship and accommodations revenue, and roughly half of the $45 million cost increase in the quarter that we believe to be transitory.
We are pleased with the growth of our Active Pass Base.
At the end of the third quarter we had 7.6 million passholders up 3% from the end of the third quarter 2019.
This is especially encouraging because we elected to not hold a highly promotional FLASH sale that we conducted around Labor Day, the last several years before the pandemic.
We expect to continue to increase our Active Pass Base through the spring while achieving higher ticket yields.
Our very large Active Pass Base sets us up for a solid fourth quarter and positions us well as we head into the 2022 season.
Deferred revenue as of October 3, 2021 was $224 million, up $26 million or 13% compared to third quarter 2019.
The increase was primarily due to the deferral of revenue for members whose benefits were extended.
Year-to-date capital expenditures were $62 million.
We expect capital expenditures of $120 million to $130 million in 2021 as we make investments to improve the guest experience and to increase capacity on our rights.
Our capex this year is heavily weighted in the fourth quarter due to our cautious approach toward capital spending in the early part of 2021.
We continue to believe 9% to 10% of revenue is an appropriate level of annual capital expenditures in a normalized environment.
As the recovery continues, we are focused on maximizing cash flow.
Year-to-date net cash flow through the third quarter was $232 million, an increase of $26 million compared to the first three quarters of 2019.
Our balance sheet is very healthy, with no borrowings under our revolver and no debt maturities before 2024.
Our liquidity position as of October 3 was $851 million.
This included $461 million of available revolver capacity, net of $20 million of letters of credit and $390 million of cash.
Our capital allocation priorities remain the same, first, to invest in our base business.
Second, to pay down debt until we reach our target leverage range of three to four times net debt to adjusted EBITDA.
Third, to consider strategic acquisition opportunities.
Finally, to return excess cash to shareholders by our dividends or share repurchases.
Moving to our transformation plan as previously discussed, we expect the plan to generate an incremental $80 million to $110 million in annual run-rate adjusted EBITDA.
In 2021, we expect to achieve $30 million to $35 million from our fixed cost reductions.
We have already realized over $23 million through the first nine months of this year.
Based on year-to-date trends, we now expect to reach the high end of $80 million to $110 million range once the plan is fully implemented and attendance returns to 2019 levels.
Thus far, our revenue management initiatives have overdelivered on our original plan.
However, our cost initiatives have been negatively impacted by labor and supply chain inflationary pressures.
For that reason, we expect our revenue initiatives to provide a greater proportion of the $110 million.
Relative to the midpoint of the company's pre-pandemic guidance range of $450 million, we are well positioned to achieve our adjusted EBITDA baseline of $560 million once our transformation plan is fully implemented, and attendance returns to 2019 levels.
This EBITDA level assumes the current wage rate environment persists.
We are laying the groundwork for sustainable earnings growth and once the base line is achieved, we expect to grow revenue by low to mid-single-digits and EBITDA by mid-to-high single-digits annually thereafter.
Now, I will pass the call back to Mike.
I'd like to take a few minutes to review some of the progress we have made on our three strategic focus areas to drive long-term, sustainable earnings growth.
Our first strategic focus area is modernizing the guest experience through technology.
We want to create more personalized and customized experiences for our guests, putting them in control of their time and activities.
This will result in our guests spending less time wait in line, and more time having fun and enjoying activities during each visit.
We believe that improving the guest experience will be the most important driver of our earnings growth.
On past calls, I've discussed a number of the exciting long-term initiatives that are underway including our new CRM platform, cash to card kiosks, ride reservations and an improved mobile app to name a few.
Today, I would like to provide some detail on three additional initiatives that are already starting to have an impact.
First, digital fright passes.
Instead of guests having to wait in long lines to pick up hundred attraction wrist bands, this Fright Fest season they able to go right to the honored attractions using their season pass card, membership card for e-tickets.
Guests are able to purchase digital fright passes on their phone from anywhere in the park by scanning QR codes.
This has increased our fright pass sales while eliminating wait times for our guests.
Second, expanding our mobile dining locations across our parks and enhancing our food and beverage offerings.
We continue to see the adoption of mobile dining leading to higher average transactions and improved guest satisfaction.
Third, culinary partnerships, to elevate the guest dining experience we have launched two we probably serve Starbucks locations that serve a variety of the premium Starbucks drinks beloved by our guests.
Early findings reveal that selective partnerships with third-party brands, improves guest satisfaction, and increases in-park spend.
Our partnership with Starbucks is only the first of several initiatives centered on enhancing our guest dining experience through strategic partnerships.
Our second focus area is to continuously improve operational efficiency.
We continue to make progress in this area in particular on our centralized back office and procurement efforts.
Our cost progress is currently being obscured by the labor cost and supply chain headwinds, but over time, we expect our cost savings to show up in our financial results as we scale our business, get closer to full attendance capacity and pursue additional cost opportunities.
Finally, our third focus area is driving financial excellence.
While we are keeping a close eye on the delta and other variants, we are optimistic that the global recovery will continue.
Timelines are hard to predict and progress will continue to vary by region, but we believe we are fast on our way to stronger guest attendance beyond the levels of 2019.
As we implement more of our transformation program and as our attendance recovers at 2019 levels, we expect to deliver $560 million in adjusted EBITDA.
Even more important, once we achieve that new EBITDA baseline, we expect to sustainably grow adjusted EBITDA from our base business mid to high single-digits over time.
In conclusion, these have been challenging times, but we are looking forward to a bright future.
With a clear focus on improving the guest experience through technology and a talented and dedicated team to execute our strategy, we are well positioned to accelerate growth in 2022.
Catherine, at this point, could you please open the call for any questions.
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q3 revenue $126 million versus refinitiv ibes estimate of $142.7 million.
six flags entertainment - believes it has sufficient liquidity to meet its cash obligations through end of 2021 even if open parks are forced to close.
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Our momentum continued this quarter with comparable sales up 2.2% for the total company and 2.6% for the U.S. on top of over 30% growth last year.
on a two-year basis.
These outstanding results were driven by disciplined execution of our Total Home strategy, which allowed us to grow our share of wallet with both Pro and DIY customers as they gain confidence in Lowe's as the right destination for all of their project needs.
Our results also benefited from the great work by our merchants and supply chain teams who delivered competitive in-stock positions as we leverage our scale and carrier relationships to build inventory in key high-demand categories despite widespread disruption in the global supply chain.
Later in the call, Bill will discuss how we are navigating these unprecedented challenges in order to meet the continued strong demand for home improvement products.
After Labor Day, we saw an increase in DIY demand on the weekends as travel activity slowed down and children returned to school.
As a result, consumers were once again spending more time on projects in their homes.
Our elevated product assortment across our home decor offerings are resonating with consumers, resulting in particularly strong performance in appliances and flooring and contributing to an 11% increase in ticket over $500.
The strength in the higher-ticket categories reflects the continued consumer confidence in their homes as a sound investment and reflects the early success of our Total Home strategy.
We're also making significant progress growing Pro sales.
Pro once again outpaced DIY this quarter with Pro growth over 16% and over 43% on a two-year basis.
Over the past two years, we have relentlessly focused on improving the Pro offering in our stores and online with better service levels, deeper inventory quantities, a more intuitive store layout combined with an increased number of Pro national brands.
As we continue to drive higher Pro growth, we will increase sales productivity and operating leverage across our stores.
Later in the call, Bill will discuss our continuing efforts to expand our Pro product offerings, and then Joe will discuss how we continue to enhance our Pro shopping experience.
For the past 18 months, the home has increased in importance for all of us and perhaps especially for our baby boomer customers, who are increasingly interested in aging in place in their own homes.
We will offer affordable on-trend solutions like walk-in bathtub, grab bars, stairlifts, nonslip floors, pull-down cabinets and wheelchair ramps.
These solutions will help our customers modify their homes to fit their lifestyle needs.
Our collaboration with AARP will leverage their trusted brand and expertise as we help to educate our customers on how to approach aging in place.
We look forward to updating you on this very exciting initiative on future calls.
Now turning to Lowes.com.
Sales grew 25% on top of 106% growth in the third quarter of 2020, which represents a 9% sales penetration this quarter and a two-year comp of 158%.
As we modernize our omnichannel offering, we continue to gain traction with consumers who increasingly expect a seamless integrated shopping experience.
And as a further indication of the strides we've made in upgrading our dot-com platform, I'm pleased to announce that we have recently launched Lowe's' One Roof Media Network.
Our recognition for the first time in 17 years as Fortune's Most Admired Specialty Retailer and our inclusion as one of the top three marketers of the year in Ad Age's annual list means that we are well positioned to put our vendor partners at the forefront of the home lifestyle movement, helping them to capitalize on the shift in consumer behavior and sentiment toward the home.
We're excited to participate in this rapidly growing segment of digital advertising.
During the quarter, operating margin expanded approximately 240 basis points, leading to diluted earnings per share of $2.73, which is a 38% increase as compared to adjusted diluted earnings per share in the prior year.
Our improved operating performance continues to reflect the great execution of the team, as well as the benefits of our new price management system and the success of our perpetual productivity improvement initiatives, or PPI.
Dave and Joe will provide further details on both of these initiatives later in the call.
Now turning to our results in Canada.
While our performance lagged the U.S. as the Canadian business is more heavily weighted toward lumber, the Canadian leadership team remains focused on driving productivity by leveraging technology and processes that have already yielded strong results in the U.S. I'd now like to take a moment to discuss how we're expanding our fulfillment capabilities to meet the ever-increasing consumer demand for omnichannel shopping solutions.
This quarter, we completed the conversion of our second geographic area, the Ohio Valley region, to the market-based delivery model for big and bulky product, building on the success we gained in Florida.
As a reminder, in the market-based delivery model for big and bulky products flowing from our supply chain directly to consumers' homes, bypassing the stores all together.
This replaces the legacy store delivery model, which is highly inefficient and relies on each store to function as its own distribution node for these products.
This new delivery model is already driving higher sales in appliances, improved operating margins, reduced inventory and higher on-time delivery rates.
We plan to complete the rollout across the entire U.S. over the next 18-plus months.
Now let's talk about the importance of culture at Lowe's.
This year, we're celebrating our centennial with a $10 million investment in 100 communities across the country with projects ranging from renovating homeless shelters, updating youth centers and addressing unique needs for communities all around the country.
You can go to Lowes.com and see a full list of all 100 community projects.
This is our way of expressing our appreciation for our loyal customers and paying tribute to the company's long-standing commitment to community service.
In addition to commitment to the community, at Lowe's, we are proud of our relationship with and support of our military veterans and active-duty service members.
This is demonstrated by the $1 billion in discounts that we give our military families in our country this year through our Military Discount program.
Joe will discuss this program in more detail later in the call.
Before I close, I would like to extend my appreciation for our frontline associates.
Every week, I'm fortunate to travel across the country visiting stores, and I'm impressed by our associates' resilience and commitment to serving our customers and our communities.
And I'm very pleased to announce that for the seventh consecutive quarter, 100% of our stores earned a Winning Together profit-sharing bonus.
This $138 million payout to our frontline hourly associates is $70 million above the target payment level and reflects our appreciation for the hard work of our hourly workforce.
In the third quarter, U.S. comparable sales increased 2.6% and 33.7% on a two-year basis as our Total Home strategy continues to gain traction with our DIY and Pro customers.
This quarter, we drove positive comps across our home decor and hardlines divisions.
Comps in the building products divisions were down slightly as compared to the prior year as we cycled over a period of extremely high DIY demand for lumber.
Growth continued to be broad-based on a two-year basis with all product categories up more than 17% in that time frame.
In our home decor division, appliances and flooring delivered standout performances as we leveraged our competitive in-stock positions and updated product assortments to deliver strong positive comps on top of 20% growth in these categories last year.
Within appliances, sales of refrigerators, freezers and washers and dryers were particularly strong.
In flooring, vinyl flooring remains the top-performing category supported by innovative product like the WetProtect from Pergo, which is exclusive to Lowe's.
And we are pleased to see the new product offerings in our own allen + roth brand resonating with our customers, like the new allen + roth Lifestyle Performance rugs.
These rugs have the appearance of an indoor rug, but they are hose-washable, which makes them ideal for busy families with kids and pets.
Turning to our performance in our hardlines division.
Customers also invested in outdoor entertainment and upgrading their outdoor living spaces, as well as holiday decorations for their homes and yards, driving strong positive comps in seasonal and outdoor living and lawn and garden, resulting in two-year comps over 43% in each category.
We were also pleased with our performance in Halloween as we've sold through much earlier than in previous years.
And our early sales of holiday trim and tree are tracking ahead, as well as consumers are getting a jump start on their holiday decorating.
In addition to early sales of holiday, we have also seen customers purchasing cold weather products like snow throwers earlier than in years past.
With broader awareness of potential global supply chain disruptions, we are seeing many consumers looking to purchase products as soon as they are available in our stores.
In the quarter, we also leveraged our No.
1 position in outdoor power equipment to deliver over 20% growth in battery-operated outdoor power equipment.
Both our DIY and Pro customers are enjoying the zero-emission rechargeable products available in the EGO, Kobalt, CRAFTSMAN and Skill brands.
We continue to expand our brand and product assortment, building on the powerful lineup of brands that include John Deere, Honda, Husqvarna, Aaron's and CRAFTSMAN.
In building products, comps were down slightly due to a decline in DIY lumber sales despite double-digit comps in electrical and strong positive comps in rough plumbing and building materials.
We feel good about the traction that we are gaining with the Pro customer as we continue to build out our product assortments that are tailored to their needs.
This quarter, we completed the launch of the SPAX fastener program in our stores.
SPAX is the market leader in multi-material construction screws.
We also continue to build out our Pro power tool accessory program with new launches from Spyder and DEWALT. This quarter, Spyder will be launching their new TARANTULA circular saw blades, offering seven new options to tackle a wider variety of tough construction jobs, all of which are exclusive to Lowe's.
And DEWALT will be launching their new ELITE SERIES circular saw blades, which are designed to maximize productivity for heavy-duty projects, and these will also be exclusive to Lowe's.
These new products are strong additions to our Pro brand lineup, which includes great programs like Simpson Strong-Tie, DEWALT, Metabo, Bosch, Spyder, GRK, FastenMaster, ITW, Lufkin, Marshalltown, Estwing, Eaton, SharkBite and LESCO and the recent additions of FLEX, SPAX and Mansfield.
Now shifting to Lowes.com.
We delivered sales growth of 25% in the quarter and 158% on a two-year basis.
Following the launch of Lowe's virtual kitchen design and visual search in Q2, we enhanced our omnichannel customer experience with the introduction of our paint visualizer on Lowes.com in the third quarter.
We are continually working to remove friction from the buying process and to fully integrate the online and in-store shopping experience.
Before I close, I'd like to discuss how we're navigating the unprecedented disruptions across the global supply chain that are impacting the retail industry.
As one of the largest importers in the U.S., we are fortunate to be able to leverage our scale and carrier relationships to secure shipping and transportation capacity and work to minimize the impact of cost increases.
We're also taking a very proactive approach by ordering inventory earlier than the years past, including our seasonal buys for both 2021 and 2022.
This gives us more time to manage through any unforeseen delays in either the production or the distribution of our orders.
Once the product lands in the U.S., we are able to leverage our growing network of coastal holding facilities so that we can hold the product upstream from our regional distribution centers and bulk distribution centers until it's needed.
From there, we can quickly flow the product to the right areas of the country.
Looking ahead, we are ready to flex our seasonal pads to a variety of different winter and early spring offerings after we sell through our trim and tree product.
The investments that we made in the U.S. stores reset last year expanded our operating capabilities and has allowed us to respond rapidly to the changing consumer shopping habits, like the early season buying that we're seeing right now.
As Marvin mentioned, this quarter, 100% of our stores earned their Winning Together profit-sharing bonus, resulting in a payout of $138 million to our frontline hourly associates.
The current hiring environment remains competitive, and we continue to align labor to meet demand.
Our labor management system has allowed us to serve the needs of our customers while addressing the lifestyle demands of our associates.
Lowe's offers a unique opportunity for job seekers as we foster a culture that is geared toward associates' skill and career development.
During the quarter, we expanded Lowe's University leadership curriculum across all of our stores.
Lowe's U provides all associates with new learning and development opportunities in addition to the standard onboarding courses.
Our program provides small digestible lessons that improve their product and how-to knowledge and is tailored to the associate's role.
The additional training complements their existing knowledge and supports improved customer service and leadership development.
Lowe's University is available for all store associates via our smart mobile devices on the sales floor or in the newly created Lowe's U learning labs in our stores, and we continue to expand it into our contact centers, as well as our distribution centers.
In addition to competitive wages and benefits and rewarding career opportunities, Lowe's U will play a pivotal role in our efforts to retain an experienced and engaged workforce.
I'd also like to provide you with an update on our perpetual productivity improvement initiatives, which continue to drive payroll leverage through the quarter.
As a reminder, PPI is an ongoing process in a series of initiatives that scale over time instead of one large single project.
One example is the simplified interface that we introduced in the checkout area last year, which allowed us to accelerate the cashier training process and improve the customer experience.
We have begun introducing the simplified interface to other selling stations throughout the store, including appliances, kitchens and bath and millwork.
This new interface will replace the primitive green screen technology that is cumbersome and difficult to learn.
Associates are starting to use this intuitive modern platform for consultative selling.
With more time to focus on the customer, the associate is now better able to capture the entire project.
Lowe's homegrown self-checkout is another PPI initiative that will drive increased labor productivity as we scale it over time.
This new option, which was designed specifically for the home improvement shopper, is so much easier to use that we are already seeing higher customer adoption rates.
These two initiatives are fantastic examples of what PPI is all about: leveraging technology to reduce tasking and drive labor productivity while improving the associate and the customer experience.
Our Pro customers are expressing appreciation for our new in-store convenience features, including Pro trailer parking, free phone charging stations and air stations for refilling tires.
This helps them get in and out of our stores quickly with additional conveniences that cut down on the number of stops they need to make during the week.
Time is money for this busy customer, so we're focused on helping them maximize the time they spend on the job site.
We recently completed our inaugural Pro Pulse Survey, which provides great insight into what is on the Pro's mind and how they view their future business opportunities.
We are encouraged to learn more about their optimistic outlook and their strong job pipelines.
I look forward to updating you on future calls on our ongoing initiatives to grow share with this very important customer.
As a veteran, I'm particularly proud of the commitment to the 10% discount for active-duty service members and our veterans and their families every single day with no purchase limit.
And I also wanted to mention that we offered our first responders a Lowe's discount for the first time this quarter.
This recognition reflects our heartfelt appreciation for their commitment to serving others during the ongoing pandemic.
At Lowe's, we remain focused on improving the communities where our associates work and live, and there is no better way to do this than to support our first responders.
In Q3, we generated $1.9 billion in free cash flow, driven by better-than-expected operating results.
Capital expenditures totaled $410 million in the quarter as we invest in our strategic initiatives to drive the business and support long-term growth.
We returned $3.4 billion to our shareholders through a combination of both dividends, as well as share repurchases.
During the quarter, we paid $563 million in dividends at $0.80 per share.
Additionally, we repurchased 13.7 million shares for $2.9 billion and have over $10.7 billion remaining on our share repurchases authorization.
And today, I'm excited to announce that we are now planning to repurchase an incremental $3 billion of shares in Q4.
This will bring our total share repurchases to approximately $12 billion for the full year, a clear reflection of our commitment to driving long-term value for our shareholders.
Our balance sheet remains very healthy with $6.1 billion in cash and cash equivalents at quarter end.
Adjusted debt-to-EBITDAR stands at 2.14 times, well below our long-term stated target of 2.75 times.
Now I'd like to turn to the income statement.
In the quarter, we reported diluted earnings per share of $2.73, an increase of 38% compared to adjusted diluted earnings per share last year.
This increase was driven by better-than-expected sales growth, improved gross margin rate and SG&A leverage as a result of strong execution across our business.
My comments from this point forward will include approximations where applicable.
In the quarter, sales were $22.9 billion with a comparable sales increase of 2.2%.
Comparable average ticket increased 9.7% driven primarily by higher-ticket sales of appliances and flooring, as well as product inflation.
Keep in mind that commodity inflation did not have a material impact on comparable sales in Q3 as deflation in lumber was largely offset by inflation in other categories, including copper.
Year-to-date, commodity inflation had lifted total sales by approximately $2.1 billion and improved comp growth by 300 basis points.
In the quarter, comp transaction count declined 7.5% due to lower sales to DIY customers of smaller-ticket items, as well as lower DIY lumber unit sales.
In the quarter, we once again cycled over a period where consumer mobility was limited.
So many of our DIY customers were working on smaller home improvement projects.
Comp transactions increased 16.4% last year, which resulted in a two-year comp transaction increase of 7.7%.
We continue to gain momentum in our Total Home strategy as both Pro and DIY customers alike increasingly look to Lowe's for a one-stop solution to their project needs.
We delivered growth of over 16% in Pro, 25% on Lowes.com and positive comps across all home decor categories.
U.S. comp sales increased 2.6% in the quarter and was up 33.7% on a two-year basis.
monthly comp sales were down 0.4% in August, up 1.1% in September and up 7.7% in October.
Trends improved as we moved through the quarter with stronger weekend traffic post Labor Day.
As Bill mentioned, we are seeing some indications of early seasonal buying, consistent with broader retail trends.
comp growth on a two-year basis.
From 2019 to '21, August sales increased 28.4%, September increased 33.3% and October increased 40%.
U.S. comp transaction count improved each month of the quarter and in October, up double digits on a two-year basis.
Gross margin was 33.1% of sales in the third quarter, up 38 basis points from last year.
Product margin rate declined 25 basis points.
Lumber margins were pressured, particularly toward the beginning of the quarter as we sold through the higher-cost inventory layers after the steep drop in lumber prices in early July.
These pressures were largely mitigated by data-driven pricing and product cost management strategies across many other product categories.
Gross margins also benefited from five basis points of favorable product mix due to a lower percentage of lumber sales versus the third quarter of last year.
In addition, higher credit revenue benefited margins by 60 basis points, while improved shrink contributed 20 basis points of benefits this quarter.
These benefits were partially offset by 30 basis points of increased supply chain costs due to higher importation and transportation costs, as well as the expansion of our omnichannel capabilities.
We are leveraging our scale and our carrier relationships to minimize the impacts of these higher distribution costs.
However, we are not immune to these rising costs, and we expect that we will continue to absorb higher cost in our distribution network going forward.
SG&A at 19.1% of sales levered 230 basis points versus LY due to better-than-expected sales and disciplined expense management.
We incurred $45 million of COVID-related expenses in the quarter, as compared to $290 million of COVID-related expenses last year.
The $245 million reduction in these expenses generated 110 basis points of SG&A leverage.
Additionally, we incurred $100 million of expenses related to the U.S. stores reset in the third quarter of last year.
As we did not incur any material expense related to this project this year, this generated 50 basis points of SG&A leverage compared to LY.
And finally, we've generated approximately 50 basis points of favorable SG&A leverage from our PPI initiatives.
We are very pleased with our operating income performance as we are driving solid growth in operating profits while significantly expanding operating margin rate.
For the quarter, operating profit was $2.8 billion, adding $600 million or a 28% increase over last year.
Operating margin of 12.2% of sales for the quarter increased approximately 240 basis points over LY driven by improved SG&A leverage and higher gross margin rate.
The effective tax rate was 26.1%.
This is above the prior year rate where there was a timing shift that benefited Q3 at the expense of Q4.
At the end of the quarter, inventory was $16.7 billion, which is $1 billion higher than the third quarter of 2020 when our in-stock positions were pressured due to strong consumer demand and COVID-related supply constraints.
Inflation did not have a material impact on inventory levels as deflation in lumber was largely offset by inflation in other categories, including copper.
Our push to land spring product earlier than normal has increased our inventory position modestly, and this approach also limits our ability to significantly improve inventory turns in the near term.
However, as both Marvin and Bill have indicated, our relatively strong in-stock positions create a competitive advantage in the current environment given the ongoing global supply chain constraints.
Now before I close, I'd like to comment on our current trends and our improved 2021 financial outlook.
We are seeing continued momentum in our business as reflected in better-than-expected results.
Month-to-date, November U.S. comparable sales trends are materially consistent with October's performance level on a two-year basis as we continue to see early holiday spending trends.
Our improved expectations for 2021 include sales of approximately $95 billion for the year, representing two-year comparable sales growth of approximately 33%.
This compares to our prior expectations of approximately $92 billion of sales, which represents approximately 30% comparable sales growth on a two-year basis.
We continue to expect gross margin rate to be up slightly versus 2020 levels.
With higher projected sales levels and our productivity efforts taking hold, we are raising our outlook for operating income margin to 12.4% from 12.2% for the full year.
We expect capital expenditures of up to $2 billion for the year.
And as I mentioned earlier, we're now planning to return excess capital to shareholders via an additional $3 billion in share repurchases in Q4.
This will bring our total share repurchases to approximately $12 billion for the full year, which is higher than our original expectations of $9 billion due to better-than-anticipated performance.
In closing, we are operating ahead of expectations, expect to benefit from the secular tailwinds over the next several years.
I am confident that the combination of our strong operating results and our shareholder-focused capital allocation strategies will continue to drive meaningful long-term shareholder value.
And as Kate announced earlier, we look forward to providing you with our 2022 financial outlook on December 15.
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compname reports q2 earnings per share of $4.25.
q2 earnings per share $4.25.
q2 sales $27.6 billion versus refinitiv ibes estimate of $26.85 billion.
q2 earnings per share $4.25 excluding items.
qtrly consolidated comparable sales decreased 1.6%.
qtrly u.s. comparable sales decreased 2.2%.
raises fiscal 2021 financial outlook.
sees fy 2021 revenue of about $92 billion.
for fiscal 2021, company expects capital expenditures of approximately $2 billion.
sees fy 2021 revenue of about $92 billion, representing about 30% comparable sales growth on a two-year basis.
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I'll begin with a high-level review of our 2020 results and highlight the many accomplishments that we were able to deliver during the year.
These accomplishments were achieved despite the tremendous challenges presented by the global pandemic.
I will then provide some closing comments and open the call to questions.
The pandemic brought immense challenges to our industry customers and our employees and their family.
Whether their jobs were performed in our manufacturing facilities, on a rig servicing our customers, or working remotely, all of our employees adjusted their lives for the good of the organization and in service to our customers.
I am grateful for all their contributions.
Although our 2020 results were challenged by the pandemic and associated oil and gas demand destruction, it was not a year without significant progress and accomplishments for Dril-Quip.
The transformation and productivity journey we started in 2019 positioned us well for this challenging environment.
We were able to conclude 2020 with $365 million of revenue and $32 million of adjusted EBITDA.
Although a decrease from our 2019 results, we successfully responded to the challenging environment by mitigating the impact of the pandemic as seen in our operating and financial results and continued delivering products and services to our customers.
We also celebrated many accomplishments in our research and development efforts during 2020.
In May, we were presented with our fifth spotlight on new technology award by the Offshore Technology Conference for our VXTe Subsea Tree System.
The VXTe system is a disruptive technology in the subsea production system space.
VXTe provides significant cost and time savings for our customers, which improves their IRR by reducing capital and time to first oil, with the added benefit of reducing their carbon footprint.
The VXTe offers the operator the ability to drill the well to completion and land the tubing hanger in the wellhead as part of their normal drilling operations without regard to its orientation.
This eliminates the traditional development well scenario, whereby the operator will cease drilling operations, pull the BOP stack and run the horizontal tree or tubing spool and then rerun the BOP stack to drill the well to completion.
We estimate that this, combined with our other e-Series technology products, will save operators approximately $5 million per well and five days of rig time.
We have seen incredibly positive response from our customers about the potential to improve their operations with this technology.
Our R&D and manufacturing teams worked hard through the pandemic to complete all qualification tests and maintain the production schedule of the first VXTe tree.
With the tree now in final assembly, we expect to make delivery in the first quarter and hopefully, installing the first VXTe this year.
While we are aware that consolidation is needed in our sector, we also know the difficulties in quickly executing that strategy.
Accordingly, we embarked on a strategy of consolidation through collaboration.
In 2020, we entered into a strategic collaboration agreement with Proserv for the manufacture and supply of subsea control systems.
This nonexclusive collaboration achieved two main priorities.
First, it allowed us to offer our customers the latest subsea controls technology without having to make the significant research and development investment of $8 million to $10 million per year over the next three years, as well as eliminated the associated operating costs of maintaining that product line.
Second, this win-win scenario allows us to bundle our award-winning subsea trees with Proserv's state-of-the-art control systems and offer our customers significant value.
The collaboration with Proserv was part of a larger strategy to continue down our transformation path to align our business with market activity.
Allowing us to refocus our engineering and manufacturing resources toward solutions that set us apart from our peers and offer the highest return on invested capital.
This strategy led us to the difficult decision to transition and consolidate our subsea tree manufacturing from Aberdeen to Houston as we saw the subsea tree market decline from close to 300 subsea trees to a little over 100 tree awards in 2020.
Aberdeen is a critical location for our operations, and therefore, we still have a significant presence there.
This includes sales, project management, fabrication, final assembly and aftermarket operations serving our customers.
In total, the productivity initiatives executed in 2020 reduced our costs by approximately $20 million on an annualized basis and helps us to continue on maintaining profitability and a strong balance sheet.
As we view the market today, it seems probable that a longer, more gradual post-pandemic recovery is likely.
This means it could take several years to return to 2019 activity levels.
The recovery is also likely to vary by geography and customer profile.
Low-cost areas of offshore development, like the Caribbean, or with the support from subsidies and parts of the North Sea, are expected to see activity levels remain steady.
The same can be said for national oil companies that typically drill for domestic energy consumption.
In contrast, the most recent developments in the U.S. regulatory environment through executive order has created uncertainty around future projects in the U.S. Gulf of Mexico.
Overall, our outlook on the market takes into account multiple factors, including demand recovery, supply control from OPEC, and increased emphasis by government regulators on transitioning toward less consumption of fossil fuels in favor of alternative energy sources.
The energy transition is a process we believe should be guided by market forces and approached rationally with regulatory consistency.
We recognize the transition is under way, but will take time and resources to accomplish.
Furthermore, we believe hydrocarbons will continue to play an important role in this transition, continuing to provide affordable, reliable and often cleaner energy to help lift developing nations out of poverty, while developed nations move more toward alternative energy sources.
Dril-Quip has a role to play in both parts of the transition solution.
As part of our commitment to this transition, we have always prioritized helping our customers efficiently produce hydrocarbons and our latest e-Series suite of products continues that legacy.
Many of our customers have made pledges to reduce emissions or become carbon neutral in the coming years.
A large part of these commitments, in some cases, as high as 70% reduction in carbon emissions, will come from the vendors who supply these companies.
Dril-Quip's innovative line of products are green by design, offering significant reductions in material or equipment that must be installed.
This design methodology, which has always been part of Dril-Quip's DNA, eliminated the carbon associated with manufacturing equipment as well as reducing the offshore installation days.
These products are thoroughly tested to improve reliability, which leads to better well integrity and fewer workovers.
For example, the combination of our e-Series technologies can help reduce roughly 40 tons of steel from traditional operations.
The elimination of this component alone reduces carbon emissions by approximately 70 tons as the process needed to produce the steel is no longer required.
We look forward to continuing to lead in the technologies and products that help our customers achieve their operational objectives.
However, as we make the energy transition together, we do not lose sight of the very important role the industry currently plays today in providing reliable, affordable energy, and we take great pride in being part of that solution as well.
I'm going to walk through Q4 performance and also provide a review for the full year of 2020.
We executed well, given the challenges we saw in the overall market.
Revenue for the fourth quarter fell slightly from the prior quarter to $87 million.
This decline was mainly due to lower manufacturing production hours related to increasing levels of quarantines from rising COVID-19 cases, seen mainly in the U.S. Adjusted EBITDA for the fourth quarter was $9 million, a decrease of $1 million from the prior quarter.
The same factors impacting our revenue fell through to the bottom line.
We also saw regional government subsidies implemented as a result of the pandemic being reduced during the quarter.
For the full year 2020, our revenues were $365 million, a decrease of $50 million versus 2019.
This was driven by the impacts of the pandemic on overall oil and gas demand.
Adjusted EBITDA for the full year 2020 was $32 million, a decrease of $22 million from the previous year.
We were successful in addressing this market decline by swiftly taking steps to reduce costs and optimize our global footprint.
As a result of this execution, we saw our margin profile improve significantly in the second half of 2020 as we realize the benefit of these cost actions.
We met our $20 million cost reduction target in 2020.
These are always difficult decisions, but were necessary in this environment.
We expect these cost reductions to be sustainable going forward.
While most of our regions saw headwinds to product and leasing revenues during the year, our service revenue saw an increase year-over-year.
This was primarily due to an increase in installations from orders booked in previous years, coupled with the growth in our downhole tools business.
Our downhole tools business was able to outpace the market by gaining share in key markets in the Middle East and Latin America as a result of service quality and execution.
I'll now move on to margins.
Gross margins were under pressure.
But given the environment, it held up falling by only 3%.
Our decision to take actions early in the year helped to support margins as the year progressed.
We saw EBITDA margins improve 3% from the first half to the second half 2020 after normalizing for mix and the impact of disruptions related to COVID-19.
Moving to SG&A expenses.
For the fourth quarter of 2020, SG&A was $26 million, an increase of $5 million compared to the third quarter.
This increase was mainly due to short-term legal expenses.
We expect these legal expenses to continue into the first half of 2021, mostly in connection with the trial currently scheduled for April.
For the full year 2020, SG&A expenses decreased by $8 million to $90 million after excluding these short-term legal expenses.
These improvements in SG&A stem from our 2020 cost out initiatives.
On the engineering R&D side, we saw a modest increase in 2020 to $19 million as we work to bring the VXTe to market.
Now looking at bookings for the year.
Product bookings were negatively impacted by the difficult market conditions in 2020.
After approximately $388 million in bookings during 2019, the uncertainty surrounding the pandemic and its impact on commodity prices led to customers holding off or delaying decisions to book orders for their upcoming projects.
We saw smaller orders with less predictable timing.
We now see one or two orders being the difference between a $40 million or a $60 million bookings quarter.
We expect the effects of the pandemic to persist into the first half of 2021, but are cautiously optimistic that things will gradually recover as the year progresses.
We believe there is some upside if operators see increased stability in prices and confidence in the global economic recovery returns with the recent rollout of COVID-19 vaccines.
We expect the road to recovery to be more gradual.
We are taking actions related to our productivity initiatives driven by our LEAN management philosophy and are targeting a $10 million cost improvement on an annualized basis.
These savings will come primarily from changes in our manufacturing and supply chain functions, including an increase in outsourcing for our downhole tools business.
The timing of these productivity actions will take place over the course of the year and is expected to deliver roughly $5 million of realized benefit in 2021.
Moving on to capital expenditure or capex.
In the fourth quarter of 2020, our capex totaled just under $2 million.
And for the full year, it was around $12 million.
This represents a minimum maintenance level of capex that we have seen over the past two years.
We are, however, anticipating an increase in capex to range in between $15 million to $17 million in 2021.
The increase is partly related to growth in our downhole tools business.
We are also investing in manufacturing safety and equipment and our information technology infrastructure.
We will monitor conditions to adjust our capex if necessary, but we believe these investments will support growth and improve our long-term efficiency and profitability.
Now let me turn to the balance sheet.
We continue to maintain a strong balance sheet and remain focused on protecting our cash position with no debt.
At year-end, we had cash on hand of $346 million and a further $40 million of availability in our ABL facility.
This results in approximately $386 million of available liquidity.
Our balance sheet and liquidity position are critical for us.
It gives our customers confidence in our ability to execute on our commitments and provides financial flexibility.
Moving on to free cash flow.
Free cash flow for the fourth quarter was a negative $18 million.
For the full year, it was negative $33 million.
Both the quarter and full year free cash flow was slowed by several headwinds, many of which were related to the pandemic.
Firstly, we saw a number of large customers whole payments that were due at year-end until early in January.
While we are accustomed to disturb our balance sheet management by our customers, this amount was beyond our normal experience.
Secondly, we saw inventory build in 2020, driven by customers requesting delays in shipments and our need to continue to procure materials for upcoming projects.
We also strategically added inventory for our expanding downhole tools business and subsea trees for stocking programs.
Both these factors led to an increase in inventory.
These working capital increases were partially offset by a federal tax refund.
We believe we have laid the foundation for a strong recovery.
We executed in improving billing turnaround and worked to improve our collection efforts and expand payment terms with vendors.
We expect we will see benefits of these efforts more clearly in 2021.
Free cash flow is a primary focus for us as a management team.
We have tied all annual incentives for our entire leadership team to free cash flow.
We are focused on all aspects of working capital.
We have dedicated a cross-functional team working on inventory reduction in a more gradual recovery environment.
Our auditor cash teams are gaining traction on reducing time to bill.
And we are continuing to leverage our supply base by moving to a more vendor-managed inventory program.
In the current environment and given the initiatives I just mentioned, we expect to be able to generate 5% free cash flow yield.
The bottom line is that free cash flow is a key metric for the management team.
Prior to turning the call back over to Blake for closing comments, I will give some color on what we expect to see in 2021.
Based on the current view and the conversations with customers, we expect 2021 bookings to be around $200 million for the year.
At these product booking levels and with the anticipated growth in our downhole tools business, we expect to see revenue to come in flat to slightly down from 2020.
We are forecasting 40% decremental margins for any given decline in revenue as we hold costs critical to address a recovery.
As I mentioned earlier, we are forecasting a free cash flow yield around 5% in 2021.
We are well positioned to achieve this goal and have aligned management objectives and incentives toward meeting this target.
To sum up, while we see near-term headwinds from the hangover of the pandemic, we see a gradual recovery in sight.
We have a proven track record of executing and meet these near-term challenges head on as we prepare for the recovery and focus on our strategic initiatives.
We have a strong financial position and a strong management team to execute in this market environment.
As we enter 2021, we believe there are signs to be optimistic that a recovery, even a more gradual one, is beginning to take form.
We have established several strategic initiatives, which will position Dril-Quip to thrive in the years ahead.
First, we are continuing to progress our consolidation through collaboration strategy through peer-to-peer collaborations that help to expand market access for our technology.
We see these collaborations through several lenses.
With respect to VXTe, we believe via conversations and significant pull from both customers and peers in the market that VXTe monetization remains a midterm opportunity via Dril-Quip providing the IP kit to our peers for delivery to end customers.
With wellheads, as a best-in-class wellhead provider, we believe both our superior technology and qualification lend themselves to partnering with multiple peers in integrated offerings.
Finally, with our connectors, we believe that real opportunity exists to partner with pipe providers around the world to build out better supply chains to improve delivery to our customers.
The common theme of these strategies is to expand share while reducing overall industry capacity.
Second, we have a downhole tool business that we believe has not fulfilled its potential.
We would expect to have a business here that has a market share similar to our wellhead franchises in most markets.
Quite frankly, we've struggled over the last few years with that business.
But we've laid the foundation in 2020 for significant growth in 2021.
We have a new leader.
We've shuttered underperforming bases.
We place smart bets with stock and added business development resources in key regions.
Further, we are only beginning to capitalize on our technology as outlined via our XPak DE technology.
Finally, as I'm sure you followed, we've moved from an organization of transformation to an organization that demands real annual productivity improvements.
These productivity initiatives span our organization and will make us nimble in difficult times while allowing us to scale up when the market returns.
Productivity and LEAN are now the way we do business and will serve us well in good and bad times.
As we look to the market increasingly focused on energy transition, we are continuing to be green by design, delivering lower carbon options for our customers, continuing to drive R&D that reduces the carbon footprint for our customers and following our customers in their transition.
While we are in the early stages of our R&D, rest assured that you can expect us to bring the same level of innovation to energy transition that we have to our customers over the last several decades.
In conclusion, the culmination of all these efforts leads to increasing market share by using technology and execution as a differentiator.
We will be keenly focused on free cash flow generation in a competitive free cash flow yield to attract investment and ultimately benefit our shareholders.
As Raj indicated, we are continuing several key working capital reduction initiatives in 2021.
We take these commitments seriously and have tied our annual performance compensation toward meeting these goals.
I look forward to providing further updates on the progress we are making across all our strategic areas in the coming quarters and sharing the benefits of success with our employees, customers and shareholders.
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anticipate that orders could continue to be lumpy and remain in a $40 to $60 million range per quarter for 2021.
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Factors that could cause the actual results to differ materially are discussed in detail in our most recent filings with the SEC.
An audio replay will be made available on our website shortly after today's call.
It is now my pleasure to introduce Anant Bhalla.
We enter 2021 focused on being vigilant about realization of shareholder value.
2021 will be a transition year from the AEL 1.0 strategy to the AEL 2.0 business model.
It will be the execution year as we make demonstrable progress with closing of already announced reinsurance transaction plan under our capital structure pillar and start our migration to alpha active with investment management partnerships under our investment management pillar.
I'll share more on these partnerships in a few minutes.
First, the Virtuous Flywheel builds on an industry-leading at-scale annuity funding origination platform.
Second, adding in differentiated investment management capabilities and expertise in aligning the annuity liability funding with cross-sector asset allocation now gives us a competitive advantage over traditional asset managers as we leverage expertise for both sides of our balance sheet.
And third, demonstrable success overtime on these first two using our own capital will attract third-party capital to our business and grow fee revenues for AEL.
These fee revenues will be generated by growing third-party assets under management in our investment management partnerships and from creation of additional side-cars reinsurance vehicles with new equity investors like the two we've announced to date with Brookfield and Varde-Agam.
These fees will diversify our earning streams.
Fourth, leveraging third-party capital will transform AEL into a more capital-light business.
The combination of differentiated investment strategies and increased capital efficiency improves annuity product competitiveness, thereby enhancing new business growth potential and further strengthening the operating platform.
We believe that in the foreseeable market environment, it is imperative for most asset-intensive insurers, including American Equity, to switch the source of earnings generation from traditional core fixed income investing to a blend of core fixed income and an alpha-generating private credit and real or physical assets, and over the next few years, migrate to a combination of spread and capital-light fee-based businesses.
Regarding American Equity-specific execution.
The fourth quarter was the start of the turnaround of the go-to-market pillar, our strategy to enhance our ability to raise long-term client assets through annuity product sales.
We and our distribution partners consider American Equity's marketing capabilities and franchise to be core competitive strengths.
The liabilities we originate result in stable, long-term attractive funding, which is invested to earn a spread and return on the prudent level of risk capital.
In the fourth quarter, we reintroduced ourselves to our markets.
We used the fourth quarter to tell distribution that we are back and in a big way.
Driven by the introduction of competitive three and five-year single-premium, deferred-annuity products at both American Equity and Eagle Life, we saw a substantial increase in sales, with total deposits of $1.8 billion, doubling from the prior year quarter and up 221% from the third quarter of 2020.
Fixed-rate annuities was a major driver of fourth quarter sales increase, while fixed-indexed annuities also increased, up 23% sequentially.
Total sales at Eagle Life were up over six fold on a sequential basis, and for the first time in its history, Eagle Life surpassed American Equity Life in total sales.
The competitive positioning we took in the fixed-rate annuity market benefited both the fixed-indexed annuity sales and recruiting of new producers.
Our FIA sales in the bank and broker-dealer channel increased 76% sequentially.
New representatives appointed with Eagle Life during the quarter increased by nearly 1,200 to over 9,300 at year-end.
While not as dramatic, we saw growth in sales at American Equity Life as well.
Total sales increased 103% from the third quarter, while fixed-indexed annuity sales climbed 16%.
The momentum that began in the fourth quarter has continued into the new year.
Pending applications when we reported third quarter results stood at 1,625.
For fixed-indexed annuities, we will shortly launch a revamped AssetShield product chassis to appeal to a broader market adding two new proprietary indices, the Credit Suisse Tech Edge Index and the Societe Generale Sentiment Index, in addition to the existing Bank of America Destinations Index, all of which we expect to illustrate extremely well with participation rates that cost well within our pricing budgets to meet our target pricing IRRs.
With the introduction of these multi-asset indices, we will offer clients a compelling single-accumulation annuity product that covers traditional equity indices as well as multi-asset custom indices focused on U.S. risk parity, global risk control asset allocation, and sector-specific allocations.
Following last year's refresh of IncomeShield, we are very well situated for income.
The level of income offered to retail clients dominates the market in almost all the important combinations of age and deferral periods, and where we don't, we are top three, which is key to getting distribution partners' attention.
I want to highlight management changes we've made at Eagle Life to accomplish our goals.
In September, we announced the hiring of Graham Day as President of Eagle Life.
Graham has added quickly to his team from other leading annuity manufacturers, including Greg Alberti as Head of National Accounts and Bryan Albert as Head of Sales.
Eagle Life is a key piece of our expansion into being a scale player in a new channel of distribution.
Pending applications when we reported third quarter results were at 975.
Moving onto the investment management pillar.
In 2021, we intend to focus on ramping up our allocation to alpha assets.
Our first foray in this area includes our partnership with Pretium, announced in the fourth quarter, including an equity investment in the general partner.
With Pretium, we expect to expand our focus as both a lender and a landlord in the residential market.
In each new alpha asset subsector that we enter, we expect to partner with a proven industry manager with aligned economic incentives and risk management culture.
This allows AEL to have an open architecture asset allocation approach versus other insurers that may have a more closed architecture approach to asset allocation.
Our focus expansion sectors include middle market credit, real estate, infrastructure debt, and agricultural loans.
Yesterday, we announced plans to enter the middle market credit space with Adams Street Partners.
American Equity and Adams Street will form a management company joint venture for co-developing insurer capital efficient assets with secured first-lien middle market credit.
Our company will initially commit up to $2 billion of invested assets to build the joint venture, and we expect to bring this capital-efficient asset product to other insurers as well.
As this venture and other similar ventures in the future garner third-party assets, American Equity's mix of fee revenues will grow supporting the migration to a more sustainable higher-return business profile.
The capital structure pillar is focused on greater use of reinsurance structuring to both optimize asset allocation for American Equity's balance sheet and to enable American Equity to free up capital and become a capital-light company overtime.
We are working diligently to complete in 2021 the announced reinsurance partnerships with Varde Partners and Agam Capital Management as well as Brookfield Asset Management and the formation of our own offshore reinsurance platform.
These transactions will enable American Equity to generate deployable capital in order to pivot toward a greater free cash flow generative and a capital-light or ROA, return on assets, business model.
Turning to financial results for the fourth quarter and full year.
For the fourth quarter of 2020, we reported non- GAAP operating income of $72 million, or $0.77 per diluted common share.
Financial results were significantly affected by excess cash in the portfolio as we repositioned our investment portfolio by derisking out of almost $2 billion of structured securities and $2.4 billion of corporates in the fourth quarter and build cash we expect to redeploy by transferring to Varde-Agam and Brookfield reinsurance transactions.
Overall, 2021 is a transition year for repositioning a significant portion of our balance sheet and hence a reset year for American Equity.
Over this year, we will explain any transaction execution driven short-term or one-time notable impacts on financial results.
For full year 2020, we reported non-GAAP operating income of $69.1 million or $0.75 per share.
Excluding notable items, specifically the one-time effect of annual actuarial review in the third quarter, a tax benefit from the enactment of CARES Act, and loss on extinguishment of debt, 2020 non-GAAP operating income was $381.4 million or $4.13 per share.
As part of our AEL 2.0 strategy work, we executed a series of trades designed to raise liquidity to fund the Varde-Agam and Brookfield block reinsurance transactions and derisk the investment portfolio.
As part of this derisking, we sold nearly $2 billion of structured securities and an additional $2.4 billion of corporates where we generally focused on securities that we believed were at risk of future downgrades.
The sales occurred before the recent ramp up in interest rates, so our timing was fortuitous.
As of the fourth quarter, the fixed maturity securities portfolio had an average rating of A minus with almost 97% rated NAIC 1 or 2.
In addition, almost 80% of our commercial mortgage loan portfolio was rated CM1 at year-end, with 99.7% rated either CM1 or CM2.
All commercial mortgage loans in the portfolio were paid current as of year-end, and in the fourth quarter of 2020, there were no additional forbearances granted.
Back on our first quarter 2020 call, we laid out an estimate of our capital sensitivity to a 12-to-18-month adverse recessionary scenario modeled on the Fed's CCAR stress test.
Through year-end, the portfolio performed better than expectations.
The impact to ratings migrations totaled 23 RBC points compared to the projection of 50 RBC points in that 12-to-18-month economic stress scenario.
The impact of credit losses and impairments was 10 points, which compared to a projection of 25 RBC points in the stress scenario.
Following derisking activities of the fourth quarter, we would expect our capital sensitivity in an adverse economic environment to be truncated relative to our March 2020 estimates.
Looking forward, we expect to reposition the portfolio starting this year.
With the completion of the reinsurance transactions with Varde-Agam and Brookfield, AEL will free up capital and then redeploy part of that capital to support a move into alpha-generating assets.
Going forward, we expect to operate at lower invested asset leverage than in the past.
Fourth quarter 2019 results included a $2 million, or $0.02 per share, loss from the write-off of unamortized debt issue cost for subordinated debentures that were redeemed during the period.
Average yield on invested assets was 3.88% in the fourth quarter of 2020 compared to 4.10% in the third quarter of this year.
The decrease was attributable to a 22 basis point reduction from interest foregone due to an increase in the amount of cash held in the quarter.
Cash and short-term investments in the investment portfolio averaged $4.4 billion over the fourth quarter, up from $1.7 billion in the third quarter.
At year-end, we held $7.3 billion in cash and short-term investments in the life insurance company portfolios yielding roughly 7 basis points.
The current point-in-time yield on the portfolio, including excess cash, is approximately 3.4%.
So the pressure on investment spread will continue in the first quarter.
Excluding excess cash and invested assets to be transferred as part of the reinsurance transactions, we estimate the current point-in-time yield on the investment portfolio to be roughly 4%.
As we expect to close the reinsurance transactions in or after the second quarter, starting in March, we may partially pre-invest the assets for the reinsurance transactions, thereby offsetting some cash drag.
We do not expect significant benefit in the first quarter from such pre-investing.
On our future quarterly earnings calls, we will call out the effect of excess cash, if any, related to the reinsurance transactions.
The aggregate cost of money for annuity liabilities was 163 basis points, down three basis points from the third quarter of 2020.
The cost of money in the fourth quarter benefited from one basis point of hedging gain compared to a three basis point gain in the third quarter.
Excluding hedging gains, the decline in the adjusted cost of money reflects a year-over-year decrease in option cost due to past renewal rate actions.
Reflecting the decline in the portfolio yield, investment spread fell to 225 basis points from 244 basis points in the third quarter.
Excluding non-trendable items, adjusted spread in the fourth quarter was 213 basis points compared to 231 basis points in the third quarter of 2020.
The average yield on long-term investments acquired in the quarter was 4.46%, gross of fees, compared to 3.59% gross of fees in the third quarter of the year.
We purchased $152 million of fixed income securities at a rate of 3.32%, originated $142 million of commercial mortgage loans at a rate of 3.67%, and purchased $224 million of residential mortgage loans at 5.63% gross of fees.
The cost of options declined slightly to 139 basis points from 142 basis points in the third quarter.
All else equal, we would expect to continue to see the cost of money continue to decline throughout most of 2021, reflecting lower volatility and the actions taken in June of last year to reduce participation rates on $4.3 billion of policyholder funds and S&P annual point-to-point and monthly average strategies.
The cost of options for the hedge week ended February 9th was 143 basis points.
Should the yields available to us decrease or the cost of money rise, we continue to have flexibility to reduce our rates if necessary and could decrease our cost of money by roughly 62 basis points if we reduce current rates to guaranteed minimums.
This is down slightly from the 63 basis points we cited on our third quarter call.
The liability for lifetime income benefit riders increased $79 million this quarter, which included negative experience of $16 million relative to our modeled expectations.
Coming out of the third quarter actuarial assumption review, we said we had expected for that quarter a $63 million increase in the GAAP LIBOR reserve based on our actuarial models, while actuarial and policyholder experience true-ups had added an additional $5 million of reserve increase.
We said that we thought expected plus or minus $10 million would seem reasonable.
So the fourth quarter of 2020 was a little bit above that range.
There were pluses and minuses in the fourth quarter, with the biggest differences due to a $6 million increase from lower-than-expected decrements on policies with lifetime income benefit riders and a $10 million increase as a result of lower caps and par rates due to renewal rate changes and policies having anniversary dates during the quarter.
We will continue to experience the impacts from the renewal rate changes made in the second quarter of 2020 and the first and second quarters of this year.
Deferred acquisition cost and deferred sales inducement amortization totaled $113 million, $16 million less than modeled expectations.
The biggest items driving the positive experience were lower-than-modeled interest and surrender margins, lower-than-expected utilization of lifetime income benefit riders, and the second quarter of 2020 renewal rate changes I spoke about previously.
The benefit on the combined deferred acquisition costs and deferred sales inducement amortization from the second quarter 2020 renewal rate changes was $10 million, effectively offsetting the negative effect on the lifetime income benefit rider reserve.
Other operating costs and expenses increased to $55 million from $43 million in the third quarter.
Notable items not likely to reoccur in the first quarter of 2021, primarily advisory fees related to the unsolicited offer for the company in September totaled, approximately, $3 million with much of the remaining increase associated with the implementation of AEL 2.0.
Post-closing of the announced reinsurance transactions with Varde-Agam and Brookfield and the creation of the affiliated reinsurance platform, we would expect the level of other operating costs and expenses to fall in the mid-to-high $40 million range.
We expect to complete the execution of the already announced accelerated share repurchase program in the first quarter.
Based on current estimates, we expect an additional 520,000 shares to be delivered to us in addition to the initial 3.5 million shares delivered at the initiation.
Combined with the 1.9 million shares we repurchased in the open market prior to the initiation of the ASR program, we will have effectively reduced the share dilution resulting from the November 30th initial equity investment of 9.1 million shares from Brookfield Asset Management by, approximately, two-thirds.
The risk-based capital ratio for American Equity Life was 372%, flat with year-end 2019.
Total debt to total capitalization, excluding accumulated other comprehensive income, was 12.2% compared to 17.7% at year-end 2019.
At year-end, cash and short-term investments at the holding company totaled $484 million.
We expect to have over $300 million of cash at the holding company even after buying back additional shares after completion of the existing ASR to fully offset Brookfield issuance related dilution.
We are strongly capitalized as we look to execute AEL 2.0 with ample liquidity at the holding company, low leverage ratio relative to our industry peers, and robust capitalization at the life company.
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q4 non-gaap operating earnings per share $0.77.
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Today marks my final earnings call as head of investor relations for Thomson Reuters.
I'm pleased to announce that we're also joined by Gary Bisbee, who will assume the role of head of investor relations for Thomson Reuters on March 1, in advance of my retirement in July.
I couldn't be more pleased to place the baton in the very capable hands of Gary, who many of you already know.
Gary has covered Thomson Reuters on the sell side of Bank of America Securities for the past three years, and I know will do a very terrific job.
After 18 years at Thomson Reuters, including 71 earnings calls and eight investor days, it's time for my next adventure and to spend more time with my wife and family.
I truly enjoyed my time at TR, having worked with four CEOs, three CFOs and hundreds of very talented colleagues over that time.
I also will miss speaking with many of you.
You challenged me, informed me and even entertained me a bit of times, and helped me do this job better.
And for that, I am grateful.
Lastly, I've watched Thomson Reuters evolve to become one of the preeminent business information services companies in the world.
And under Steve and Mike's leadership, I'm confident TR will continue to build on its progress, further strengthening its position for the benefit of our investors, customers and employees.
And now, to the results.
A lot to share today, so to enable us to get to as many questions as possible, we'd appreciate if you would limit yourselves to one question each and one follow-up when we open the phone lines.
We believe this provides the best basis to measure the underlying performance of the business.
For comparability, we will revise our 2021 results and during when we report our first quarter 2022 results in May.
These changes will not have any impact on our consolidated results.
First, we will record intercompany revenues for Reuters News for content-related services that it provides to our legal professionals, corporates and tax and accounting professionals businesses.
Previously, these services have been reported as a transfer of expense from Reuters to these businesses.
So there is no impact on any segment's adjusted EBITDA.
Two, we will transfer $9 million of revenue from the corporates business to our tax and accounting business, where it will be managed and where it fits better.
I'd like to direct you to the investor relations section of our website, where we posted a schedule that reflects our revised full year 2019, 2020 and 2021 results, as well as our revised 2021 quarterly results in the manner we will begin reporting in 2022.
Actual results may differ materially due to a number of risks and uncertainties related to the COVID impact and other risks discussed in reports and filings that we provide from time to time to regulatory agencies.
You may access these documents on our website or by contacting our investor relations department.
I'm pleased to report the momentum we saw in the first nine months of the year continued in the fourth quarter.
Revenue and sales growth were again strong, exceeded our expectations, and we closed out the year on a solid footing.
This performance has created momentum as we started 2022.
And it has helped build our confidence as we work to achieve our 2022 and 2023 targets.
We are increasingly in a position of strength.
Since March 2020, when COVID began to negatively impact the global economy, professional markets have remained resilient and continued to grow, helped by a significant global shift by our customers to upgrade legal, tax, and risk, fraud, and compliance products.
Customers also continued to exhibit more confidence in their own future prospects.
And our products are proving well suited to enable our customers to effectively serve their clients, targeting investment in products that are driving faster growth and where we have strong positions in growing markets.
This dynamic enabled us to achieve 5% organic revenue growth for the full year 2021, the highest growth rate in over a decade, while also improving our underlying profitability and free cash flow.
Our fourth quarter results reflect an improving performance.
Four of our five business segments again recorded organic revenue growth of 6% or greater and total company organic revenues grew 6%.
We continue to make steady progress with our Change program as we transform to a content-driven technology company.
And we have achieved over $200 million in savings thus far, one-third of our $600 million target.
We also achieved all of our 2021 guidance targets that we increased throughout the year.
Given the momentum in the business and our growing confidence, today, we increased our 2022 and 2023 guidance from what we provided at this time last year.
Now, for the results for the quarter.
Fourth quarter reported and organic revenues were up 6%, attributable to strong results from the Big 3 businesses in Reuters.
And similar to the last quarter, this performance included strong organic growth of more than 20% from our Latin American businesses and nearly 10% growth from our Asia and emerging markets businesses.
Adjusted EBITDA declined 14% to $452 million due to cost related to the Change program, higher performance bonus expense and a discretionary investment of $25 million to better position the business for 2022, which Mike will discuss.
This resulted in a margin of 26.4%.
Excluding Change program, Costs, adjusted EBITDA margin was 31.1%.
Adjusted earnings per share for the quarter was $0.43 compared to $0.54 per share in the prior year period.
The additional $25 million we invested in the quarter lowered adjusted earnings per share by $0.04.
Turning to fourth quarter results by segment.
The Big 3 businesses achieved organic revenue growth of 7%, reflecting strength across each of the businesses.
U.S. legal market was very healthy throughout 2021.
And our performance benefited from that dynamic.
Legal's fourth quarter performance was again impressive with organic revenue growth of 6%, the third consecutive quarter of 6% growth.
Full year revenue growth was also 6%, the highest annual growth rate since 2008.
Sales was strong throughout the year, including Q4.
We exited the year in a good position, recording double-digit recurring sales growth in Q4, reflecting customers' willingness to invest in productivity-enhancing product.
For example, Westlaw Edge continued to achieve strong sales growth in the end of the quarter with an annual contract value, or ACV, penetration of 65%, achieving the top end of our guidance with more opportunity in 2022 with a target of 70% to 75% penetration and the expected launch of Edge 2.0.
Second, practical law, as reported in the Legal segment, had a terrific quarter and year, growing mid-teens in both periods.
We forecast another strong performance in 2022 for practical law as we continue to invest in this key legal workflow initiative.
Third, our government business, which is managed within our Legal segment, grew 7% organically in Q4 and 9% for the year and achieved strong sales in Q4, setting it up well for strong growth in 2022.
And fourth, our Legal businesses in Canada and Asia grew double digits in the quarter while Europe grew mid-single digits.
Turning to the corporates business.
Organic revenue growth continued to accelerate and was up 7% from 6% in Q3 and 4% in the first half of the year.
This improvement came from increasing demand for customers for our legal, tax and risk products.
And tax and accounting had a terrific quarter and year with organic revenue growth of 9% for both periods and strong Q4 sales.
Reuters News organic revenues increased 12% in Q4 with growth across all of the business lines, particularly the professional business, which includes digital advertising, custom content and Reuters Events, which continues to recover from the negative impact of COVID-19 in 2020.
And finally, global print organic revenues declined 4%, more than expected due to a continued gradual return to office by our customers and higher third-party print revenues.
So in summary, we're very pleased with our results, and we're very excited about the momentum we're building.
We expect further improvement to our performance this year as we invest to further strengthen our positions across the business segments.
Adjusted EBITDA declined slightly and was just shy of $2 billion due to cost related to the Change program and higher performance bonus expense, resulting in a margin of 31%.
Excluding Change program costs, adjusted EBITDA margin was 33.9%, about 100 basis points higher than 2020.
Adjusted earnings per share for the year was $1.95 compared with $1.85 per share in the prior year.
Now, let me discuss several of the key contributors to our accelerating growth and improving prospects.
During our investor day in March last year, I shared with you that we're investing in seven strategic growth priorities with the Big 3 segments.
These businesses grew 6.5% on a combined basis in 2021 with several growing double-digit and our foundational Westlaw product up 4%.
We continue to believe that our opportunity is about powering the world's most important professionals.
And we're helping forge their future through digital automation, augmentation and collaboration, powered by a combination of unique content, world-class AI and machine learning and best-of-breed workflow software, and these products do precisely that.
Against this frame, we'll continue in investing heavily in these strategic priorities, and we'll continue to shift the proportion of capital investment allocated to these initiatives.
These investments are expected to continue to help accelerate organic growth and enable us to achieve our revenue growth target of 5.5% to 6% in 2023.
M&A is also expected to play an important role in accelerating our organic growth and priorities.
And we have an active pipeline of potential future acquisitions across our core segments.
Additionally, we recently launched our new Thomson Reuters venture fund, which will invest up to $100 million of seed funding to start-up companies to cultivate innovation and expand our M&A pipeline.
Let me finish on the financials for full year by noting that we met or exceeded each of our 2021 guidance metrics, which reflects the resilience of the business and the visibility we have in our businesses and markets.
I would now like to update you on the progress related to our Change program, including highlighting the progress from our product and innovation teams.
You will recall, I presented this slide at our investor day last year.
And it's as relevant today as it was then.
We continue to benefit from fundamental and prevailing tailwinds due to increasing legal, tax and regulatory complexity, which favors business information services markets and providers.
And as we enter the third year of the pandemic, its lasting impact on the market segments we serve is becoming clearer.
Digital transformation has accelerated, driven by virtual working and client demands to engage digitally with the firms and departments that serve them.
It's unlikely to be a passing fad.
Hybrid and virtual working is here to stay, which is increasing customer expectations of digital experiences.
And demand for content-enabled, cloud-based, AI-powered solutions that drive professional efficiency and effectiveness continues to grow.
Hesitation to embrace new technologies in our core -- in our more traditional customer segments is giving way to an appreciation of the benefits to be gained from doing so.
And our goal of becoming a content-driven technology company includes excelling at product innovation and successfully integrating our products to provide customers with a seamless offering while delivering an excellent customer experience.
We believe this approach will further improve customer loyalty and increase retention as we continually enhance our products, adding to organic growth.
Our Change program is targeted at achieving these objectives.
And we're making good progress.
Let me share several examples of that progress.
I won't take you through each of the items on this slide.
Rather, I want to highlight the progress we've made last year in transforming to a more integrated, simple, agile company.
We are reducing complexity in our operations and technology group, which is critical for us to achieve the Change program goals and margin targets.
We've made significant progress, which you can see on this slide, including 37% of our revenue is now on a cloud solution, and we're on track to achieve our target of 90% of our revenue available in the cloud by the end of 2023.
SMB digital sales increased to 29% as a percentage of total sales.
Improving our internal process within order-to-cash has reduced customer-facing incidents, invoice rework and have brought together our product, content and editorial strategies to improve customer delivery and drive efficiencies.
Each of these achievements are critical if we are to simplify and improve the customer experience we provide.
We also reduced our global footprint of office locations from 102 to 46 and our call centers from 99 to 77.
And one additional point here.
Talent is key to completing our initiatives.
And our goal is to build the best team in business information services by developing and attracting top global talent and delivering a differentiated employee experience.
Over the past two years, we have brought in new key talent into our organization within product, engineering, marketing, data and analytics, design, operations and technology, among other key areas, adding talent with different perspectives and approaches, which have complemented the skills and experiences of existing leadership.
I'm very, very pleased with the progress we're making.
A few additional points regarding the Change program.
We made progress toward shifting customers to a more digital, automated experience with the launch of self-serve capabilities and automated tools for support.
Delivery of the customer experience of the future is underway.
And our goal remains to create fast, frictionless, connected, transparent and personalized customer experiences.
Our key areas of focus continue to be: First, a digital-first approach for small customers.
Second, a 360-degree view of the customer.
Third, simplified and standardized commercial terms, billing processes, and customer support.
Fourth, seamless digital product trials and digital purchasing.
And fifth, data-driven and AI-powered sales and marketing.
We expect these changes to redefine our customer experience to match their expectations by the end of 2023, by which time a large portion of customer-facing sales, sales operations and support could be digitized and automated.
The impact of this should be twofold.
First, we believe delighting our customers will translate to improved Net Promoter Score, leading to improved retention and new sales opportunities.
And second, decreasing the cost to serve customers enables us to reallocate funds to pursue new organic growth opportunities, improving our agility to test new product ideas quickly with customers, which we believe would lead to further improvements in the top and bottom lines.
So let me now turn to product innovation.
Last year, we ramped up our focus and our investments in product innovation, and we will continue to do so.
We expect new products and product enhancements will be a key lever to accelerate revenue going forward.
And our product development teams are making good progress.
Entering 2022, the product organization is prioritizing resources where we can build and maintain leadership positions and support fewer products, a shift from our historical approach of making small investments in many products.
The organizational design model enables us to work as a better integrated, more effective team, moving from an organization with data to a data-driven organization.
Our content is a significant competitive advantage and differentiates us against our key competitors.
The new product organizational structure we formed last year positions us to achieve greater success by leveraging that valuable content, enriching it with world-class AI and machine learning and best-of-breed software and delivering it in the cloud.
Investing in an improved user experience across our products is another important priority so that our customers can interact with our content with minimal points of friction.
And we're increasing investments in our people, as well as our technology and product organizations to expand and accelerate innovation and speed to market.
We believe this will enable us to continue to be leaders within our core market segments and allow us to expand into adjacent market opportunities.
And lastly, here are some examples of products and initiatives in which we're investing that are contributing to higher organic growth.
Practical law and indirect tax, two of our strategic seven initiatives, released new and enhanced product modules last year, which were well received by customers.
And we expect they will again contribute to higher organic revenue growth in 2022 and beyond.
We also made good progress last year forming a centralized partnership team, led by our corporates group, which we are seeing good traction having signed partnership agreements with Oracle, SAP, AWS, and Alteryx.
And in 2021, we accelerated the work we're doing to provide our content and workforce solutions to customers via our APIs.
For 2022, we'll accelerate and expand our API ecosystem, where we can improve the experience for both existing and new customers.
We're confident this will open up new channels, new business models and new product offerings and will help grow our partner ecosystem.
And as our capabilities surrounding APIs continue to grow, it will enable us to further integrate our best-in-class content and solutions into our customers' workflows, contributing to our growth.
I am very pleased to report that given the positive trajectory of the business, we're increasing our revenue, adjusted EBITDA margin and free cash flow guidance from that which we provided at investor day in March 2021.
We now forecast total company organic revenue growth of approximately 5% for 2022 and 5.5% to 6% for 2023.
Let me remind you that 2021's organic revenue growth of 5% included about 100 basis point benefit from easier year-over-year comps related to COVID-19 items in 2020.
Big 3 organic revenue growth is forecast between 6% and 6.5% in 2022 and 6.5% to 7% in 2023.
We forecast an adjusted EBITDA margin of 35% for 2022 and between 39% and 40% for 2023.
And free cash flow is now forecast at about $1.3 billion for 2022 and between $1.9 billion to $2 billion with free cash flow per share between $3.90 and $4.10 for 2023.
I'm confident we'll achieve these higher targets.
As a reminder, I will talk to revenue growth before currency and on an organic basis.
Let me start by discussing the fourth quarter revenue performance of our Big 3 segments.
Revenues were up 7% organically and at constant currency for the quarter.
This marks the sixth consecutive quarter our Big 3 segments have grown at least 5%.
Legal professionals' total revenues increased 5% and organic revenues increased 6% in the fourth quarter.
Recurring organic revenue grew 6% and transaction revenues increased 6%.
Fourth quarter organic revenue growth was driven by practical law, Elite, FindLaw and our government business.
Westlaw Edge added about 100 basis points to Legal's organic growth rate, is maintaining a healthy premium and is expected to continue to contribute at a similar level going forward, supported by the planned release of Edge 2.0 during the second half of this year.
Our government business, which is reported within legal and includes much of our risk and compliance businesses, grew 7% for the quarter and 9% for the year and exited Q4 with strong sales and good momentum entering 2022.
Quarter-to-quarter performance can vary for this business, given the government contracting process, project work, and fiscal year funding from the various agencies.
We believe 2022 will be another year of healthy revenue growth, supported by strong Q4 2021 sales.
In our corporates segment, total and organic revenues increased 7% for the quarter due to recurring organic revenue growth of 7% and transactions organic revenue growth of 4%.
Recurring revenue was driven by clear, practical law, indirect tax and legal software, as well as our businesses in Latin America.
And transactions organic revenue increased 10%.
Moving to Reuters News.
Fourth quarter performance was very strong with total and organic revenue growth of 12%.
Reuters achieved growth across all business lines, including the bounce-back in the Events business as it continues to recover from the negative impact from COVID in 2020.
In global print, total and organic revenues declined 4%, better than expected.
On a consolidated basis, fourth quarter total and organic revenues each increased 6%.
Before turning to profitability, let's look closer at recurring and transaction revenue results for the fourth quarter.
Starting on the left side, total company organic revenue for the fourth quarter 2021 was up 6% compared to 2% in the prior year period, which was impacted by COVID.
Fourth quarter 2021 performance for the Big 3 was strong with organic revenues up 7% compared to 5% in the same period last year.
This was partly driven by strong performance in the corporates segment, which grew 7% organically compared to 3% in Q4 2020.
Total company recurring organic revenues grew 6% in Q4, 110 basis points above Q4 2020 with Big 3 recurring organic revenues up 7%, above last year's fourth quarter growth of 6%.
Turning to the graph on the bottom right of this slide.
Transaction revenues in Q4 were up 16% compared to the prior year period, when COVID affected our implementation services and the Reuters Events business.
We continue to remain encouraged by our momentum in 2021, especially for recurring revenues.
This gives us confidence in the trajectory of the business and our ability to achieve our 2022 growth targets.
Turning to our profitability performance in the fourth quarter.
Adjusted EBITDA for the Big 3 segments was $488 million, down 2% from the prior year period, driven by higher performance bonus expense.
Fourth quarter costs also included a discretionary investment of $25 million related to go-to-market initiatives, product development initiatives and data and analytics tools to support the customer experience to better position us for 2022.
I will remind you the Change program operating costs are recorded at the corporate level.
Moving to Reuters News.
Adjusted EBITDA was $15 million, $9 million more than the prior year period, driven by revenue growth.
Global print's adjusted EBITDA was flat at $61 million with a margin of 35.9%, 130 basis points higher than Q4 2020.
So in aggregate, total company adjusted EBITDA for the quarter was $452 million, a 14% decrease versus Q4 2020.
Excluding costs related to the Change program, adjusted EBITDA increased 1%.
Fourth quarter's adjusted EBITDA margin was 26.4% and was 31.1% on an underlying basis, excluding costs related to the Change program.
For the full year, total company adjusted EBITDA margin was 31%.
Excluding costs related to the Change program, full year adjusted EBITDA margin was 33.9%.
Now, let me turn to our earnings per share and free cash flow performance.
Starting with earnings per share, adjusted earnings per share was $0.43 per share versus $0.54 per share in the prior year period.
Of note, fourth quarter adjusted earnings per share was reduced by approximately $0.04 due to the additional $25 million investment in Q4.
Let me now turn to our free cash flow performance for the full year 2021.
This performance reflects the momentum of our businesses as we transition into 2022 and continue to execute on the Change program initiatives.
Reported free cash flow was $1.3 billion, $74 million lower than in 2020.
Consistent with previous quarters, this slide removes the distorting factors impacting free cash flow performance.
Working from the bottom of the slide upwards, the cash outflows from the discontinued operations component of our free cash flow was $51 million more than the prior year.
tax authority related to our former Refinitiv business.
For the full year, we made $166 million of Change program payments as compared to Refinitiv-related separation cost of $95 million in the prior year.
So if you adjust for these items, comparable free cash flow from continuing operations was just shy of $1.5 billion, $189 million better than the prior year.
This increase was primarily due to higher adjusted EBITDA and dividends from our interest in LSEG.
We'll now provide an update on our Change program progress.
In the fourth quarter, we achieved $85 million of annual run rate operating expense savings.
This brings the cumulative annual run rate operating expense savings to $217 million for the Change; program, which exceeds our target of $200 million.
This puts us more than a third of the way toward achieving our goal of $600 million of gross savings by 2023.
As a reminder, we anticipate reinvesting $200 million of the projected $600 million savings back into the business for a net savings of $400 million.
Now, an update on our Change program costs for the fourth quarter and full year 2021.
Spend during the fourth quarter was $125 million, comprised of $78 million of opex and $47 million of capex.
For the full year, Change program opex and capex spend totaled $295 million, at the lower end of the range of $290 million to $320 million we have forecast last year.
Spend is forecast to step up in 2022 related to cloud migration, streamlining internal systems and product engineering.
We are still expecting to incur approximately $600 million over the course of the program.
And there is no change in the anticipated split of about 60% opex and 40% capex.
I'll now provide an update on our capital structure at year-end.
As you can see, our capital structure and liquidity position remained strong as we exited 2021.
We generated $1.3 billion of free cash flow last year.
We had $0.8 billion of cash on hand at December 31.
We have an undrawn $1.8 billion revolving credit facility.
And we also have a $1.8 billion commercial paper program.
From a liquidity and capital structure standpoint, we entered 2022 in a very strong position.
And we would like to put that capital to work to further accelerate our growth.
We continue to evaluate potential acquisitions within our core markets and have the ability and desire to move quickly if an opportunity presents itself this year.
We received notices from the U.K. tax authorities requiring us to pay about $80 million in March related to an ongoing tax matter.
While we believe we will prevail on these issues and be refunded substantially all the payments, including those made last year, we are required to pay the amount upfront while contesting them.
Any payment would not reflect our view of the merits of the case as we believe our position is supported by the weight of law.
Regarding our investment in the London Stock Exchange Group.
The pre-tax value of our 72.4 million shares is currently $7 billion, or an estimated $14 per share in TR stock price.
In March 2021, we sold 10.1 million shares to pay taxes related to the transaction.
We expect to receive dividends from LSEG of more than $75 million in 2022 based on LSEG's current annual dividend payout.
I will remind you, dividends from the investment are part of our free cash flow.
We remain subject to a lockup for our LSEG shares until January 30, 2023.
At which time, we can sell approximately one-third of the shares.
The remaining two tranches can be sold in January 2024 and 2025.
We view our equity interest in LSEG as a store value, which we expect to continue to monetize over time, which provides us with a significant level of financial flexibility related to the use of proceeds.
And finally, today, we announced a 10% annualized dividend increase, the largest percentage increase since 2008, taking our annual dividend to $1.78 per share, up $0.16 per share from $1.62.
This also marks the 29th consecutive year of annual dividend increases for the company.
The increase will be effective with our Q1 dividend payable next month.
These annual dividend increases speak to the solidity of our business and consistent and growing free cash flow generation.
We'll now turn to our outlook for 2022 and 2023.
As Steve mentioned, we are increasing our guidance for both years since we expect to continue the positive trajectory for all key metrics.
Organic revenue is expected to continue its upward trajectory as we work to become a consistent and sustainable mid-single-digit grower.
We forecast organic revenue growth of about 5% in 2022 and 5.5% to 6% in 2023.
Key drivers include continued investment in our seven strategic priorities and delivering on our digital and sales effectiveness work streams and the Change program.
We forecast the Big 3 organic revenues to grow between 6% and 6.5% in 2022 and between 6.5% and 7% in 2023.
We also believe our legal business can grow 5% to 7% over the cycle versus the 5% to 6% we mentioned at investor day last year with continued margin expansion.
Turning to adjusted EBITDA margin and free cash flow.
Our guidance in 2022 reflects the dilutive impact of the Change program investments.
We forecast adjusted EBITDA margin in 2022 will increase to about 35% with an underlying margin of over 37%, putting us on a path to achieve our 2023 margin target of 39% to 40%.
Free cash flow is expected to be approximately $1.3 billion in 2022 and includes Change program spend of over $300 million.
Free cash flow is expected to increase to between $1.9 billion and $2 billion in 2023, driven by higher revenue growth and savings and efficiencies from the Change program.
Let me conclude with our updated and detailed guidance for 2022 and 2023.
This slide includes the guidance we provided in February 2021, enabling you to compare the changes and raised guidance.
I will also note, we expect our first quarter revenue growth rate and adjusted EBITDA margin to be comparable to our full year 2022 guidance targets.
Now, the guidance metrics on the slide are self-explanatory.
But I would like to address the outlook for our effective or book tax rate and our cash tax rate for 2022 and 2023 based on current tax law.
In 2021, our effective or book tax rate was 14% and included a 200-basis-point benefit from the reversal of reserves for prior tax year.
This benefit will not reoccur in 2022.
We also forecast in 2022 minimum taxes this year, which bumps the expected ETR up to between 19% and 21%.
Looking to 2023, we expect our ETR to decline to the upper-teens.
And as a rule of thumb, our cash tax rate is forecast to be approximately 5% below our book or effective tax rate.
This is fully reflected in our 2023 free cash flow guidance of $1.9 billion to $2 billion.
To conclude, our confidence in achieving our 2022 and 2023 guidance has only increased from one year ago.
We continue to believe we can achieve faster revenue growth, higher profitability, lower capital intensity, and significantly higher free cash flow as we benefit from transitioning to a content-enabled technology company.
I will conclude by saying that we're very pleased with our 2021 performance, but we still have much more work ahead.
Our confidence is strengthened by our 2021 organic revenue, and we have good momentum entering 2022.
The Change program is progressing well.
And we're confident in achieving our $600 million savings target and our $100 million incremental revenue target.
We have numerous levers to pull that should help us accelerate our growth.
And we're building a strong leadership team with new talent that's brought different perspectives, which complemented the skills of existing leadership and has energized our teams.
And lastly, to elevate our ambition, we kicked off the year with confidence by announcing our new company purpose, which is to inform the way forward.
This unites our commercial strengths, the critical role we play in society.
Customers and employees have responded very positively to this, redoubled commitment to serve professionals, advance critical institutions and to build trust through our products and with our actions.
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compname reports q4 adjusted earnings of $0.43 per share.
q4 adjusted earnings per share $0.43.
q4 revenue $1,710 million, up 6% on constant currency basis.
change program on track - $217 million run-rate operating expense savings at year-end.
increased annualized dividend per share by 10%.
board approved a $0.16 per share annualized increase in the dividend to $1.78 per common share.
quarterly adjusted ebitda margin 26.4% versus 32.5% last year.
q4 adjusted earnings per share decreased from prior-year period primarily due to lower adjusted ebitda.
q4 adjusted ebitda declined 14% as higher revenues were more than offset by higher costs.
quarterly legal professionals revenues increased 5% at constant currency.
quarterly reuters news revenues of $182 million increased 12%, at constant currency.
quarterly corporates revenues increased 7% (all organic) to $361 million, at constant currency.
quarterly global print revenues decreased 4% to $170 million, at constant currency.
quarterly tax & accounting professionals revenues increased 9% (all organic) to $309 million, at constant currency.
sees q1 2022 revenue growth rate and adjusted ebitda margin will be comparable to its full-year 2022 outlook targets.
sees fy 2022 total revenue growth of about 5%.
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Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group.
You will find the most directly comparable GAAP financial metrics and reconciliations on our website.
Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months.
Also as announced, we will hold our virtual Investor Day in a few weeks on December 9th.
We look forward to having you join us on December 9th.
Today, I want to get straight to our quarterly results, because they tell a very compelling story.
The Agilent team delivered a very strong close to 2020.
We posted revenues of $1.48 billion during the quarter.
Revenues are up 8% on a reported basis and up 6% core.
Operating margins are a healthy 24.9%.
EPS of $0.98 is up 10% year-over-year.
These numbers tell the story of a strong resilient company that is built for continued growth.
Our better-than-expected results are due to the strength of our core business, along with signs of recovery in our end-markets.
Geographically, China continues to lead the way with double-digit growth.
From an end-market view, both our pharmaceutical and food businesses grew double-digits.
In addition, our chemical and energy business grew after two quarters of declines, exceeding our expectations.
We also saw a rebound in U.S. sales during the quarter.
Overall, COVID-19 tailwinds contributed just over 2 points of core growth.
Achieving these results in the face of a global pandemic is a tribute to our team and the company we've built over the last five years.
I couldn't be more pleased with the way the Agilent team has performed over the last quarter and throughout 2020.
We have again proven our ability to work together and step up to meet any challenge that comes our way.
During the quarter, all three of our business groups grew high-single digits on a reported basis.
Our Life Sciences and Applied Markets Group generated $671 million in revenue, up 8% on a reported basis and up 4% core.
LSAG growth is broad based.
The cell analysis and mass spec businesses both grew at double-digit rates.
In terms of end markets, chemical and energy returned to growth, food grew double-digits and pharma high-single digits.
LSAG remains extremely well positioned and is outperforming the market.
The Agilent CrossLab Group came in with revenues at $518 million.
This is up a reported 9% and up 7% core.
ACG's growth is also broad based across end-markets and geographies.
Our focus on on-demand service is paying off as activity on our customer labs continues to increase.
The ACG team continues to build on its already deep connections with our customers, helping them operate through the pandemic and continue to drive improved efficiencies in lab operations.
For the Diagnostics and Genomics Group, revenues were $294 million, up 9% reported and up 7% core.
Growth was broad based, with NASD oligo manufacturing revenues up roughly 40%.
The genomics and pathology businesses continued to improve during the quarter.
I'm also very proud of our NASD team for successfully ramping production at our new Frederick site this year.
We have built a very strong position in this attractive market with excellent long-term prospects for high growth.
Let's now shift gears and look at our full-year fiscal 2020 results.
Despite the disruption, uncertainty and economic turmoil of dealing with the global pandemic, the Agilent team delivered solid results.
We generated $5.34 billion in revenue, up 3% on a reported basis and up nearly 1% core.
To put this in perspective, it's helpful to recall the progression of our growth.
In Q1, we delivered 2% core growth, as you saw the first impact of COVID-19 in our business in China.
Both Q2 and Q3 declined low-single digits as the pandemic spread across the globe and governments instituted broad shutdowns.
With 6% core growth, 8% reported in Q4, we're seeing business and economies start to recover.
As a result, we are clearly exiting 2020 with solid momentum.
Our recurring types of businesses represented by ACG and DGG proved resilient, growing low-to-mid single digits for the year.
In a very tough capex market, our LSAG instrument business declined only 2% for the year and returned to growth in the final quarter.
China led the way for our recovery with accelerating growth as the year progressed.
In our end-markets, pharma remained the most resilient and food markets recovered most quickly.
Full-year earnings per share grew 5% during fiscal 2020 to $3.28.
The full-year operating margin of 23.5% is up 20 basis points over fiscal 2019.
As we head into 2021, we do so with tremendous advantage.
Our diverse industry-leading product portfolio has never been stronger.
Our building and buying growth strategy with a focus on high-growth markets continue to deliver.
Our ability to respond quickly to rapidly changing conditions is also serving us well.
The way our sales and service teams have been able to quickly pivot to meet customer requirements during the pandemic has been nothing short of remarkable.
Our approach is focused on delivering above market growth while expanding operating margins along with a balanced deployment of capital.
We prioritized deployment of our capital, both internally and externally, on additional growth.
A few proof points on our growth-oriented capital deployment strategy.
A year ago, we spoke about recently closing the BioTek acquisition and the promise of growth that BioTek represented.
Today, BioTek is no longer a promise but a driver of growth.
In total, the cell analysis business generated more than $300 million in revenue for us during the year, with double-digit growth in Q4 and continued strong growth prospects.
Similar to last year, I was talking about ramping up our new Frederick site facility, a $185 million capital investment.
In addition to successfully ramping Frederick as we planned, we did so with an expanding book of business.
We also recently announced additional $150 million investment to our future manufacturing capacity.
We are aggressively adding capacity to capture future growth opportunities in this high-growth market.
Even in the face of the pandemic, we stayed true to our build and buy strategy.
We have clearly seen the advantages of our approach.
I'm confident our strategy will tend to produce strong results for us.
The strength of our team and resilience of our business model has served us well, and as you can see from the numbers, our growth strategy is producing outstanding results for our customers, employees and shareholders.
While uncertainties remain, as we begin fiscal 2021, we're operating from a position of strength.
Because of this, we're cautiously optimistic about the future.
We have built and will sustain our track record of delivering results and working as a one-Agilent team on behalf of our customers and shareholders.
As I noted earlier, I couldn't be more pleased with the results the Agilent team delivered in the fourth quarter and throughout the year.
I will now hand the call off to Bob.
In my remarks today, I will provide some additional revenue detail and take you through the fourth quarter income statement and some other key financial metrics.
I'll then finish up with our outlook for 2021 and the first quarter.
We are very pleased with our fourth quarter results as we saw strong growth exceeding our expectations, especially considering the ongoing challenges associated with COVID-19.
For the quarter, revenue was $1.48 billion, reflecting core revenue growth of 5.6%.
Reported growth was stronger at 8.5%.
Currency contributed 1.7%, while M&A added 1.2 points to growth.
From an end-market perspective, pharma, our largest market, showed strength across all regions and delivered 12% growth in the quarter.
Both small and large molecule businesses grew, with large molecule posting strong-double-digit growth.
We continue to invest and build capabilities in faster growth biopharma markets and offer leading solutions across both small and large molecule applications.
The food market also experienced double-digit growth during the quarter, posting a 16% increase in revenue.
While our growth in food business was broad based, China led the way.
And as Mike noted earlier, our chemical and energy market exceeded our expectations, growing 3% after two quarters of double-digit declines.
While one quarter does not a trend make, we are certainly pleased with this result, and the growth came primarily from the chemical and materials segment.
Diagnostics and clinical revenue grew 1% during Q4, led by recovery in the U.S. and Europe.
We continue to see recovery in non-COVID-19 testing, as expected, although the levels are still slightly below pre-COVID levels.
Academia and government was flat to last year, continuing the steady improvement in this market, and revenue in the environmental and forensics market declined mid-single digits against a strong comparison from last year.
On a geographic basis, all regions returned to growth.
China continues to lead our results with broad-based growth across most end-markets.
For the quarter, China finished with 13% growth and ended the full year up 7%.
Just a great result from our team in China.
The Americas delivered a strong performance during the quarter, growing 5% with results driven by large pharma, food, and chemical and energy.
And in Europe, we grew 2% as we saw lab activity improved sequentially, benefiting from our on-demand service business in ACG, as well as from a rebound in pathology and genomics as elective procedures and screening started to resume.
However, while improving, capex demand still lags our service and consumables business.
Now turning to the rest of the P&L.
Fourth quarter gross margin was 55%.
This was down 150 basis points year-over-year, primarily by a shift in revenue mix and an unfavorable impact of FX on margin.
In terms of operating margin, our fourth quarter margin was 24.9%.
This is down 20 basis points from Q4 of last year, as we made some incremental growth-focused investments in marketing and R&D, which we expect to benefit us in the coming year.
The quarter also capped off in full-year operating margin of 23.5%, an increase of 20 basis points over fiscal 2019.
Now wrapping up the income statement, our non-GAAP earnings per share for the quarter came in at $0.98, up 10% versus last year.
Our full-year earnings per share of $3.28 increased 5%.
In addition, our operating cash flow continues to be strong.
In Q4, we had operating cash flow of $377 million, up more than $60 million over last year.
And in Q4, we continued our balanced capital approach, repurchasing 2.48 million shares for $250 million.
For the year, we repurchased just over 5.2 million shares for $469 million and ended the fiscal year in a strong financial position with $1.4 billion in cash and just under $2.4 billion in debt.
All in all, a very good end to the year.
Now let's move on to our outlook for the 2021 fiscal year.
We and our customers have been dealing with COVID-19 for nearly a full year and are seeing our end-markets recover.
Visibility into the business cadence is improving.
And as a result, we are initiating guidance for 2021.
There is still a greater than usual level of uncertainty in the marketplace across most regions, and so while we're providing guidance, we're doing so with a wider range than we have provided historically.
It is with this perspective that we're taking a positive but prudent view of Q1 in the coming year.
For the full year, we're expecting revenue to range between $5.6 billion and $5.7 billion, representing reported growth of 5% to 7% and core growth of 4% to 6%.
This range takes into account the steady macro-environment we're seeing.
It does not contemplate any business disruptions caused by extended shut downs like we saw in the first half of this year.
In addition, we're expecting all three of our businesses to grow, led by DGG.
We expect DGG to grow high-single digits, with the continued contribution of NASD ramp and the recovery in cancer diagnostics.
We believe ACG will return to its historical high-single-digit growth, while LSAG is expected to grow low-to-mid single digits.
We expect operating margin expansion of 50 basis points to 70 basis points for the year, as we absorb the build out costs of the second line in our Frederick, Colorado NASD site.
And then helping you build out your models, we're planning for a tax rate of 14.75%, which is based on current tax policies and 309 million of fully diluted shares outstanding, and this includes only anti-dilutive share buybacks.
All this translates to a fiscal year 2021 non-GAAP earnings per share expected to be between $3.57 and $3.67 per share, resulting in double-digit growth at the midpoint.
Finally, we expect operating cash flow of approximately $1 billion to $1.05 billion and an increase in capital expenditures to $200 million, driven by our NASD expansion.
We have also announced raising our dividend by 8%, continuing an important streak of dividend increases, providing another source of value to our shareholders.
Now let's finish with our first quarter guidance.
But before we get into the specifics, some additional context.
Many places around the world are currently seeing renewed spikes in COVID-19 that could cause some additional economic uncertainty.
And while we're extremely pleased with the momentum we have built during Q4, we are taking a prudent approach to our outlook for Q1, because of the current situation with the pandemic.
For Q1, we're expecting revenue to range from $1.42 billion to $1.43 billion, representing reported growth of 4.5% to 5.5% and core growth of 3.5% to 4.5%.
And first quarter 2021 non-GAAP earnings are expected to be in the range of $0.85 to $0.88 per share.
To be where we are now after knowing where we stood in March is truly remarkable.
Add to this, the strong momentum we saw in Q4, I truly believe we are well positioned to accelerate our growth in fiscal 2021.
With that, Ankur, back to you for Q&A.
David, let's provide the instructions for Q&A.
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q4 non-gaap earnings per share $0.98.
q4 revenue $1.48 billion versus refinitiv ibes estimate of $1.4 billion.
sees q1 revenue $1.42 billion to $1.43 billion.
sees fy 2021 revenue $5.6 billion to $5.7 billion.
sees q1 non-gaap earnings per share $0.85 to $0.88.
sees q1 revenue up 4.5 to 5.5 percent.
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Please keep in mind that our actual results could differ materially from these expectations.
All these documents are available on our website at brunswick.com.
Our businesses had a fantastic start to 2021 with a very healthy marine market, strong boating participation and outstanding operating performance, driving historic financial results.
Robust retail demand for our products continues to drive low field inventory levels, with increased production across all our facilities necessary to satisfy orders from our OEM partners and dealer network.
Our teams have performed exceptionally well in the face of supply and transportation headwinds, tighter labor conditions, and continued impact from the COVID-19 pandemic.
And we are excited about our ability to further harness the positive momentum we've generated to propel our growth and industry leadership.
Our Propulsion business continues to deliver outstanding top-line, earnings and margin growth, outperforming the market by leveraging and expanding the strongest product lineup in the industry.
Our parts and accessories businesses delivered strong top-line growth and robust operating margins as a result of increased boating participation, which drove strong aftermarket sales, together with high demand for our full range of OEM systems and services, as boat manufacturers attempt to satisfy retail demand.
Our boat business performed well, as anticipated, in the quarter, reaching double-digit adjusted operating margins for the first time in over 20 years.
Despite elevated production levels consistent with our plans for the year, the continued surge in retail demand is still driving historically low pipeline inventory levels, with 41% fewer boats in dealer inventory at the end of the first quarter, versus the same time last year.
Finally Freedom Boat Club has had an extremely busy start to the year, which I will discuss further in a couple of slides.
We have exceptional momentum as we enter the prime retail season in most markets, and as you can see from our significant guidance increase, we are confident in our ability to perform for the rest of the year and well beyond.
Before we discuss the results for the quarter, I wanted to share with you some updated insights from 2020 concerning our boat buyers and Freedom Boat Club members that reflect very favorable trends for the future of our business.
We continue to outperform the industry in attracting new, younger and more diverse boaters, positioning us for very strong growth in the years to come.
Last year, Brunswick's average boat buyer age was two years younger than the industry average and reached its lowest level in over a decade.
Additionally, Brunswick's first-time boat buyers averaged five years younger than our overall boat buyer demographic, and three years younger than the industry.
Equally encouraging was the fact that the percentage of Brunswick female boat buyers in 2020, while still a minority, equaled the highest percentage on record and first-time female boat buyers entered at double that rate, which was a notable 700 basis points higher than the industry.
In Freedom Boat Club, we saw even more promising trends with the average Freedom member being almost three years younger than our typical boat buying customer, and female Freedom members making up 35% of our member base in 2020 and 2021.
These trends are an extremely important validation of our strategy to secure a healthy future for Brunswick and are also favorable for the entire marine industry.
I also wanted to briefly update you on some very important awards and milestones for Brunswick during the first quarter, which are important in positioning Brunswick for investors and employees, and our ability to secure top new talent.
I am pleased to announce that for the second consecutive year, Brunswick has been recognized by Forbes as one of the Best Employers for Diversity.
Those recognized were chosen based on an independent survey of over 50,000 employees working for companies employing at least 1,000 people in their U.S. operations.
Diversity and inclusion are cornerstones of our culture and a source of innovation and inspiration for our Company.
We also published our 2020 Sustainability Report at the end of March which reviews the exceptional progress we have achieved against our sustainability goals, including our prioritization of the health and safety of our employees.
In 2020, we reported the lowest recordable incident rate in Company history, in the face of immense challenges resulting from the COVID-19 pandemic.
And I also wanted to share with you a snapshot of what the return to in-person boat shows looks like.
The Palm Beach International Boat Show was recently held for the first time since the Spring of 2019.
This was the first major in-person saltwater show of the 2021 season and the outcomes were very positive.
Attendance was up and our brands outperformed the broader marine industry.
Over the course of the four-day show, Sea Ray and Boston Whaler more than doubled the number of boats sold this year vs.
2019 and revenues more than tripled, driven by increased demand for the recently launched models.
Consumers were also able to see Mercury's V-12 600 horsepower Verado in person for the first time, with many eager to repower their boats with this new, game changing engine.
I'll now provide some first quarter highlights on our segments and the overall marine market.
Our Propulsion business continues to gain significant retail market share in outboard engines, especially in higher horsepower categories where we have focused higher levels of investment in recent years.
Mercury gained share in each horsepower category over 50 horsepower in the first quarter, with outsized gains in nodes in excess of 200 horsepower.
As I mentioned earlier, Mercury launched its new 600 horsepower, V-12 Verado engine in February at Lake X in Florida to much fanfare.
Many OEM partners, including Fountain, Scout, Viking and Tiara, and our own Boston Whaler and Sea Ray brands, have already designed boats with this engine in mind and are taking orders.
Many models are already sold out for 2021, with twin-, triple- or even quad-configurations being very popular with both OEMs and customers.
New or enhanced OEM relationships, along with significant investments in new technology, have also helped fuel the continued growth in Mercury's industry-leading controls, rigging and propeller businesses.
As Mercury's growth continues to accelerate, we regularly review our capacity requirements to ensure we are able to meet projected demand and fully capitalize on future growth opportunities.
In this regard, we anticipate having to pull ahead some additional capacity actions.
Our Parts and Accessories businesses also experienced significant top-line and earnings growth in the quarter as aftermarket sales remain elevated due to strong participation trends and service needs, with increased OEM orders to keep up with production resulting from the accelerating retail demand.
Our dealer network reports that their service centers are busier than ever, with the strong participation trends from 2020 continuing into 2021.
In addition, favorable weather conditions in many parts of the U.S. are enabling consumers to return to the water early and in force.
This demand drives the need for aftermarket service parts and a healthy distribution network to get dealers the products they need on a same-day or next-day basis.
The Advanced Systems Group, which has a larger OEM component to its business and also serves some non-marine segments demonstrated significant growth across all its product categories and delivered strong operating margins that were accretive to the overall segment.
Our boat segment had an outstanding quarter, with successful execution of its product plan, resulting in strong revenue and earnings growth, together with double-digit operating margins.
Given the continued retail demand surge, 95% of our production slots are now sold for the calendar year, with many Whaler, Sea Ray and other models now sold out at wholesale well into 2022.
Pipeline inventory, which Ryan will discuss in more detail in a few slides, remains at historically low levels, and we continue to hire additional workers at most facilities to ramp up production consistent with our stated plan.
We remain on track with our plans to reopen and staff the Palm Coast facility and expand our operations at Reynosa and Portugal.
However, it remains very unlikely that pipelines will be significantly rebuilt until 2023 at the earliest.
Freedom Boat Club also continues to exceed our growth expectations, now with over 40,000 memberships and 280 locations, which is more than 100 new locations since we acquired Freedom in 2019.
Freedom has been expanding both through acquisition and organic growth in 2021.
We acquired franchise operations in major boating markets including Chicago and New York, and opened our first location in the U.K. As a reminder, having company operated locations allows us to gain the full economic benefits of the territories, and allows us to increase investment to enable faster growth.
In addition, company operated locations provide the opportunity to get close to the end boating consumer and allow us to enhance our other offerings including Boateka and our F and I businesses.
The outstanding operational and financial performance I have been discussing has not been without some external challenges that our businesses continue to manage and mitigate, sometimes on a daily basis.
Our supply chain teams in particular performed exceptionally well.
Winter storms and resulting power outages in the Central and Southern United States affected oil-based product production and supply, including our third-party producers of resin and foam, while tight semiconductor supply, raw material shortages, and transportation disruption, and resulting cost increases, continue to present challenges to our businesses to varying degrees.
However, the global reach of our supply network and our unique scale in the marine industry, together with our purposeful vertical integration, have so far enabled us to mitigate these challenges and keep our production plans on track for 2021.
Finally, labor conditions remain tight in many locations in which we manufacture product, but our talent acquisition teams have been working hard and successfully to add manufacturing and other talent to our teams as we increase production.
Next, I would like to review the sales performance of our business by region on a constant currency basis.
First quarter sales increased in each region, with international sales up 42% and sales in the U.S. up 47%.
International growth was very strong across all regions, with continued strength in Europe and Asia-Pacific contributing to growth in propulsion and P&A sales.
Canada continued its trend from the back half of 2020 with significant sales growth in all three segments.
This table provides more color on the recent performance of the US marine retail market.
All boat categories reported retail gains in the first quarter, continuing the momentum from 2020.
The main powerboat segments were up 34% in the quarter, with Brunswick's unit retail performance ahead of market growth rates, especially in outboard boat categories.
Outboard engine unit registrations were up 21% in the first quarter, with Mercury significantly outperforming the market and taking market share as I discussed earlier.
As we enter the primary selling season in the U.S., lead generation, finance applications, dealer sentiment and other leading indicators all remain very positive.
In addition, similar to our comments on previous calls, at the end of March, our percentage of dealer orders received with a customer name already attached is approximately three times the percentage from the same time last year.
All these factors give us high confidence in the continuing strength of the retail market as we move through 2021.
Our first quarter results were outstanding.
Year-over-year comparisons are not particularly helpful given the significant COVID impact starting in March of last year, but our performance in the quarter stands on its own against any quarter from the last two decades.
First quarter net sales were up 48%, while operating earnings on an as adjusted basis increased by 116%.
Adjusted operating margins were 17% and adjusted earnings per share was $2.24, each being the highest mark for any quarter for which we have available records.
Sales in each segment benefited from strong global demand for marine products, with earnings positively impacted by the increased sales, favorable factory absorption from increased production, and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs.
Finally, we had free cash flow usage of $23 million in the first quarter as we built inventory ahead of the prime retail selling season, which is very favorable versus free cash flow usages of $144 million in the first quarter of 2020 and $159 million in Q1 of 2019.
Revenue in the Propulsion business increased 47% as each product category experienced strong demand and market share gains.
All customer channels showed growth in the quarter as boat manufacturers continued to ramp up production, and increased capacity enabled continued elevated sales to the independent OEM, dealer and international channels.
Operating margins and operating earnings were up significantly in the quarter, benefiting from positive customer mix in addition to the factors positively affecting all our businesses.
In our Parts and Accessories segment, revenues increased 52% and adjusted operating earnings were up 83% versus first quarter 2020 due to strong sales growth across all product categories.
Adjusted operating margins of 21.3% were 350 basis points better than the prior year quarter, with strong sales increases, together with favorable sales mix, driving the robust increase in adjusted operating earnings.
Continuing the theme from 2020, this aftermarket-driven, annuity-based business is benefiting from more boaters on the water, which is being augmented by flexible work schedules allowing for more leisure time, with the OEM component of the business leveraging investments in technology to take advantage of strong demand from boat builders as they increase production.
In our boat segment, sales were up 44%, with 31% adjusted operating leverage resulting in 10.9% margins for the quarter.
Each brand had strong operational performances and contributed to the successful results, with Lund and Boston Whaler leading the gains in the premium brands, and Bayliner having another strong quarter as a mid-tier value brand.
Although it's only one quarter above our stated goal of double-digit margins, this is the third consecutive quarter of margins above 9%, and we believe that we can continue this trend throughout the year and beyond.
Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020.
Freedom Boat Club, which Dave discussed earlier, contributed approximately two percent of the segment's revenue, at a margin profile that continues to be accretive to the segment.
Our boat production continues to ramp consistent with our plans to produce in excess of 38,000 units during the year.
Despite producing approximately 9,400 units in the quarter, which is up 16% from the 4th quarter of 2020, we only added a few hundred units to dealer inventories given the continued robust retail market.
Our boat brands ended March with just under 19 weeks of boats on hand, measured on a trailing twelve-month basis, with units in the field lower by 41% versus same time last year.
We continue to believe that our current manufacturing footprint will support the production necessary to satisfy the anticipated 2021 retail demand, but we continue to work with our brands to unlock additional near-term capacity through automation, labor and select capital initiatives, including the capacity actions announced earlier in the year related to our Palm Coast, Reynosa and Portugal facilities, which will begin providing benefits by the end of the year.
As a result of historically low product pipelines and continued very strong boating participation, including in many northern regions in recent weeks due to the early Spring, production levels remain elevated across all our businesses to both satisfy retail demand and to rebuild product pipelines.
These factors, together with our strong pipeline of new products and outstanding operational performance, continue to provide enhanced clarity on our ability to drive growth in upcoming periods, resulting in the following guidance for full-year 2021.
We anticipate U.S. Marine industry retail unit demand to grow mid-to-high single-digit percent versus 2020; net sales between $5.4 billion and $5.6 billion, adjusted operating margin growth between 130 and 170 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million; and adjusted diluted earnings per share in the range of $7.30 to $7.60.
We're also providing directional guidance regarding the second quarter, where we anticipate revenue growth of approximately 50% over the second quarter of 2020, with adjusted operating leverage in the low-20s percent.
As we look to the second half of the year, despite extremely challenging comparisons to 2020, we still believe that we will deliver top-line and earnings growth over the second half of last year.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of 2021.
The only significant update relates to the working capital usage for the year.
Projected increases in accrued expenses and accounts payable are exceeding anticipated increases in accounts receivable, resulting in a lower working capital build throughout the year.
We now estimate a working capital increase of $80 million to $100 million for 2021, which together with the higher anticipated earnings, results in a stronger free cash flow projection of $425 million.
Our capital strategy assumptions, however, have been augmented in places to take advantage of our stronger, early year cash position.
We still plan to retire approximately $100 million of our long-term debt obligations, as we repaid $9 million in the first quarter and $60 million already in April.
We repurchased $16 million of shares in the quarter, and plan to continue our systematic approach throughout the year.
We anticipate spending $250 million to $270 million on capital expenditures in the year to support, and in some cases accelerate, growth initiatives throughout our organization.
This slightly increased spending will be directed to new product investments in all of our businesses, cost reduction and automation projects, and select additional capacity initiatives to support demand and future growth, primarily in the Propulsion business.
We are also raising our dividend, for the ninth straight year, to $0.335 cents a share, or a 24% increase, as our strong cash position enables us to raise our dividend earlier in the year than usual, and keep our payout ratio close to our target 20% to 25% range, and continue to provide strong returns to our shareholders.
Finally, we've had a busy start to the year with M&A activity, primarily in expanding Freedom Boat Club as Dave discussed earlier.
Completed deals to date will have an immaterial impact on 2021 results, but we remain active in several areas including P&A, Freedom and ACES and intend to close additional deals throughout the year.
As we discussed on our January call, we felt that 2021 was setting up to be an outstanding year for all of our businesses and the first quarter did not disappoint.
The combination of robust consumer demand during the quarter and solid operational execution by our businesses has us squarely on track to deliver against our operating and strategic priorities.
Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in the dealer, saltwater, repower and international channels.
We are continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top-line and earnings growth far into the future.
Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of product strength in the areas of advanced battery technology, digital systems, and connected products in support of our ACES strategy.
We will continue to focus our M&A activity in this area as we look for opportunities to further build out our technology and systems portfolio.
The Boat segment will build on its first quarter successes by continuing to focus on operational excellence, improving operating margins, launching new products, executing capacity expansion plans, and refilling pipelines in a very robust retail environment.
Lastly, we remain keenly focused on accelerating the Company's ACES strategy, building on our connectivity and shared access initiatives, but also in the areas of autonomy, where we recently announced a new partnership with Carnegie Robotics, and in marine electrification, where we plan a portfolio of new products.
We will also continue to advance our ESG and DEI strategies across the company.
As we have done with past investor days, we have gathered our business leaders to provide you with an update to our 2022 strategy that was originally presented in February of 2020 in Miami, as well as to discuss certain longer-term initiatives that will grow and differentiate Brunswick through the next decade.
We will also hold a Q&A session for investors to ask questions of our management team on Monday, May 17th at noon Central Daylight Time.
Just a reminder that while we will not be providing a full financial update during this event, Ryan will be providing an abbreviated update on our 2022 financial targets, which will include further details regarding the substantial increase of our 2022 earnings per share target to between $8.25 and $8.75 per share as announced today.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpace our initial growth and profit expectations.
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sees fy non-gaap earnings per share $8.85 to $9.15.
q4 comparable sales decreased 2.3% compared to 12.6% growth in q4 fy21.
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As you may recall, on our Q2 call in July, we were still somewhat apprehensive as we had just surpassed last year's COVID-impacted leasing velocity and the emerging Delta variant was creating uncertainty around universities plans to move forward with in-person classes and a return of campus social activities.
At that time, based on historical leasing velocity data, we continued to believe that the industry's COVID recovery would not fully materialize until the fall of 2022.
Today, just three months later, we are extremely pleased to report that students all across the nation continue to flock back to their college towns and leased well into the months of August and September, and universities continued to press forward with their plans to return to in-person activities, including full attendance at college football stadiums across America.
The result, the student housing industry has emerged from the COVID pandemic in the fall of 2021 with its investment thesis fully intact and with the sector having tailwinds, the like of which we haven't seen in many years.
As outlined in our interim update earlier this month, we're pleased that the execution of our fall '21 lease-up produced an opening fall occupancy of 95.8% for our total portfolio and rental rate growth of 330 to 380 basis points for our 2021 and 2022 same-store property groupings, respectively.
All these metrics are above the assumptions in the high end of our prior lease-up guidance.
In addition to the extremely successful lease-up, our operational and financial results also exceeded our expectations in the third quarter, with ancillary income and operating expenses beating our forecast.
In addition, the ongoing development and commencement of operations at Flamingo Crossings Village, our community serving the Disney College Program, are also going quite well.
During the quarter, we delivered the fifth phase of development and have now achieved 85% occupancy, in line with our expectations for this fall.
Notably, since the DCP program recommenced only five months ago, we have already executed leases with and moved in more than 4,500 residents, demonstrating the continued vibrant demand for the Disney College Program.
Our lease-up results and recent operational outperformance allowed us to increase the midpoint of our financial guidance by 4% to $2.08 per share, which is above the high end of our prior guidance range.
Based on the progress we've made this year, total property NOI returned to prepandemic levels this quarter, a full year earlier than we previously anticipated.
And more impressively, rental revenue is expected to exceed prepandemic levels in the fourth quarter for our same-store properties from 2019.
We now expect to grow earnings by 3% to 7% over 2020.
All in all, the company's recovery and financial performance this year has certainly exceeded our expectations as cumulatively, we have exceeded our original guidance for the first three quarters of the year by $0.12 per share or almost 10%, as students continue to return to college campuses throughout the year.
I'd like to now turn to the fundamentals of our industry.
As reported by owners and operators attending the NMHC Student Housing Conference earlier this month, occupancy and supply demand fundamentals of the sector are strong.
And again, the industry is experiencing some of the most substantial tailwinds we've seen in many years.
The broader comparable sector represented by the RealPage/Axiometrics 175 returned to prepandemic occupancy levels of approximately 94%, while also producing attractive rent growth of 2.5%.
We saw robust admission applications at four-year public and private universities we serve and target.
The strength in admission applications appears to have directly led to the highest level of first year student enrollment growth we have seen.
In the 48 of 68 university markets for which we are able to collect first year enrollment data, there was an increase of 7.4% over fall 2020 and 6.4% above prepandemic fall 2019.
For perspective, for four-year public institutions, in the prior 30-year period, average first year enrollment growth was approximately 2%.
This level of significant growth in first year students occurring this year indicates the emerging post-COVID era demand from students wanting to attend high-quality universities in person and should provide significant recurring housing demand in the years to come.
The record number of first year students, the reinstatement of on-campus housing policies and the resumption of in-person campus activities will once again allow us to implement our in-person and exclusive sports marketing program activities in the 2022 leasing season.
Historically, these programs have been an integral part of our early leasing season velocity outperformance and our final fall occupancy outperformance as compared to our peers.
The significant increase in first year students led to the highest level of total enrollment growth in recent years, up over 1.5% versus academic year 2020 and prepandemic academic year 2019.
In 62 of the 68 ACC markets for which we've been able to collect total enrollment data, this represents the addition of over 30,000 students.
Sector tailwinds also include a reduction in national new supply, continuing at least through the 2022-2023 academic year.
This includes a projected decrease of over 25% in ACC markets and represents the lowest level of new supply we have seen in over a decade.
In total, we are tracking new supply of only 15,500 beds with only 1/3 of our NOI being produced in markets seeing new supply.
This compares to 55% to 67% of NOI being produced in new supply markets over the last three years.
We're also seeing significant demand from universities seeking to modernize their on-campus housing.
During the quarter, we were awarded new third-party developments at Emory University and the University of Texas.
And this month, we started a new third-party development on the campus of Princeton University.
In all, we are tracking more than 60 universities that are evaluating privatized residential projects, a continuing increase compared to prepandemic levels.
In summing it up, we're extremely pleased with the progress that we and the sector have made in managing through the global pandemic.
Finally, with our sector's resiliency and investment thesis fully intact as we emerge from COVID, institutional capital is once again focusing on the sector, with several notable transactions recently occurring in the space.
We are highly confident in our ability to fund our business through strategic capital recycling and free cash flow generation, while producing attractive earnings growth for our shareholders.
With the sector's COVID recovery now largely complete, we believe the current transaction environment affords us the opportunity to accretively fund recent and ongoing development activity and further strengthen our balance sheet in 2022.
As such, we intend to accelerate $200 million to $400 million of disposition activity, which fully satisfies our projected funding needs.
Including the strategic capital recycling, we believe that FFOM per share growth in the range of 12% to 15% is achievable in 2022.
Based on the positive fundamentals in the student housing industry and the accretive contribution from our ongoing development program, we are excited about the prospects for continued growth beyond 2022.
We believe we are now well positioned to produce long-term earnings growth, net asset value creation and superior returns for our investors in the years ahead.
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q2 adjusted ffo per share $0.37.
q2 same store net operating income decreased by 20.9 percent versus q2 2019.
anticipates about $1.5 to $2.5 million in rent refunds in q3 of 2020.
no remaining debt maturities in 2020.
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Both of these documents are available in the Investor Relations' section of applied.com.
In addition, the conference call will use non-GAAP financial measures, which are subject to the qualifications referenced in those documents.
We appreciate you joining us and hope your new year is starting well.
I'll begin today with some perspective on our second quarter results, current industry conditions and our position going forward.
Dave will follow with a summary of our financials and some specifics on our second quarter and outlook, and then I'll close with some final thoughts.
We're pleased to report a solid and productive quarter for Applied, along with positive momentum building as we enter the second half of our fiscal year.
Our team executed extremely well during the second quarter and we saw a sustained sequential improvement in customer demand following the initial recovery highlighted last quarter.
We are leveraging our industry position and generating incremental traction from our strategic growth initiatives.
These include addressing customer's early cycle, technical MRO needs, as well as playing a vital role in supporting efficiency and performance initiatives across their critical industrial infrastructure.
We believe these customer initiatives will be increasingly relevant giving a greater focus on operational risk management and supply chain considerations.
We are capturing these initial tailwinds while remaining disciplined with controlling cost as sales continue to recover.
Cost accountability and execution have always been key to our culture and remain integral to our operational focus going forward.
This is supplemented by operating efficiencies gained from optimizing processes, systems and talent across the organization in recent years.
While additional expense restoration will occur in the second half of our fiscal year, we expect these counter elements to provide further balance to our cost trajectory near-term and support our long-term EBITDA margin expansion potential as the demand recovery continues to unfold and we leverage our operational network.
I'm also encouraged by the strong cash generation we continue to see across the business.
Year-to-date, free cash is up over 60% from prior-year levels and over 200% of adjusted net income.
While influenced by the counter-cyclical nature of our model, cash flow is ahead of our expectations and up meaningfully from prior-year levels.
This highlights the progress we continue to make with regard to expanding our market position while optimizing our margin profile and working capital management.
Our first-half cash generation and balance sheet flexibility leave us well-positioned entering the second half of our fiscal year.
As it relates to the broader demand environment, underlying trends remain below prior-year levels during our fiscal second quarter, but continue to improve sequentially despite the recent rise in COVID rates.
We saw greater break-fix and maintenance-related demand across our service center network on rising production activity, greater spending authorizations and enhanced sales momentum across strategic accounts.
Customers are remaining productive in the current environment as established safety protocols are proving effective and providing support.
Demand across our Fluid Power and Flow Control segment was also encouraging, with order activity and backlog momentum building.
This partially reflects firm demand from our leading service and engineered solutions capabilities as secular growth tailwinds continue across various industries.
Combined, the year-over-year organic sales decline of 10.5% in the quarter, improved from 13.5% decline last quarter.
Year-over-year trends improved each month, while sequential trends in daily sales rates were seasonally strong.
Areas such as food and beverage, aggregates, technology, lumber and wood, chemicals, and pulp and paper continue to show positive momentum.
And while year-over-year weakness remains greatest across heavy industries such as machinery, metals and oil and gas, demand within these verticals continues to gradually improve and related indicators suggest further recovery could emerge in the coming quarters.
The positive sales momentum has continued into the early part of fiscal third quarter with organic sales through the first 17 days of January down a mid-single digit percent over the prior year.
It's important to note that visibility remains limited and uncertainty persists as customers continue to manage through a challenging macro and pandemic outlook near-term.
Like many, we are hopeful the business environment continues to recover as vaccines are deployed further in coming months, but we remain cognizant of the potential impact from research and COVID cases, timing of mass vaccine distribution and possible fiscal policy changes from the new administration.
As we have shown in recent quarters, we know how to manage and execute in this uncertain business environment.
In addition, I firmly believe our value proposition and company specific growth potential is the greatest in Applied's history.
There is evidence of this emerging across the organization.
For example, we're playing a key part in the recent vaccine rollout and related COVID-19 response.
Our flow control offering and support team are providing critical products and solutions for vaccine production.
This includes hygienic diaphragm valves, water for injection pumps, and cleaning place flows systems used to clean and regulate material flow and temperature as the vaccine is manufactured.
We're proud and grateful to be participating in this historic moment which highlights our expanding position and capabilities across essential industries.
We're also seeing positive momentum across our fluid power operations as more customers integrate new technologies into their equipment and critical assets in order to optimize productivity, safety and energy costs, while reducing broader business and supply chain risk.
In addition, demand tailwinds tied to 5G infrastructure, cloud computing and other growing technologies are driving demand for pneumatic and electronic automation systems.
Our leading fluid power service and engineered solutions capabilities provide us a strong position to capture these growth opportunities, as reflected in our growing backlog in recent months.
Our technical position and long-term opportunity is further supplemented by the progress we are making in expanding our next-generation automation solutions following three acquisitions in the past 16 months.
This includes our recent acquisition of Gibson Engineering in late December.
Our growing automation footprint and offering focused on robotics, machine vision, motion control and digital technologies is being recognized across our industries and presents a significant growth opportunity longer-term, as we address customers' operational technology, needs in an improving industrial sector.
Overall, from critical break-fix MRO applications to emerging technologies and specialized engineering services, our value proposition is evident, and we continue to see greater demand as industrial production ramps.
These are positive developments and we are benefiting as customers themselves benefit from the value we bring to these opportunities.
Unusual items in the quarter include a $49.5 million pre-tax non-cash impairment charge on certain fixed, leased and intangible assets, as well as non-routine costs of $7.8 million pre-tax related to an inventory reserve charge, facility consolidations and severance.
These charges are the result of weaker economic conditions and resulting business alignment initiatives across a portion of our Service Center segment locations exposed to oil and gas end markets.
We remain focused on appropriately aligning cost and resources with current demand levels across our organization, following a pandemic-driven downturn over the past year.
These business alignment actions are consistent with our internal initiatives and strategic focus going forward and will drive additional cost savings in the back half of our fiscal year.
Now turning to our results, absent these in our non-routine charges during our second quarter, consolidated sales decrease 9.9% over the prior year quarter.
Acquisitions contributed a half point of growth and foreign currency was favorable by 0.1%.
Netting these factors, sales decreased 10.5% on an organic basis with a light number of selling days year-over-year.
While still down as compared to the prior year quarter, sales exceeded our expectations with average daily sales rates at nearly 3% sequentially on an organic basis and above the normal seasonal trends for the second straight quarter.
Following a slow start to the quarter in early October, sales activities strengthened sequentially and remained firm late in the quarter, despite typical seasonal slowness and rising COVID cases across the U.S. Comparative sales performance was relatively consistent across both segments as highlighted on slide 6 and 7.
Sales in our Service Center segment declined 10.4% year-over-year or 10.5% on an organic basis when excluding the modest impact from foreign currency.
The year-over-year organic decline of 10.5% improved notably relative to the mid-teens to low 20% declines we saw of the prior two quarters, while the segment's average daily sales rates increased nearly 4% sequentially from our September quarter and over 8% from the June quarter.
The sequential improvement primarily reflects greater customer maintenance activity and break-fix demand across our core U.S. service center network.
Positive momentum has been relatively drive-based, though end markets such as food and beverage, aggregates, pulp and paper, lumber and forestry, and rubber our leading to recovery.
Heavier industries are also starting to show positive signs while ongoing growth across our Australian operations has provided additional support.
Within our Fluid Power and Flow Control segment, sales decreased 8.5% over the prior year quarter, with our recent acquisition of ACS contributing 1.6 points of growth.
On an organic basis, segment sales declined 10.1%, reflecting lower demand across various industrial, off-highway mobile and process-related end markets.
This was partially offset by firm demand within technology, life sciences, transportation and chemical end markets.
In addition, as Niel mentioned, we are seeing encouraging demand for fluid power solutions tied to electronic control integration, equipment optimization and pneumatic automation.
This is supporting backlog, which was up both sequentially and year-over-year at the end of the quarter.
Moving to gross margin performance, as highlighted on Page 8 of the deck, adjusted gross margin of 28.9% declined 8 basis points year-over-year, or 19 basis points when excluding non-cash LIFO expense, $0.9 million in the quarter and $1.9 million in the prior year quarter.
On a sequential basis, adjusted gross margins were largely unchanged.
Overall, adjusted gross margin trends were in line with our expectations and continue to reflect some volume-driven headwinds year-over-year, as highlighted last quarter, which were partially offset by the ongoing benefit from our internal initiatives.
Turning to our operating costs.
On an adjusted basis, selling, distribution and administrative expenses declined 11.2% year-over-year or approximately 12% when excluding incremental operating cost associated with our ACS acquisition.
The year-over-year decline reflects the ongoing benefit of cost actions taken in recent quarters to align expenses with volume.
As discussed in prior calls, this includes a mix of both structural and temporary actions.
While we have restored a portion of the temporary cost actions, our team continues to demonstrate great discipline in controlling cost.
These results highlight the resiliency of the Applied team and our operating model as well as efficiency gains from operational excellence initiatives, leverage of our shared services model and technology investments made in recent years.
Year-over-year comparisons also benefited from this amortization expense, following the asset impairment charge we took during the quarter.
For your reference, our second quarter depreciation and the amortization expense of $13.5 million is a good quarterly run rate to assume going forward.
Overall, our strong cost control combined with improving sales trends during the quarter resulted in mid-single digit decremental margins on adjusted operating income or high-single digit decrementals when excluding depreciation and amortization expense.
Going forward, we will remain prudent and disciplined in managing our cost structure as we continue to roll off temporary cost actions to align with our recent performance and a more constructive outlook.
Since the start of our fiscal year, we have gradually eliminated the temporary cost actions as the business environment has slowly recovered and expect to discontinue the vast majority of the remaining temporary cost actions during this current fiscal third quarter.
Adjusted EBITDA in the quarter was $68.3 million, down 8.4% compared to the prior year quarter, while adjusted EBITDA margin was 9.1%, up 14 basis points over the prior year or virtually flat when excluding non-cash LIFO expense in both periods.
On a GAAP basis, we reported an operating loss of $0.14 per share, which includes the previously referenced non-cash impairment and non-routine charges.
On a non-GAAP adjusted basis, excluding these items, we reported earnings per share of $0.98, which compared to $0.97 in the prior year quarter.
Our adjusted tax-rate during the quarter of 18.6% was below prior year levels of 23%, as well as our guidance of 23% to 25%.
The adjusted tax rate during the quarter includes several discrete benefits related to income tax credits and stock option exercises.
We believe the tax rate of 23% to 25% for the second half of fiscal 2021 is appropriate assumption near-term.
Moving to our cash flow performance and liquidity.
Cash generated from operating activities during the second quarter was $77.5 million, while free cash flow totaled $72.7 million or approximately 190% of adjusted net income.
This was up from $55 million and $48 million respectively, as compared to the prior year quarter and represents record second quarter cash generation.
Year-to-date, free cash generation of $151 million is up over 60% for prior year levels and represents a 206% factor of adjusted net income.
The strong cash performance year-to-date reflects solid operational execution, significant ongoing contribution from our working capital initiatives and that counter-cyclical cash flow profile of our business model.
Given the strong free cash flow performance in the quarter, we ended December with approximately $289 million of cash on hand.
Of note, this is after utilizing cash during the quarter with two acquisitions.
Net leverage stood at 2.1 times adjusted EBITDA at quarter-end, consistent with the prior quarter and below the prior year level of 2.5 times.
In addition, our revolver remains undrawn with approximately $250 million of capacity and an additional $250 million accordion option.
Combined with incremental capacity under our uncommitted private shelf facility, our liquidity remains strong.
This provides flexibility to fund incremental working capital requirements in coming quarters as customer demand continues to improve as well as to pursue strategic M&A and fund other growth initiatives.
Our M&A focus near-term remains on smaller bolt-on targets that align with our growth priorities, including additional automation and fluid power opportunities.
This represents the 12th dividend increase since 2010 and under-stores our strong cash generation and commitment to delivering shareholder value.
Transitioning now to our outlook.
Based on month-to-date trends in January and assuming normal sequential patterns, we would expect fiscal third quarter 2021 organic sales to decline by 3% to 4% on a year-over-year basis.
This includes an assumption of low-single digit organic declines in our Service Center segment and mid-single digit organic declines in our Fluid Power and Flow Control segment.
Again, this direction is meant to provide a starting framework on how third quarter sales could shape up if trends follow normal seasonality going forward.
In addition, we expect our recent acquisitions at ACS and Gibson Engineering to contribute approximately $10 million to $11 million in sales during our fiscal third quarter.
We expect gross margins to remain relatively unchanged sequentially into the second half of fiscal 2021.
We continue to see some incremental price announcements from suppliers, so the magnitude of the increases are not materially different from what we've seen over the past year.
Our history highlight strong management of supplier inflation and price cost dynamics reflecting our industry position, internal initiatives and positive mix opportunities.
As it relates to operating costs, based on the 3% to 4% organic sales decline assumption, we would expect selling, distribution and administrative expense of between $170 million and $175 million during our fiscal third quarter.
In addition, if sales follow normal sequential patterns for the balance of the year, we would expect a similar to slightly higher SD&A range in our fiscal fourth quarter.
This represents an increase from second quarter levels and partially reflects the ongoing roll off of temporary cost actions.
As indicated, we will continue to take a mindful and balanced approach to managing our operating costs going forward.
We were encouraged by our cost and margin execution year-to-date, which is providing a strong position to further discontinue temporary cost actions as we take an offensive approach to an emerging recovery and our strategic growth targets.
Lastly, from a cash flow perspective, we expect free cash to moderate in the second half relative to first half levels.
Working capital will likely become a use of cash as their level start to cyclically build, and we begin to replenish inventory in support of our growth opportunities, and the recovery as the year moves forward.
We remain confident on our cash generation potential and reiterate our normalized annual free cash target of at least 100% of net income over a cycle.
Approximately three quarters ago, during the initial weeks of the pandemic, I stated my belief that Applied has never been in a better position to manage through the current environment and exit the pandemic-driven downturn in an even stronger position.
Our performance since then provide strong confirmation of disposition, the tremendous team we have at Applied, and the earnings potential that lies ahead.
This includes record cash generation and a 30% reduction in our net debt, our strong cost execution supporting relatively stable EBITDA margins despite the meaningful end market slowdown.
During this time, we also completed two acquisitions, supplementing our long-term growth profile, while advancing other key growth initiatives, including optimizing our cross-selling opportunity and strategic end-market positioning.
We are delivering on our requirements and commitments while moving the organization toward our longer-term next milestone financial objectives of $4.5 billion of revenue and 11% EBITDA margins.
We remain cognizant of ongoing end-market uncertainty, but we're eager to demonstrate what we're fully capable of in the years ahead as we continue to leverage our differentiated industry position as the leading technical distributor and solutions provider across critical industrial infrastructure.
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q2 adjusted non-gaap earnings per share $0.98 excluding items.
q2 loss per share $0.14.
would project fiscal 2021 q3 sales to decline 3% to 4% year over year on an organic basis.
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I am Pat Ackerman, Senior Vice President, Investor Relations, Corporate Responsibility and Sustainability and our Treasurer.
Also as a courtesy to others in the question queue, please limit yourself to one question and one follow-up return.
If you have multiple questions, please rejoin the queue.
Our global A.O. Smith team delivered first quarter earnings per share of $0.60 on a 21% increase in sales, demonstrating solid execution, despite pandemic and weather-related challenges in our supply chain and operations, along with rapidly rising material costs.
I greatly appreciate the diligence of our team to keep each other healthy and safe.
Outside of India, where COVID-19 cases have recently surged, I am pleased that we have experienced steady improvement in this area since the beginning of the year.
North America water treatment grew 12%, driven by continued consumer demand for home improvement products, which provides safe drinking water in the home.
The direct-to-consumer channel with our Aquasana brand and the dealer channel contributed to solid growth to start 2021.
Boiler sales grew 12%, as we have seen strong demand, particularly within commercial boilers, as a result of completed projects carried over from 2020, as well as a resilient replacement demand.
Our volumes of US tank residential water heaters declined in the first quarter, due to weather disruptions at our facility, supply chain constraints, which limited production.
If not for limited production based on our surge in customer orders in the quarter, our US residential shipments would have increased compared with 2020.
Strong orders in the quarter were largely due to extended lead times, our second price increase, which was effective April 1, and announced third price increase effective in June.
Due to continued pandemic-related disruptions in restaurant and hospitality new construction and replacement demand, our commercial water heater volumes declined in the first quarter, largely in line with our expectations coming into the year.
In China, sales increased over 100% in local currency, driven by higher consumer demand and the easy comparison compared with the pandemic disrupted first quarter of 2020.
First quarter sales of $769 million increased 21%, compared with 2020, largely due to significantly higher China sales.
As a result of higher sales, first quarter net earnings increased 89% to $98 million or $0.60 per share compared with $52 million or $0.32 per share in 2020.
Sales in the North America segment of $553 million increased 4% compared with the first quarter of 2020.
Higher commercial boiler service parts and tankless water heater sales in the US, improved water heater sales in Canada, a 12% price -- 12% growth in water treatment sales and inflation related price increases on water heaters in the US were partially offset by lower US residential and commercial water heater volumes.
Rest of the World segment sales of $222 million increased over 100% from the first quarter of 2020 driven by stronger consumer demand in each of our major product categories in China.
Pandemic-related lockdowns and weak end market demand in the first quarter of 2020 provided an easy comparison for the first quarter of 2021.
Currency translation of China sales favorably impacted sales by approximately $14 million.
On slide 6, North America segment earnings of $130 million increased 3% compared with the first quarter of 2020.
The impact to earnings from higher sales and inflation-related price increases on water heaters was partially offset by higher material costs and freight costs and lower water heater volumes in the US.
Segment operating margin of 23.6% was slightly lower than the first quarter of 2020.
Rest of the World segment earnings of $12 million increased significantly compared with the first quarter of 2020, which was negatively impacted by the pandemic.
In China, higher volumes and lower selling and administrative costs contributed to higher segment earnings.
As a result, segment operating margin of 5.3% improved significantly from negative 38.3% in the first quarter of 2020.
Our corporate expenses of $15 million were similar to the first quarter of 2020.
Our effective tax rate of 22.5% was 110 basis points lower than the prior year largely due to geographical differences in pre-tax income.
Cash provided by operations of $104 million increase -- or during the first quarter was higher than the first quarter of 2020, primarily as a result of higher earnings in 2020 compared with the prior year.
Our cash balances totaled $660 million at the end of the first quarter and our net cash position was $559 million.
Our leverage ratio was 5% as measured by total debt to total capital at the end of the first quarter.
We completed refinancing our $500 million revolver credit facility on April 1st of this year.
We currently have no borrowings on this facility.
During the first quarter, we repurchased approximately 1.1 million shares of common stock for a total of $67 million.
The midpoint of our range represents an increase of 20% compared with the 2020 adjusted results.
We expect cash flow from operations in 2021 to be between $475 million and $500 million compared with $560 million in 2020.
We expect higher earnings in 2021 will be more than offset by higher investments in working capital than in our prior year.
Our 2021 capital spending plans are between $85 million and $90 million and our depreciation and amortization expense is expected to be approximately $80 million.
Our corporate and other expenses are expected to be approximately $52 million, which is similar to 2020.
Our effective tax rate is assumed to be approximately 23% in 2021.
Average outstanding diluted shares of 160 million assumes $400 million worth of shares are repurchased in 2021.
Our businesses continue to navigate through supply chain and logistic challenges.
The first quarter was particularly challenging for our North America water heater business.
Severe weather impacted our Ashland City and Juarez facilities resulted in a weak production at each plant in the quarter.
Supply chain constraints limited our ability to make up the lost production within the quarter.
As a result of a surge in orders approximately 30% higher than the first quarter last year, our lead-times have further extended.
We are working with customers on managing orders along with our operations and supply chain teams working diligently to meet demand.
However, we expect to be catching up throughout the second quarter and into the third quarter.
Our outlook for 2021 includes the following assumptions.
We have not changed our outlook for full year US residential heater industry volumes and continue to project a full year volume will be down 2% or 200,000 units in 2021, a small retracement from the record volume shipped in 2020.
We expect commercial industry water heater volumes will decline approximately 4% as pandemic impacted business delay or defer new construction and discretionary replacement installation.
We continue to experience inflation across our supply chain, particularly steel and logistics costs.
Steel has increased 25% since we announced our April 1st water heater price increase.
We announced a third price increase in late March on water heaters effective June 1 at a blended rate of 8.5%.
In China, it is encouraging to see sales of our products continue to remain strong through April.
Our strategy continues to expand distribution to Tier 4 through 6 cities is on track.
We see improvement in consumer trends toward trading up for higher priced products across all product categories, driven by differentiated new products launched in the last 12 to 24 months.
We expect year-over-year increase and local currency sales between 18% to 20% in China.
We assume China currency rates will remain at current levels adding approximately $50 million and $3 million to sales and profits over the prior year respectively.
We have nearly doubled our growth projections and our outlook for our North America boiler sales for mid-single-digit growth to approximately 10% growth based on a strong first quarter, strong backlog, and visibility into coating activity.
Our expectations are based on several growth drivers.
We believe pent-up demand from the declines last year will drive growth.
The transition to higher energy efficient boilers will continue particularly as commercial buildings improve their overall carbon footprint.
In 2020, condensing boilers were 39% of the commercial boiler industry.
That represents our addressable market, which provides continued opportunity for our leading market share commercial condensing boilers.
New product launches including improvements to our flagship Crest commercial condensing boiler with a market differentiating oxygen center, which continuously measures and optimizes boiler performance, an introduction of a one million BTU light-duty commercial Knight FTXL.
We continue to project 13% to 14% full year sales growth in our North America water treatment products, similar to that which we have seen in the first quarter.
We believe the mega trends of healthy and safe drinking water, as well as a reduction of single-use plastic bottles will continue to drive consumer demand for our point-of-use and port of entry water treatment systems.
We believe margins in this business could grow by 100 to 200 basis points higher than the nearly 10% margin achieved in 2020.
In India, first quarter 2021 sales were nearly double the prior year.
While India is challenged with recent COVID case resurgence, we project 2021 full year sales to increase over 20%, compared with 2020 to incur a smaller loss of $1 million to $2 million.
We project revenue will increase between 14% to 15% in 2021, as strong North America water treatment, boiler and China sales, enhanced by pricing action, more than offset expected weaker North America water heater volumes.
Our sales growth projections include approximately $50 million of benefit from China currency translation.
We expect North America segment margin to be between 23% and 23.5% and Rest of World segment margins to be between 7% and 8%.
I'm on slide 11.
Our operations faced continued challenges in the first quarter.
And while we expect continued headwinds in supply chain and logistics in the near term, I have confidence in our teams to continue to navigate through this environment.
Along with the strength of our people, I believe A.O. Smith is a compelling investment for numerous reasons.
We have leading share positions in our major product categories.
We estimate replacement demand represents 80% to 85% of US water heater and boiler volumes.
We have a strong brand, premium brand in China, a broad product offering in our key product categories, broad distribution and a reputation for quality and innovation in that region.
Over time, we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We are excited for the opportunity we see in our North America water treatment platform.
We have strong cash flow and balance sheet, supporting the ability to continue to invest for the long term, with investments in automation, innovation and new products, as well as acquisitions and return cash to shareholders.
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a. o. smith suspends 2020 outlook.
q1 earnings per share $0.32.
sales in quarter ended march 31 were approximately 15 percent lower.
2020 outlook suspended.
company suspended its 2020 full year outlook.
believes it is in a solid financial position with sufficient liquidity to navigate through today's challenging business environment.
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There is an inherent risk that actual results and experience could differ materially.
You can find a discussion of our risk factors, which could potentially contribute to such differences, in our Form 10-Q filed earlier today.
Before we get started on operational results, one of the strategic priorities outlined during our Strategy Day was to foster a high-performance culture with purpose.
And I'm pleased to announce that we have appointed Tolani Azis, a six-year Fluor employee with 20 years of EPC experience, to lead our diversity, equity and inclusion efforts.
Fluor is a vast and diverse company, and with Tolani's leadership, she will help us retain, attract and cultivate a workforce that represents the world in which we live and operate.
On a separate subject, please note that earlier this week, a favorable motion was granted as it relates to an outstanding securities class action lawsuit.
This motion dismissed with prejudice all allegations, except those relating to a single statement in 2015 about one gas-fired power project.
While no assurance can be given as to the ultimate outcome of this remaining allegation, we do not believe it is probable that a loss will be incurred.
It's been great to see the vaccine rollout around the globe, and I'm particularly encouraged at the speed of distribution here in the United States.
Although there are still many regional challenges to deal with, the end of the pandemic seems to be in sight, which will be a relief to all of us.
Currently, well over 90% of our project sites and about 80% of our offices are operating at limited operations or better.
One exception is our office in New Delhi, where a surge in COVID cases has caused local officials to issue a lockdown and curfew order effective until May 10.
The safety and well-being of all employees is our top priority.
To help support our Delhi colleagues and families that are in medical need, we airlifted several oxygen concentrators from Houston.
Our 1,500 New Delhi employees are all now working safely and productively from home.
In the first quarter, our book-to-bill ratio was 1.25, with new awards led by the Dos Bocas in our Energy Solutions Group.
While we continue to see softness in the markets when it comes to capital spending, we anticipate that awards will start to pick up as we get into the back half of 2021.
And our teams are busy on front-end work and project pursuits that will help to build a healthy backlog over the next few years.
Note again that we are now reporting in line with our three new business segments: Energy Solutions, Urban Solutions and Mission Solutions.
Additionally, Stork is now a part of discontinued operations.
Joe will give an update on our divestitures of Stork and AMECO in just a few minutes.
Moving to Slide 5, with regard to NuScale's.
On April 5, we announced a $40 million equity contribution from JGC.
We know JGC well, having executed projects with them for more than 10 years.
They are an ideal partner that could support NuScale's industry-leading carbon-free energy solution.
This is consistent with the strategy announced in January to reduce Fluor's equity ownership of NuScale.
Regarding our cost savings initiative, efforts are now well under way to streamline the organization.
We will be updating you on our progress as the year proceeds.
Key to this program will be ensuring the deployment of world-class execution teams onto new prospects over the coming quarters, coupled with the proper level of fit-for-purpose back-office support.
I'd like to take the next few minutes to inform you on what is happening across our end markets and what we expect to see over the next few quarters.
In Energy Solutions, this quarter, our ICA Fluor joint venture was awarded three contracts totaling $2.8 billion for the PEMEX Dos Bocas refinery in Mexico.
We have a long and successful history of PEMEX contracts, and we are pleased to be adding our $1.4 billion share of this refinery program to backlog.
During the quarter, a chemicals project was canceled.
And as a result, we removed approximately $1 billion from backlog while slightly increasing Energy Solutions total backlog to $11.1 billion.
When we unveiled our strategy in January, there was a lot of interest in Fluor's energy transition opportunities, supporting a reduced carbon future.
Over the past few months, we've been in extensive conversations with clients about our energy transition capabilities.
We are executing several carbon capture FEED and feasibility studies using our proprietary Econamine FG plus technology.
Additionally, we are doing early work in the areas of refinery efficiency, gasification to produce carbon-negative energy, green hydrogen, renewable diesel, renewable jet fuel and energy storage.
In each of these areas, we have identified projects and are continuing to pursue new opportunities as well.
I encourage all of you to check out the project website and social media channels to see our progress on the project.
On site, we have completed all site preparation work.
The Cedar Valley Lodge camp is filling up, pilings are in place and -- overseas -- modules are being constructed in the fab yards.
We've been remobilizing craft workers on site and are currently at required staffing levels.
In 2021, the focus on site is completing the installation of underground cable and pipe as well as concrete foundations.
This will allow the project team to go vertical and be positioned for the receipt of large equipment and the first modules which are scheduled to arrive later this year.
COVID-19 and changes in law have impacted both engineering and material deliveries as well as the site's ability to mobilize workers due to public health orders.
However, several opportunities are being jointly explored with the client to mitigate the COVID-19 and change in law impacts.
We will keep you updated on the outcome of these discussions.
Moving to Urban Solutions on Slide 8.
This segment is comprised of the infrastructure, mining and metals and advanced technologies and life sciences end markets.
In infrastructure, we completed the handover for the 183 South Highway project outside of Austin, just a few miles from the Oak Hill Parkway project we booked in 2020.
There is obviously a lot of interest and excitement with the proposed federal infrastructure plan.
We think a long-term infrastructure bill would obviously be a good thing for the U.S. economy.
In addition to providing needed funding for surface transportation improvements, it would enable state and local governments to better plan for future growth and capacity needs.
It's too soon to tell what impact the bill could have on Fluor, but we typically experience a two- to three-quarter lag between any new federal infrastructure spending and the release of construction and services RFPs within the states.
Within our infrastructure-focused area of regional projects in selected states, we are tracking some key opportunities in Texas and North Carolina this year.
Next, we remain confident in our mining and metals opportunities and prospects.
We are currently completing FEED work that represents $20 billion of potential projects, and we see a robust pipeline of FEED and feasibility studies ahead of us.
These projects will support an increasingly urbanized and electrified world that is driving the need for investment in minerals like copper and lithium.
We have several large prospects in 2021 and expect awards throughout the year.
For our last group in Urban Solutions, we have a lot of positive momentum in advanced technologies and life sciences, as we briefly mentioned in February.
In the first quarter, we won a significant EPCM biotech project in Europe.
This award from Fujifilm is for a world-scale biologics drug substance manufacturing facility that will be used to produce a variety of treatments, including vaccines.
As we have seen over the last 18 months, vaccine development is an integral part of our global economy, and facilities like this one will be essential going forward in protecting the population.
Finally, there's been a lot of news recently about the inability of semiconductor chip manufacturers to increase production to meet demand.
While it will take several months for the supply chain to overcome this shortage, this is another area where we can leverage our advanced manufacturing capabilities.
Currently, we are tracking several semiconductor prospects in the United States.
Moving to Mission Solutions on Slide 10.
This quarter, our Fluor-led joint venture won an extension for the Portsmouth decontamination and decommissioning contract from the Department of Energy in Ohio.
This reimbursable 12-month contract with two six-month options is valued at $690 million.
The DOE is a key long-term client, and we look forward to continuing our support at Portsmouth.
And finally, a few weeks ago, the federal government announced that it was -- would withdraw all troops from Afghanistan by September 11.
Although uncertainty about the pace of withdrawal remains, Fluor expects to book an additional three-month extension to LOGCAP IV in the second quarter that will allow us to further support the U.S. Army in Afghanistan until they are demobilized.
Peter is the last of a long line of family members to serve the company since our founding in 1912.
Joining the Board in 1984, he continued the Fluor family legacy of a commitment to excellence, integrity and ethics, always putting the safety and well-being of employees first and recognizing that teamwork is a key component of our success.
For the first quarter of 2021, we are reporting adjusted earnings per share of $0.07.
As a reminder, we are adjusting out NuScale expenses, foreign exchange fluctuations, impairments and certain legal-related costs.
Our adjusted results also exclude an embedded foreign currency derivative for an Energy Solutions project in Mexico.
This derivative is based on exchange rates between the U.S. dollar and the Mexican peso and will fluctuate over the life of the contract or at least until the job has been fully procured.
Our overall segment profit for the quarter was $60 million or 2% and includes the $29 million embedded derivative in Energy Solutions and quarterly NuScale expenses of $15 million.
This compares favorably to $55 million in the first quarter of 2020.
Removing NuScale expenses and the effect of the embedded derivative would improve our total segment profit margin to 3.6%.
Margins in Energy Solutions and Urban Solutions reflect reduced execution activity on certain projects and the lack of new awards to replace projects we are completing.
We anticipate project activities will accelerate as we move through 2021.
In Mission Solutions, margins were strong due to the increased execution activity on DOE projects as well as an increase in performance scores on several projects.
As David mentioned, we received a $40 million investment in NuScale from JGC this quarter and are anticipating other significant investments in the near future.
Note here that even though partners are meeting NuScale's cash needs, we will continue to expense 100% of this investment on our income statement on a consolidated basis.
Our G&A expense in the quarter was $66 million.
This is higher than our expected run rate due to the increase in our stock price driven -- driving up the value of our executive compensation expense.
As David said, our cost savings initiative is well under way.
We have identified cost savings above the $100 million target previously discussed.
I look forward to providing an update on the progress as we get into the execution phase later this year and transition into a fit-for-purpose organization.
On Slide 12, our ending cash for the quarter was $2 billion, 25% of this domestically available.
As a reminder, the rest of our cash is tied up in either VIEs in projects or in foreign accounts and is not easily accessible.
Our operating cash flow for the quarter was an outflow of $231 million and was negatively impacted by increased funding of COVID costs on our projects, higher cash payments of corporate G&A, including the timing and extent of employee bonuses, and increased tax payments.
While it is typical to have a lower operating cash flow in the first quarter, we expect full year operating cash flow to be positive.
We used approximately $50 million in cash for challenged legacy projects in the first quarter.
As I stated in February, we expect to spend an additional $65 million over the balance of 2021 to fund these projects.
As we announced earlier this week, we have divested our AMECO North America business for $73 million.
This follows our successful transaction of our AMECO Jamaica business last year.
We are now focusing on our South American assets, and we'll update you on that plan later in 2021.
The store divestiture process is well under way, and we have received interest from a number of promising buyers.
We are working through our diligence and are targeting a sale near the end of this year or early in 2022.
Please move to Slide 13.
We are maintaining our adjusted earnings per share guidance of between $0.50 and $0.80 for the full year.
Hitting this target is dependent on projects being awarded in a timely fashion and revenue picking up over the next two quarters.
We are also maintaining our previous segment level guidance and expect 2021 full year segment margins to be approximately 2.5% to 3.5% in Energy Solutions, which excludes any fluctuation from the embedded foreign currency derivative; 2% to 3% in Urban Solutions; and 2.5% to 3% in Mission Solutions.
We have posted unaudited financials for 2019 and 2020 that aligns with our new reporting structure on the Investor Relations section of our website.
Operator, we are now ready for our first question.
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q4 earnings per share $1.17.
q4 revenue $699 million versus refinitiv ibes estimate of $694.7 million.
backlog as of december 31, 2020 was $1.51 billion.
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I'm Larry Mendelson, Chairman and CEO of HEICO Corporation.
Now before reviewing our fourth quarter and full fiscal year results, I'd like to take a few moments to discuss the impact on HEICO's operating results from the COVID-19 global pandemic.
The results of operations in fiscal '20 were significantly affected by COVID-19 global pandemic.
The effects of the pandemic and related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers and manufacturers.
Since the beginning of the pandemic in March 2020, we have implemented health and safety measures at our facilities in accordance with the CDC guidelines to protect team members and mitigate the spread of in COVID-19.
Most of our facilities are considered essential businesses and have remained operational during the pandemic.
The Board of Directors and management of HEICO are truly humbled by the dedication of our team members to their company during these unprecedented times.
Currently, we believe the recent vaccine progress will most notably result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal '21 as demand for air travel slowly recovers, we remained very confident in our ability to offer cost saving solutions and robust product development programs that we expect to increase our market share and allow us to have even a stronger presence within the commercial aviation market.
I'd like to take a few moments to summarize the highlights of our full fiscal '20 and fourth quarter results.
Despite, the many challenges faced in fiscal '20, HEICO has continued to generate excellent cash flow.
Our cash flow provided by operating activities was very strong at $409 million and $437.4 million in fiscal '20 and '19, respectively.
Cash flow provided by operating activities totaled $110.2 million, or 177% of reported net income in the fourth quarter of fiscal '20, as compared to $124 million in the fourth quarter of fiscal '19.
As all of you know, HEICO's most important metric is cash flow, and I think that the results of 2020 operations, particularly the fourth quarter are clearly indicative of this success.
We are encouraged by the sequential improvements in our fiscal '20 consolidated fourth quarter operating results over the third quarter of fiscal '20.
And during the fourth quarter, we experienced increases in consolidated operating income, net income, and net sales of 30%, 15% and 10%, respectively.
In fact, despite the continued impact from the pandemic on demand for our commercial aerospace parts and services, the Flight Support Group's operating income and net sales in the fourth quarter of fiscal '20 improved sequentially by 78% and 9%, respectively, as compared to the third quarter of fiscal '20, a significant improvement.
The Electronic Technologies Group and from now on I will call it ETG, set all-time quarterly net sales and operating income records in the fourth quarter of fiscal '20 improving 8% and 14%, respectively, over the fourth quarter of fiscal '19.
These increases principally reflect the excellent operating performance of our fiscal '20 acquisitions, as well as continued disciplined cost management on the part of our operating teams.
We recently entered into an amendment to extend the maturity date of our revolving credit agreement by one year to November 23 and to increase the committed capital to $1.5 billion.
In addition, our credit facility continues to include a feature that will allow the company to increase the capacity by $350 million to become a $1.85 billion facility through increased commitments from existing vendors or the addition of new lenders and can be extended for an additional one-year period.
Their loyalty to HEICO is demonstrated by this credit facility amendment, further offers us the financial flexibility to pursue our disciplined strategy of acquiring high-quality businesses at fair prices.
Our net debt, which we define as total debt less cash and cash equivalents of $333 million, compared to shareholders equity ratio improved to 16.6% as of October 31 '20, and this was down from 29.8% as of October 31 '19.
Our net debt to EBITDA ratio improved to 0.71 times as of October 31 '20, down from 0.93 times as of October 31 '19.
Keep in mind this is after making six acquisitions during the year.
During fiscal '20, we successfully completed six acquisitions, four of which were completed since the pandemic start.
We have no significant debt maturities until fiscal '24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes and accelerate growth to maximize shareholder returns.
As we reported yesterday, we declared an $0.08 per share regular semi-annual cash dividend on both classes of common stock, payable January 21, 2021 to shareholders of record as of January 7, 2021.
This cash dividend will be our 85th consecutive semi-annual cash dividend since 1979.
HEICO's strength in the face of challenging business conditions, coupled with our optimism of the future, gave our Board of Directors the confidence to continue paying our normal cash dividend.
While this is very important to all of our shareholders, it is especially important to our team members, the vast majority of whom are fellow HEICO shareholders through the personal holdings in their 401(k) plan.
Let's talk about some of the new fourth quarter acquisitions.
As I discussed during the third quarter teleconference, we completed three acquisitions in August through our ETG Group.
First, we acquired a 75% of the equity interest in Transformational Security and Intelligent Devices.
These two companies design and develop and manufacture state-of-the-art technical surveillance countermeasures equipment.
Next, we acquired approximately 90% of the equity interest of Connect Tech.
Connect Tech designs and manufactures rugged small form factor embedded computing solutions used in rugged commercial and industrial, aerospace and defense, transportation and smart energy applications.
These acquisitions are expected to be accretive to earnings within the first 12 months following closing.
The Flight Support Group's net sales were $924.8 million in fiscal year '20, as compared to $1,240.2 million in fiscal year '19.
The Flight Support Group's net sales were $193.6 million in the fourth quarter of fiscal '20, as compared to $324.7 million in the fourth quarter of fiscal '19.
The net sales decreases are principally organic and reflect lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020, due to the pandemic.
Net sales in fiscal '20 follows the 13% and 12% organic growth reported in the year and fourth quarter of fiscal '19, respectively.
The Flight Support Group's operating income was $143.1 million in fiscal '20, as compared to $242 million in the fiscal year '19.
The Flight Support Group's operating income was $21.5 million in the fourth quarter of fiscal '20, as compared to $62.2 million in the fourth quarter of fiscal '19.
The operating income decreases principally reflects the previously mentioned decrease in net sales, a lower gross profit margin, and an increase in bad debt expense, due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal '20 as a result of the pandemic's financial impact, partially offset by a decrease in performance-based compensation expense.
The lower gross profit margin principally reflects an increase in inventory obsolescence expense, mainly resulting from the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers, due to the pandemic's financial impact.
Additionally, the lower gross profit margin reflects the impact from lower net sales within our repair and overhaul; parts and services and aftermarket replacement parts product lines.
The Flight Support Group's operating margin was 15.5% in fiscal '20, as compared to 19.5% in fiscal '19.
The Flight Support Group's operating margin was 11.1% in the fourth quarter of fiscal '20, as compared to 19.2% in the fourth quarter of fiscal '19.
The decrease -- the operating margin decreases principally reflect the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher bad debt expense and fixed cost efficiencies loss resulting from the pandemic's impact, partially offset by lower performance-based compensation expense.
The Electronic Technologies Group's net sales increased 5% to a record $875 million in fiscal '20, up from $834.5 million in fiscal '19.
The increase in fiscal '20 is attributable to the favorable impact from our fiscal '20 and '19 acquisitions, partially offset by an organic net sales decrease of 1%.
The organic net sales decrease is principally due to lower sales of commercial aerospace and medical products, largely attributable to the pandemic, partially offset by increased sales of defense and space products.
The ETG's net sales increased 8% to a record $236.7 million in the fourth quarter of fiscal '20, up from $219.5 million in the fourth quarter of fiscal '19.
The increase in the fourth quarter of fiscal '20 is attributable to the favorable impact from our fiscal '20 acquisitions and the anticipated increase in commercial space revenues.
The Electronic Technologies Group's operating income increased 5% to a record $258.8 million in fiscal '20 up from $245.7 million in fiscal '19.
The increase in fiscal '20 partially -- principally reflects the previously mentioned net sales growth, lower performance-based compensation expense and a decrease in acquisition-related expenses, partially offset by a lower gross profit margin.
The lower gross profit margin is mainly due to a decrease in net sales and less favorable product mix of certain commercial aerospace and medical products, partially offset by increased net sales of certain defense products.
The ETG's operating income increased 14% to a record $73.9 million in the fourth quarter of fiscal '20, up from $64.6 million in the fourth quarter of fiscal '19.
The increase in the fourth quarter of fiscal '20 principally reflects the previously mentioned net sales growth and improved gross profit margin.
The improved gross profit margin principally reflects a more favorable product mix and increased net sales of certain space and defense products, partially offset by a decrease in net sales of certain commercial and aerospace products.
The Electronic Technologies Group's operating margin improved to 29.6% in fiscal '20, up from 29.4% in fiscal '19.
The ETG's operating margin improved to 31.2% in the fourth quarter of fiscal '20, up from 29.4% in the fourth quarter of fiscal '19.
The increase in the fourth quarter of fiscal '20 mainly reflects efficiencies gained from the previously mentioned net sales growth, and the improved gross profit margin.
Moving on to diluted earnings per share, consolidated net income per diluted share decreased 4% to $2.29 in fiscal '20, as compared to $2.39 in fiscal '19.
Consolidated net income per diluted share decreased 27% to $0.45 in the fourth quarter of fiscal '20, as compared to $0.62 in the fourth quarter of fiscal '19.
Those decreases principally reflect the previously mentioned lower operating income of Flight Support, partially offset by lower income tax expense, less net income attributable to non-controlling interest, as well as lower interest expense.
Depreciation and amortization expense totaled $88.6 million in the fiscal '20, up from $83.5 million in fiscal '19 and totaled $23.3 million in the fourth quarter of fiscal '20, up from $21.8 million in the fourth quarter of fiscal '19.
The increase in the fiscal year and fourth quarter of fiscal '20, principally reflects the incremental impact from our fiscal '20 and '19 acquisitions.
Research and development -- significant ongoing new product development efforts are continuing at both ETG and Flight Support.
R&D expense was $65.6 million in fiscal '20 or about 3.7% of net sales and that compared to $66.6 million in fiscal '19%, or 3.2% of net sales.
R&D expense was $16.6 million in the fourth quarter of fiscal '20, or 3.9% of net sales, and that compared to $17.9 million in the fourth quarter of fiscal '19 and that was 3.3% of net sales.
SG&A expenses consolidated decreased by 14% to $305.5 million in fiscal '20, and that was down from $356.7 in fiscal '19.
The decrease in consolidated SG&A expense in fiscal '20 reflects a decrease in performance-based compensation expense, a reduction in other G&A expenses, and a reduction in other selling expenses, including outside sales commissions, marketing and travel.
These decreases were partially offset by the impact of our fiscal '19 and '20 acquisitions, as well as the previously mentioned increase in bad debt expense, and that was due to collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal '20 as a result of the financial impact of the pandemic.
Consolidated SG&A expense decreased by 18% to $72.6 million in the fourth quarter of fiscal '20, down from $88.8 million in the fourth quarter of fiscal '19.
The decrease in consolidated SG&A expense in the fourth quarter of fiscal '20 reflects a reduction in other general and administrative expense, decrease in performance-based compensation expense, and a reduction in other selling expenses including outside sales commissions, marketing and travel.
The decreases were partially offset by the impact of our fiscal '20 and '19 acquisitions, as well as the increase in bad debt expense.
Consolidated SG&A expense as a percentage of net sales dropped to 17.1% in fiscal '20, and that was down slightly from 17.4% in fiscal '19.
The decrease in consolidated SG&A expense as a percentage of net sales in fiscal '20, again is due to lower performance-based compensation expense and a decrease in other selling expenses, partially offset by the impacts of higher other G&A expense as a percentage of net sales and an increase in bad debt expense.
Consolidated SG&A expense as a percentage of net sales increased to 14% -- I'm sorry, 17% in the fourth quarter of fiscal '20, and that was up slightly from 16.4% in the fourth quarter of fiscal '19.
The increase in consolidated SG&A expense as a percentage of net sales in the fourth quarter of fiscal '20, reflects higher other general and administrative expense as a percentage of net sales, due to the decreased sales volume and the aforementioned increase in bad debt expense, partially offset by a decrease in lower performance-based compensation expense, and a decrease in other selling expenses.
Interest expense decreased to $13.2 million of fiscal '20 and that was down significantly from $21.7 million of fiscal '19 and it decreased to $2.5 million in the fourth quarter of fiscal '20, down from $5.2 million in the fourth quarter of fiscal '19.
The decreases are principally due to a lower weighted average interest rate on borrowings outstanding under our credit facility.
Our effective tax rate in fiscal '20 was 7.9%, as compared to 17.8% in fiscal '19.
The decrease in fiscal '20 is mainly attributable to a larger tax benefit recognized in fiscal '20 from stock option exercises, compared to fiscal '19, and that resulted from more stock options being exercised, as well as the strong appreciation in HEICO's stock price during the optionees' holding period.
Our effective tax rate in the fourth quarter of fiscal '20 was 22.3% and that compared to 19.8% in the fourth quarter of fiscal '19.
Net income attributable to non-controlling interest was $21.9 million in fiscal '20, and that compared to $31.8 million in fiscal '19.
The decrease in fiscal '20, principally reflects a decrease in operating results of certain subsidiaries of Flight Support, in which non-controlling interests are held, as well as the impact of a dividend paid by HEICO Aerospace in June '19 -- 2019, that is -- that effectively resulted in the transfer of 20% non-controlling interest held by Lufthansa Technik in eight of our existing subsidiaries and that was transferred back to our Flight Support Group.
Net income attributable to non-controlling interest was $5.3 million in the fourth quarter of fiscal '20, and that compared to $6.9 million in the fourth quarter of fiscal '19.
The decrease in the fourth quarter of fiscal '20, principally reflects a decrease in the operating results of certain subsidiaries of the Flight Support Group in which non-controlling interests are held.
For the full fiscal year '21 at the present time, we anticipate a combined tax and non-controlling interest rate of approximately 23% to 24%.
Moving onto the balance sheet and cash flow, as you all know, our financial position and forecasted cash flow remain very strong.
Previously, I mentioned cash flow provided by operating activities was consistently strong at $409.1 million and $437.4 million in fiscal '20 and '19, respectively.
Cash flow provided by operating activities totaled $110.2 million, or 177% of net income in the fourth quarter of fiscal '20 and that compared to $124 million in the fourth quarter of fiscal '19.
We currently anticipate capital expenditures of approximately $40 million in fiscal '21, and that would be up from the $22.9 million spent in fiscal '20.
Our working capital ratio, which is, of course, current assets divided by current liabilities, improved to 4.8 as of October 31, '20, as compared to 2.8 as of October 31, '19.
Days sales outstanding, DSOs of accounts receivable approved -- improved to 45 days as of October 31, '20 and that compared favorably to the 47 days as of October 31, '19.
We continue to closely monitor all receivable collection efforts in order to limit our credit exposure.
No one customer accounted for more than 10% of sales, and our top five customers represented approximately 24% and 20% of consolidated net sales in fiscal '20 and '19, respectively.
Our inventory turnover rate increased to 153 days for the year ended October 31, '20, as compared to 124 days for the year ended October 31, '19.
That increase in turnover rate principally reflects certain long-term and non-cancelable inventory purchase commitments, which were based on pre-pandemic net sales expectations and also to support the backlog of certain of our business.
As we look ahead to fiscal '21, the pandemic will likely continue to negatively impact commercial, aerospace industry, as well as HEICO.
Given this uncertainty, HEICO cannot provide fiscal '21 net sales and earnings guidance at this time.
However, we do believe our ongoing fiscal conservative policies, healthy balance sheet, increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers.
In addition, our time-tested strategy of maintaining low debt and acquiring -- operating high cash-generating businesses across a diverse base of industries, besides commercial aerospace and these industries are defense-based and other high-end markets; including electronics and medical, puts us in good financial position to weather this uncertain economic period.
We are cautiously optimistic that the recent vaccine progress should generate increased commercial air travel and will result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal '21.
Their dedication to HEICO's customers and to the safety of their fellow team members has been exemplary.
I am confident that our future is bright and we will exit this COVID-19 period as a stronger and more competitive company.
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compname reports q2 earnings per share of 51 cents.
q2 earnings per share $0.51.
cannot provide fiscal 2021 net sales and earnings guidance at this time.
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I'm pleased to report that we experienced a very successful year, both financially and operationally, especially with our revenue and earnings per share growth.
As we begin 2022, we believe that Rollins is poised to deliver on our short-term and long-term objectives.
We look forward to sharing our progress with you as the new year unfolds.
As we previously disclosed, the company is in discussion with the staff at the U.S. Securities and Exchange Commission to resolve our SEC investigation.
During the fourth quarter, we increased the accrual related to this matter to $8 million for a potential settlement.
Given that the investigation is ongoing and out of respect for the process, we cannot answer any questions during our Q&A, but we are focused on resolving this inquiry in the very near future.
As Gary mentioned, we are extremely pleased with our 2021 performance and very proud of the hard-working men and women of our company that propelled us to achieve record levels of revenue growth across each of our brands.
I'm also pleased to note that we again realized a very strong performance in our termite service line, posting year-over-year double-digit growth of 14.3%.
While our termite business has been growing by double digits for several years in a row now, termite damage claims, as well as any related to litigation have declined year by year reaching our lowest level in recent history during 2021.
To be more specific, termite damage claims received have declined from a high of 9,349 to the low of 380 new claims received this past year while, at the same time, revenue from termite has tripled.
The genesis of this great story started with a serious commitment to address a problem that had been building for several years.
Obviously, resolve alone wouldn't clean up a problem that large.
Success came from a series of changes initiated by our leadership team to our culture, our training, our treatment protocols, and our quality assurance processes.
We significantly improved and expanded training of our field service and sales team members, and our managers made that training mandatory before you could be allowed to service our customers.
We held hundreds of regional training meetings and a multitude of termite-specific training modules were developed.
We revised our treatment protocols to solve situations we were experiencing, due in part to evolving new construction practices in various markets.
These revised treatment protocols, in many cases, exceeded state treating requirements.
Additionally, we created a nationwide quality assurance team that took control of the claims process, requiring our branch offices to report each claim immediately.
This ensured a quick response to our customers when most needed.
This QA group also went to the field and inspected our team's work and verified that things were being done according to our new treating requirements.
Finally, and maybe most important, the most difficult change was to our culture.
As an example, any location failing quality assurance team inspections had to make a trip to the Division President of the company.
Those that failed to adjust and adhere to the new practices by the time a follow-up QA visit occurred didn't receive a return trip.
Change came quickly due to those practices.
Fast forward to today and all our newly acquired companies are brought under these standards as quickly as possible.
We believe these service level commitments are important to meet our -- or exceed the expectations our customers have for us.
Operationally, our service offering is led by a very strong and dedicated termite services group and a very experienced technical service team.
I'm proud to work for a company that has made these commitments to protect our customers, our brands, and our reputation.
2021 was a strong and productive year for Rollins' family of pest control brands.
Q4 revenues increased 11.9% to $600.3 million, compared to $536.3 million the previous year.
Net income rose to $65.3 million or $0.13 per diluted share, compared to $62.6 million or $0.13 per diluted share for the same period in 2020.
Our revenues for the full year were $2.424 billion, an increase of 12%, compared to $2.161 billion for the same period last year.
Net income for the full year increased 34.5% to $350.7 million or $0.71 per diluted share, compared to $260.8 million or $0.53 per diluted share for the comparable period last year.
Again, Julie will review our full-year GAAP and non-GAAP results shortly.
All our business lines experienced solid growth, with residential pest control up 11.9% and termite realizing growth of 13.6%.
Additionally, commercial pest control delivered an impressive 11.4% growth over the fourth quarter of last year.
Julie will give you a more detailed breakdown on organic revenue growth by service line in a few moments.
Before I move on from revenue and address expenses, I want to emphasize how proud we are of the growth rates we achieved in the fourth quarter and for the year.
During the year, coincidentally, Orkin reached their 120th anniversary and celebrated by putting up one of their best performances in years.
All our brands grew and contributed greatly to our operating results.
On the expense side, payroll, materials and supplies, and fleet are our three largest expense areas, and I'll give you some additional color on how each of these items impacted margin in Q4.
Let's start with labor.
Remarkably, we've been able to achieve above-average revenue growth rates, while keeping our service payroll expense margins below last year in Q4.
On a year-to-date basis, that expense margin is flat to 2020.
Our administrative payroll margins also improved over 2020 as we continue to improve productivity.
However, we did experience a slight increase in our sales payroll margin.
The sales payroll expense trend is reflective of the planned investment we made in up-staffing our residential and commercial sales teams over the last 12 months.
This investment yielded the high levels of growth I mentioned a few minutes ago.
If there's an area I do not mind giving up margin to, its sales payroll so long as we are growing revenue faster than the sales payroll expense.
I'm proud of our team's ability to manage payroll expense despite recruiting challenges caused by labor shortages.
Last week, we held our virtual Rollins leadership meeting with over 175 of our top leaders.
Most of our topics were about best practices in recruiting and retaining our people.
This is a huge focus item for us in 2022.
Let's move to materials and supplies costs or M&S.
Our M&S costs were a slight headwind in the quarter, particularly for our termite and ancillary service offerings, where we've had more supply chain issues in the latter part of the year.
Our procurement team is working hard in this area by seeking alternate products, while our operations team has analyzed the impact of these increases and adjusting our rate card pricing upward where needed to counteract the rise in material costs.
Probably most impactful to us in Q4 is fleet expense, particularly fuel.
Compared to Q4 of 2020, our fuel costs were up 56.5% in Q4 of 2021.
That equated to over $4.5 million in increased fuel costs for the quarter.
In addition, increases in fleet repair costs for items like tires and basic maintenance also rose double digits.
As we've discussed in the past, we're making significant progress with our BOSS operating systems' routing and scheduling technologies, which help us mitigate some of these fuel cost increases.
Since reducing miles driven between services saves not only fuel but also time, this technology contributed in an even bigger way to helping us manage our service payroll expense by enabling us to reach our customers in a more efficient and productive manner.
We began to feel the first significant impacts of the fuel increases in Q2 of 2021.
So, we anticipate that fleet costs will continue to be a significant headwind for us in the first quarter of this year.
Related to expenses, there's one other item I'd like to mention.
Most are familiar with the cybersecurity attacks experienced by SolarWinds and Colonial Pipeline and others that recently put a spotlight on cybersecurity threats.
Due to concerns about these types of cybersecurity issues, in Q4, we fast-tracked our multiyear strategy to enhance our protection against cybersecurity threats by accelerating a $3 million expenditure.
We have a dedicated cyber team implementing enhanced cybersecurity controls for our domestic and international operations to protect our employees, our customers, and our brands.
Shifting briefly to the acquisition landscape, we continue to successfully execute our acquisition strategy of identifying and acquiring high-quality companies with shared culture and values.
Last year ended strong with over 70% of our trailing 12 months revenue acquired occurring in the fourth quarter.
And looking ahead, we expect that strategic acquisitions will continue to be an important component in our initiatives to further grow our business.
We delivered an outstanding fourth quarter, highlighted by significant growth across many key financial metrics.
As we previously discussed in our third-quarter conference call, we assess the performance metrics we report to ensure they best articulate Rollins' business.
To that end, we discussed several additional measurements we would present each quarter, including EBITDA, free cash flow, and total organic revenue growth.
In addition, we're now including organic revenue growth by revenue type, specifically residential, commercial, and termite.
We believe this will bring further transparency to our revenue growth measurements.
We realize we are going over a lot of information today and believe this will give you a resource to review everything that we have covered.
So, now on to the numbers.
Our fourth-quarter revenues of $600 million was an increase of 11.9% actual exchange rate growth, 8.9% organic.
For the constant exchange rate, the total revenue growth percentages calculated to 11% with an 8.1% organic.
For the full year 2021, revenues of $2.4 billion was an increase of 12.2% over full year 2020, 9.5% organic.
The constant exchange rate, total revenue growth for 2021 equaled 11.4%, 8.7% organic.
As mentioned previously, residential, commercial, and termite all grew double digits this quarter over the same quarter last year.
What Jerry did not tell you was that all three also grew double digits for the full year 2021 over 2020.
For the fourth quarter growth over last year, residential grew 11.9%, 8.4% organic; commercial grew 11.4%, 9.3% organic; lastly, we have termite, which grew 13.6% with 10.1% organic.
For the full year 2021 over 2020, residential grew 12.9%, 10% organic; commercial grew 10.2%, 7.4% organic; and we closed out with termite at a 14.3% growth, 11.9% organic.
Now, to our income.
For the fourth quarter and year to date, we are presenting adjusted EBITDA for comparison purposes due to the one-time super vesting of our late chairman stock grants in the third quarter of 2020, the impact of our gain on sale of several of our Clark properties in the first six months of 2021 and our recorded accruals related to the potential settlement of the SEC matter in the third and fourth quarters of 2021.
Fourth-quarter adjusted 2021 EBITDA was $122.2 million or 11.2% over 2020.
Fourth quarter 2021 adjusted earnings per share was $0.14 per diluted share or 7.7% improvement over 2020.
For the full year 2021, our adjusted EBITDA was $546.4 million or 20.1% over last year.
Year to date, 2021 adjusted earnings per share was $0.68 per diluted share or 25.9% over 2020.
For fourth quarter 2021, gross margin increased 50.4% or 0.10 point over last year.
That was after overcoming our strong headwinds of fleet expenses, specifically fuel in the amount of $4.5 million and termite M&F for $2.7 million.
Sales, general and administrative fourth quarter 2021 margin increased 1.6% over last year.
This was driven by the increase in sales salaries mentioned by Jerry along with the increased SEC accrual.
Without these two items, our SG&A fourth-quarter margin presented an improvement over fourth quarter 2020.
Related to the SEC potential settlement, we recorded an accrual of $5 million in Q4.
This was in addition to the $3 million we previously accrued in the third quarter.
These amounts are not tax-deductible for state or federal taxes.
The company continues to cooperate with the SEC and working toward a final resolution.
During the year, we completed significant remediation efforts, including the addition of a Chief Accounting Officer, SEC Attorney, and SEC External Reporting Director.
Also, we reevaluated and strengthened our internal controls over financial reporting, while improving processes, procedures, and related supporting documentation, including those related to management's judgments and estimates.
Now, for a few notes regarding our cash flow.
Our dividends full year 2021 were $208.7 million or an increase of 30% over 2020, while cash used for acquisitions declined 5.8% to $139 million for 2021.
We ended the current period with $105.3 million in cash, of which $78.1 million was held by our foreign subsidiaries.
As you've probably noted over time, our foreign cash held has increased with the exception of use for acquisitions.
We are in the process of restructuring our foreign entities to make cash from foreign operations more readily available.
This should be completed later in 2022.
Now, to free cash flow.
For the fourth quarter of 2021, our free cash flow was $88.9 million, or a decrease of 0.8% over last year.
The decline was due to a capital expenditure increase from upgrading our data center facility as part of our cybersecurity initiatives.
Full-year free cash flow was $395 million or a decrease of $41 million.
This decline was primarily due to the $30 million 2020 carry back taxes paid in 2021 and a $32 million gain from the sale of the Clark properties, the latter of which is an operating cash reconciling item.
Last, I'm happy to share that yesterday our board of directors approved a regular cash dividend of $0.10 per share that will be paid on March 10, 2022, to shareholders of record at the close of business, February 10, 2022.
This represents a 25% increase over the March 2021 regular cash dividend paid out.
The dividend increase reflects our strong performance in 2021 and that accentuates our financial strength, our solid capital position, and the board's confidence in our outlook for continued growth.
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q4 revenue $536.3 million versus refinitiv ibes estimate of $530.2 million.
q4 earnings per share $0.13.
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Joining me in the call today are Dushyant Sharma, our founder and CEO, and Matt Parson, our CFO.
In addition, during today's call, we will discuss non-GAAP financial measures, specifically contribution profit, adjusted gross profit, and adjusted EBITDA, our non-GAAP financial measures.
These non-GAAP financial measures, which we believe are useful on Paymentus' performance and liquidity, should be considered in addition to, not as a substitute for, or an isolation from, GAAP results.
I'm very excited, and it's my pleasure to talk to you for our first earnings call as a public company.
I'm also grateful for our clients and partners who put their faith in us every single day.
We are very proud of you.
I'm very pleased with our second-quarter results.
The progress we have made on IPN, including the signing of definitive agreements to acquire Payveris and Finovera, that puts us at the heart of the bill payment ecosystem for financial institutions of all sizes.
Before covering our second-quarter highlights and talking more about each of these exciting items, I would like to provide a summary of our business for those who aren't familiar with Paymentus.
I founded Paymentus to power the next-generation ecosystem for electronic payments by simplifying them for both consumers and dealers, and with an eye to do the same for financial institutions and consumer platforms.
We took a very deliberate approach through strategy over the years in three different horizons.
During the first horizon, we built an agent platform and targeted the middle market billers with it.
In the second horizon, we moved up market and expanded the functionality of our product.
With the recent introduction of our Instant Payments Network, we entered our third horizon, which allows us to put all the pieces in place to create a modern payment ecosystem.
The IPN leverages our biller network and extends it outside of those billers to financial institutions, retailers, and technology companies that can access Paymentus payments for their customers.
In essence, IPN creates the paradigm shift in the bill payment industry and creates a multi-sided network effect for our business.
Our objective is to be the central modern-age bill payment ecosystem for the entire payments industry, including banks, credit unions, and other financial institutions.
To that effect, we have taken a major step toward the strengthening of our IPN presence in the financial institutions market.
This week, as we are pleased to announce, that we have signed a definitive agreement to acquire Payveris.
Payveris is a modern money movement platform for banks and credit unions.
What that means is that any customer of a bank on Payveris platform can pay any bills from the bank, including the largest billers to smallest businesses like their lawyers, accountants, send money to anyone in the U.S., using their person-to-person transfer capabilities, and move money between their own accounts, bank accounts, across multiple financial institutions using their account-to-account transfer capabilities.
Payveris serves over 265 national institutions.
What this means to Payveris -- this transaction means Payveris that it provides a unique offering for financial institutions when combined with Paymentus' unique Instant Payment Network, and therefore accelerate payment -- Payveris' customer acquisition strategy.
And what that means to Paymentus is that this allows us to accelerate our IPN strategy for banks by having nearly 300 financial institutions join our network.
In addition to that opportunity, there is another equally exciting opportunity where each of these nearly 300 FIs can be direct billers on our platform, which will add to our existing base of direct billers.
In addition to agreeing to acquire Payveris, we have also signed an agreement to acquire Finovera, a technology provider that aggregates consumers' bills, including faster statements in one place.
This is a platform that is already being utilized by Payveris and many of the financial institutions.
We believe the combination of Finovera and Payveris with our IPN, was already favor offering for financial institutions as we provide a robust coverage of billers, whether they are currently utilizing Paymentus platform or not.
This will continue to allow our sales team to prioritize biller outreach for direct onboarding onto our platform based on the bill volumes.
We anticipate that both of these acquisitions will close by end of Q3 and have been considered in the outlook that Matt will share shortly.
On our core horizon one horizon two strategies, we continue to execute very successfully.
Our second-quarter performance was strong.
Revenue grew 30% over the same period in 2020 to $93.5 million.
Q2 contribution profit grew 25% to $37.4 million.
Adjusted gross profit in the quarter was $30.1 million, which was a 24% increase over Q2 of last year.
And the transaction processed grew over 39% year over year.
Matt will provide more color on the financials shortly.
We continue to execute on all three strategic horizons I described earlier.
From the first horizon, small to medium billers continue to be a focus of ours, and we completed a multitude of implementations in the quarter.
As an example, we implemented a midsized public utility in Arizona, resulting in an improved customer experience and access to new payment methods.
The utility was very pleased with our product and implementation process and have offered us to implement other departments in the field.
In the second quarter, we also continue to build on our more than 350 integrations divisions by adding new partners, including completing an integration with a leading provider of software to midsized telecommunication companies.
Going forward, Paymentus will be the preferred provider of payments to their clients.
In the second horizon, which targets larger, more diverse billers, we implemented several new billers, including a large auto finance company.
And we also continue to make progress in our partnership with UPS, adding them to our platform in the U.S. this quarter.
is an addition to other countries around the world already live for UPS on our platform.
We are excited about this partnership and how we look UPS and Paymentus can co-create a leading experience for business clients.
Beyond the implementations, we also have the opportunity to expand at existing clients.
This growth occurs as clients migrate additional divisions to acquire companies and convert them to us, all by adding new payment types and features such as AutoPay.
Beyond new implementations, we also have the opportunity to expand at existing clients.
Two examples of expansion are a large utility with over 2 million customers, which added advanced payment methods like PayPal to provide their customers with more choices.
And a software utility which moved its AutoPay payments to Paymentus to improve its customers' experience by combining one-time and recurring payments under Paymentus' platform.
In addition to new sales and the same-store sales expansion, we completed several key renewals, including extending our relationship with the leading provider of insurance to the jewelry industry.
Through the addition of IPN, we ended our third horizon with a focus of building out our partner network.
IPN expands our reach beyond billers to FIs, technology partners, and retailers who originate transactions that we process.
PayPal, one of our founding IPN partners, continues to focus on introducing enhanced bill payment functionality across its platform.
We are also really excited about IPN across -- other IPN partners, and especially, our extended reach to nearly 300 financial institutions with the Payveris transaction.
In summary, I'm very pleased with the financial results of this quarter and the progress we have made through the acquisition of Payveris and Finovera to move closer to our original long-term vision: to be that ecosystem for consumers, dealers, financial institutions and partners.
You all are the reason for the strong Q2 financial results that I have the privilege of sharing today.
As a quick reminder, today's discussion includes non-GAAP financial measures.
Before I talk about the second quarter's financial results and our outlook for 2021, let me remind you about our business model.
As Dushyant [Audio gap] we get paid when our clients get paid, so the key indicator to measure the performance of the business is the number of transactions processed.
For the vast majority of our clients, transaction fees are the same regardless of the payment amount.
For example, we would receive a $1.50 for a utility payment of $50 and the same $1.50 for a payment of $275.
Interchange fees may vary by bill or industry and type of payment among other things, but in most cases, we have caps on interchange and payment amounts to help us manage the costs.
These transaction fees can be paid by the biller, the consumer, or a combination of both, and we generally do not charge for implementation or customization fees for our platform, so professional services revenue is minimal.
Now turning to the quarter.
We processed $64.2 million transactions, representing a year-over-year increase of approximately 39%.
This transaction growth drove a 30.3% increase in revenue over the same period in 2020, which resulted in revenue of $93.5 million.
As we've explained before, as we see larger -- as we sign larger and larger billers, we anticipate the mix shift of fees will continue.
Contribution profit for Q2 was $37.4 million, a 24% increase over the same period last year.
Adjusted gross profit for the second quarter was $30.1 million and this was an increase of 24% from Q2 of 2020.
Contribution profit growth and adjusted profit growth can vary more than revenue growth due to the change in interchange cost.
As a reminder, there are certain external factors that impact interchange, such as the average payment amount in a particular month or quarter.
For example, hot summers or cold winters may increase utility bills, which increases our interchange cost.
And we also have property tax payments that see large amounts twice per year.
Adjusted EBITDA was $8.3 million, which represents a 22.2% margin on contribution profit.
The 5% decline in adjusted EBITDA from the second quarter of 2020 is due to cost increases related to being a public company, as well as increased investments in R&D and sales and marketing.
The adjusted EBITDA margin for Q2 was higher than anticipated as a result of the higher contribution profit than anticipated for Q2.
And the fact that travel and concerts did not start back as soon as we thought, as well as the ongoing tightness in the U.S. labor market making hiring more challenging than expected.
Operating expenses rose $7.8 million to $24.8 million for Q2 of 2021.
R&D expense increased $1.9 million or 32.4% as we continue to invest in new features and functions in our payments platform and we build out IP with additional partners.
Over half of the operating expense increase, or $4 million, was in G&A and was driven by public company cost, as well as continuing to build out the public company infrastructure.
Sales and marketing increased $1.9 million or 24.5% as we ramped up selling activity relative to the same time last year in the middle of the COVID uncertainty.
Our GAAP net income and earnings per share for Q2 was slightly lower than we anticipated due to one-time discrete tax items that arose as a result of going public.
These two one-time tax items totaled approximately $2 million or about $1 million each.
As a result of these two discreet one-time items that hit GAAP tax expense in our Q2, our effective tax rate for the quarter was approximately 86%.
Excluding these two discreet one-time tax items, our net income for the quarter would have been $2.6 million.
As of June 30, 2021, we had $266.4 million of cash and cash equivalent on our balance sheet.
Now, from our Q2 results, let's turn to our 2021 full-year outlook.
Inclusive of our Payveris and Finovera acquisitions, our revenue outlook for 2021 is in the range of $378 million to $382 million, which represents growth between 25% and 27% year over year.
For contribution profit, our full-year outlook is between $152 million and $154 million, or approximately 26% to 28% growth.
For both revenue and contribution profit, we expect Q4 to see almost all the benefit due a full quarter of Payveris.
As you may recall, we typically see the highest average payment amounts of the year in Q3 as a result of the summer heat, combined with some semi-annual per-year tax payments.
In fact, in Q3 of 2020, we actually saw a slight sequential reduction in contribution profit.
While we do not anticipate a sequential reduction this year, we do anticipate similar factors that will influence our Q3 results.
For full-year 2021, we also see adjust EBITDA in the range of $25 million to $28 million, with an adjusted EBITDA margin of 16.5% to 18.5% on contribution profit.
labor market, making hiring more challenging than in the past several quarters.
With respect to taxes, we do not anticipate any further impacts on the one-time discrete items or any other one-time discrete items this year.
However, as a result of the items mentioned for Q2, we expect that our full-year effective tax rate for 2021 will be approximately 47%.
Federal tax laws or rates.
And this is due to fact that a large majority of our revenue is in the U.S., so it represents the U.S. federal statutory rate combined with various state income taxes.
Look, overall, we are very pleased with the financial and strategic progress we have made this quarter, especially in the expansion of our IPN ecosystem deeper into the financial institutions market.
We continue to execute across our three-horizon strategy and drive organic growth.
With Payveris and Finovera, we'll continue to accelerate the breadth of our IPN offering.
We'll now open the call to questions.
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sees fy revenue $378 million to $382 million.
q2 revenue $93.5 million versus refinitiv ibes estimate of $89 million.
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Yesterday, following the close of the market, we issued our news release and investor supplement and posted related materials to our website at allstateinvestors.com.
Our management team is here to provide perspective on these results.
Let's start on slide two.
So this is Allstate's strategy on the left-hand side, which we've talked about before.
We have two components: increase personal property-liability market share and expand the protection solution.
Those are the two ovals you see on the left with the intersection between them.
The key third quarter results are highlighted on the right-hand panel.
Property-Liability policies in force increased by 12.5%.
Allstate Protection Plans continue to grow rapidly by both broadening its product offering and expanding the network of retail providers.
As a result, we now have almost 192 million policies in force across the enterprise.
Financially, the results were more mixed.
Revenues were up substantially, but net income and adjusted net income declined from the prior year quarter.
Underwriting income declined primarily due to higher loss costs in settling auto insurance claims.
We've implemented price increases to proactively respond to the sharp rise in loss cost, and Transformative Growth continues to position us for long-term success, both of which we'll talk about in a couple of minutes.
This was partially offset by the benefits from our long-term risk and return programs that include significant reinsurance recoverables.
They were primarily related to Hurricane Ida, and a substantial increase in performance-based investment income.
Capital deployment results were excellent, with $1.5 billion of cash returned to shareholders in the quarter.
We also completed the divestitures of our two largest life and annuity businesses, one in October and then one just earlier this week.
So let's go to slide three.
Revenues of $12.5 billion in the quarter increased 16.9% compared to the prior year quarter, and that reflects both the higher earned -- National General acquisition, Allstate brand, homeowners premium growth and higher net investment income.
Property-Liability premiums and policies in force increased 13.5% and 12.5%, respectively.
Net investment income was $764 million, and that's up almost about $300 million compared to the prior year quarter, reflecting strong results from the performance-based portfolio.
Net income was $508 million in the quarter, and that's compared to $1 billion in the prior quarter as lower underwriting income was partially offset by the higher investment income.
Adjusted net income was $217 million or $0.73 per diluted share, and it's decreased $683 million compared to the prior year quarter, reflecting the lower underwriting due to the higher auto and homeowners insurance loss costs.
Net income for the first nine months of 2021 was below the prior year, and that's largely due to the loss on the sale of the life annuity business, which we reported earlier in the year.
Adjusted net income was $10.70 per share for the first nine months, and that was above the prior year as higher investment income and lower expenses [Technical Issues] more than offset higher loss costs.
What I would do is put the pandemic in a longitudinal perspective because this created volatility for our results, and it obviously requires us to adapt quickly, which we do.
But before we go through the impact on the third quarter results of the supply chain disruption, let's talk about the initial and subsequent impact of the pandemic.
So in 2020, the economic lockdown resulted in fewer miles being driven and promoted -- and prompted an aggressive economic support response from, really, governments around the world.
The impact on auto insurance was a dramatic drop in the number of accidents.
And of course, due to this unprecedented driver in frequency, we proactively provided our customers with some money back, which increased customer retention.
Since then, since there was less road congestion and fewer accidents that occurred during commuting hours, the average speed and severity of auto claims increased, offsetting some of the frequency benefit.
Nevertheless, underwriting margins improved dramatically, so we introduced a temporary Shelter-in-Place payback rather than take a permanent rate reduction and took some modest overall reductions in rate levels.
This year, as you can see from the right-hand column, the story has been just the opposite as it relates to frequency with large percentage increases.
And while the overall level of accident frequency for the Allstate brand is still below prepandemic levels, the national and general nonstandard business is back to the levels before the pandemic.
Auto severity this year, however, has been dramatically impacted by the supply chain disruption, and price increases on used cars and original equipment parts, and Mario will take you through that in a couple of slides.
From a pricing perspective, this results in moving from modest rate reductions to significant increases in auto insurance prices.
From a growth standpoint, at the onset of the pandemic, we began to see a material increase in the consumer acceptance telematics, and we've really leaned into that with our Milewise product, which is really the only national product out there to pay for the mile, and that's led to substantial increase in our telematics product.
Now the pandemic has also had a significant impact on the investment portfolio, and this is the tale of the beginning and the end as well.
So early in the crisis, equity valuations were down, and this had a negative impact on investment results.
Then, of course, on -- and we have a broad-based long-term spread out over a decade really investing in these kinds of funds.
And so we do it on a long-term basis, whether that's three, five or 10 years.
But -- so what's happened this year, of course, is we've had the opposite happen, which is with the economic stimulus, we've had equity valuations going up, and our returns have come back strongly.
In the market-based portfolio, lower interest rates at the onset of this pandemic did lead to an increase in the unrealized gains in the portfolio.
But of course, what that does is reduce future interest rate income, which you see slight decline in this quarter.
And many of our other businesses have been impacted some positively, some negatively, but it's our ability to adapt and seize the opportunities that are presented that create shareholder value.
So Mario will now go through the third quarter results in more detail and how Transformative Growth positions of Allstate for continued success.
Let's move to slide five to review Property-Liability margin results in the third quarter.
The recorded combined ratio of 105.3 increased 13.7 points compared to the prior year quarter.
This was primarily driven by increased underlying losses as well as higher catastrophe losses and non catastrophe prior year reserve reestimates.
The chart at the bottom of the slide quantifies the impact of each component in the third quarter compared to the prior year quarter.
As you can see, the personal auto underlying loss ratio drove most of the increase due to higher auto accident frequency and the inflationary impacts on auto severity.
Higher catastrophe losses shown in the middle of the chart had a negative 1.4 point impact on the combined ratio as favorable reserve reestimates recorded in 2020 from wildfire subrogation settlements positively impacted the prior year quarter.
Gross catastrophe losses were higher but were reduced by nearly $1 billion of net reinsurance recoveries following Hurricane Ida, demonstrating the benefits of our long-term approach to risk and return management of the homeowners insurance business and our comprehensive reinsurance program.
Noncatastrophe prior year reserve strengthening of $162 million in the quarter drove an adverse impact of 0.8 points primarily from increases in auto and commercial lines.
This also included $111 million of strengthening in the quarter related to asbestos, environmental and other reserves in the runoff Property-Liability segment following our annual comprehensive reserve review.
This was partially offset by a lower expense ratio when excluding the impact of amortization of purchased intangibles primarily due to lower restructuring and related charges compared to the prior year quarter.
Moving to slide six.
Let's go a bit deeper on auto insurance profitability.
Allstate brand auto insurance underlying combined ratio finished at 97.5 for the quarter and 89.7 over the first nine months of 2021.
The increase to the prior year quarter reflects higher loss cost due to higher accident frequency, increased severity and competitive pricing enhancements implemented in late 2020 and earlier this year.
While claim frequency increased relative to prior year, we continue to experience favorable trends relative to prepandemic levels.
Allstate brand auto property damage frequency increased 16.6% compared to 2020 but decreased 16.8% relative to 2019.
The chart on the lower left compares the underlying combined ratio for the third quarter of 2019 to this quarter to remove some of the short-term pandemic volatility.
The underlying combined ratio was 93.1 in 2019, which generates an attractive return on capital.
Favorable auto frequency in the third quarter of 2021 lowered the combined ratio by 6.4 points compared to 2019.
Increased auto claim severity, however, increased the combined ratio by 12 points versus two years ago, as you can see from the red bar.
The cost reductions implemented as part of Transformative Growth reduced expenses by 1.3 points, which favorably impacted 2021 results.
As Tom mentioned, early in the pandemic, the severity increases were driven by higher average losses due to a reduction in low severity claims.
This year, the increase reflects the impact of supply chain disruptions in the auto markets, which has increased used car prices and enabled original equipment manufacturers to significantly increase part prices.
The chart on the lower right shows used car values began increasing above the CPI in late 2020, which accelerated in 2021, resulting in an increase of 44% since the beginning of 2019.
Similarly, OEM parts have also increased in 2021, roughly twice as much as core CPI.
This has resulted in higher severities for both total loss vehicles and repairable vehicles.
Since these increases were accelerating throughout the second and third quarters of the year, we increased expected loss costs for the first two quarters of 2021, and this prior quarter strengthening shows up in the combined ratio for the third quarter.
Increases in report year severities for auto insurance claims during the first two quarters of 2021 increased the third quarter combined ratio by 2.6 points, as you can see by the green bar on the lower left.
So let's flip to slide seven, which lays out the steps we're taking to improve auto profitability.
As you can see from the chart on the top, Allstate has maintained industry-leading auto insurance margins over a long period of time, with a combined ratio operating range in the mid-90s, exhibiting strong execution and operational expertise.
To maintain industry-leading results, we are increasing rates, improving claims effectiveness and continuing the lower costs.
After lowering prices in early 2021 to reflect in part Allstate's lower expense ratio, we have proactively been responding with increases in the third quarter, with actions continuing into the fourth quarter and into 2022.
The chart on the right provides selected rate increases already implemented in the third and fourth quarter as well as publicly filed rates that have yet to be implemented in the fourth quarter.
Those states denoted with the caret are top 10 states in terms of written premium as of year-end 2020.
In the third quarter, we've received rate approvals for increases in 12 states, primarily in September.
We adapted quickly to higher severities in the fourth quarter, with plans to file rates in an additional 20 states.
We have already implemented rate increases in eight states during the fourth quarter, with an average increase of 6.7% as of November 1.
Looking ahead, we expect to pursue price increases in an additional 12 locations by year-end.
We are working closely with state regulators to provide detailed support and decrease the lag time between filing, implementation and premium generation.
As we move into next year, it is likely auto insurance prices will continue to be increased to reflect higher severities.
We also continue to leverage advanced claims capabilities and process efficiencies.
Cost reductions as part of Transformative Growth will also continue to be implemented.
As you can see by the chart on the bottom of the slide, we've defined a new non-GAAP measure this quarter referred to as the adjusted expense ratio.
This starts with our underwriting expense ratio, excluding restructuring, coronavirus-related expenses, amortization and impairment of purchased intangibles and investments in advertising.
It then also adds in our claim expense ratio, excluding costs associated with settling catastrophe claims, which tend to be more variable.
We believe this measure provides the best insight into the underlying expense trends within our Property-Liability business.
Through innovation and strong execution, we achieved 2.6 points of improvement when comparing 2020 to 2018, with further improvement occurring through the first nine months of 2021.
Over time, we expect to drive an additional three points of improvement from current levels, achieving an adjusted expense ratio of approximately 23 by year-end 2024.
This represents about a 6-point reduction relative to 2018 or an average of one point per year over six years, enabling an improved price position relative to our competitors while maintaining attractive returns.
Future cost reductions center around continued digital enhancements to automate processes, enabling the retirement of legacy technology, operating efficiency gains from combining organization -- combining organizations and transforming the distribution model to higher growth and lower costs.
Transitioning to slide nine, let's go up a level to show how Transformative Growth positions us for long-term success and how the components of Transformative Growth work together to create a flywheel of profitable growth.
As you know, Transformative Growth is a multiyear initiative to increase personal Property-Liability market share by building a low-cost digital insurer with broad distribution.
This will be accomplished by improving customer value, expanding customer access, increasing sophistication and investment in customer acquisition and deploying a new technology ecosystem.
We've made significant progress to date across each component.
Starting at the top of the flywheel visual, our commitment to further lower our costs, improves customer value and enables a more competitive price position while maintaining attractive returns.
Enhancing and expanding distribution puts us in a position to take advantage of more affordable pricing.
Increasing the analytical sophistication of new customer acquisitions lets consumers know about this better value proposition.
New technology platforms, lower costs and enable us to further broaden the solutions offered to property liability customers.
This flywheel will enable us to increase market share and create additional shareholder value.
Turning to slide 10.
Let's look at the changes to the distribution system, which are also underway.
As you can see in the chart on the left side of the slide, Property-Liability policies in force grew by 12.5% compared to the prior year quarter.
National General, which includes Encompass, contributed growth of four million policies, and Allstate brand Property-Liability policies increased by 231,000 driven by growth across personal lines.
Allstate brand auto policies in force increased slightly compared to the prior year quarter and sequentially for the third consecutive quarter, including growth of 142,000 policies compared to prior year-end, as you can see by the table on the lower left.
The chart on the right shows a breakdown of personal auto new issued applications compared to the prior year.
[Technical Issues] 38% increase in the direct channel more than offset a slight decline from existing agents and volume that would have normally been generated by newly appointed agents.
As you know, we've significantly reduced the number of new Allstate agents being appointed beginning in early 2020 since we are developing a new agent model to drive higher growth at lower cost.
The addition of National General also added 502,000 new auto applications in the quarter.
Moving to slide 11.
Protection Services continues to grow revenue and profit.
Revenues, excluding the impact of realized gains and losses, increased 23.3% to $597 million in the third quarter.
Protection Plans and net written premium increased by $139 million due to the launch of the Home Depot relationship focusing on appliances.
Our quarterly net written premium is now 5.5 times the level of when the company was acquired in 2017.
Arity expanded revenues due to the integration of LeadCloud and Transparent.
ly, which were acquired as part of the National General acquisition as well as increased device sales driven by growth in the Milewise products.
Policies in force increased 12.5% to 150 million driven by growth in Allstate Protection Plans and Allstate Identity Protection.
Adjusted net income was $45 million in the third quarter, representing an increase of $5 million compared to the prior year quarter driven by higher profitability at Allstate Identity Protection and Arity.
This was partially offset by higher operating costs and expenses related to investments in growth.
Now let's shift to slide 12, which highlights our investment performance.
Net investment income totaled $764 million in the quarter, which was $300 million above the prior year quarter, driven by higher performance-based income, as shown in the chart on the left.
Performance-based income totaled $437 million in the quarter, as shown in gray, reflecting increases in private equity investments.
As in prior quarters, several large idiosyncratic contributors had a meaningful impact on our results.
These results represent a long-term and broad approach to growth investing, with nearly 90% of year-to-date performance-based income coming from assets with inception years of 2018 and prior.
Market-based income, shown in blue, was $6 million below the prior year quarter.
The impact of reinvestment rates below the average interest-bearing portfolio yield was somewhat mitigated in the quarter by higher average assets under management and prepayment fee income.
Our total portfolio return was 1% in the third quarter and 3.3% year-to-date, reflecting income and changes in equity valuations, partially offset by higher interest rates.
We take an active approach to optimizing our returns per unit risk for appropriate investment horizons.
Our investment activities are integrated into our overall enterprise risk and return process and play an important role in generating shareholder value.
While the performance-based investment results continue to be strong in the third quarter, we manage the portfolio with a longer-term view on returns.
On the right, we have provided our annualized portfolio return in total and by strategy over various time horizons.
Consistent with broader public and private equity markets, our portfolio has experienced returns above our historical trend over the last several quarters.
While prospective returns will depend on future economic and market conditions, we do expect our performance-based returns to moderate in line with our longer-term results.
Now let's move to slide 13, which highlights Allstate's strong capital position.
Allstate's balance sheet strength and excellent cash flow generation provides strong cash returns to shareholders while investing in growth.
Significant cash returns to shareholders, including $1.5 billion through a combination of share repurchases and common stock dividends, occurred during the third quarter.
Common shares outstanding have been reduced by 5% over the last 12 months.
Already in the fourth quarter, we successfully completed the acquisition of SafeAuto on October one for $262 million to leverage National General's integration capabilities and further increased personal lines market share.
We also recently closed on the divestitures of Allstate Life Insurance Company and Allstate Life Insurance Company in New York.
These divestitures free up approximately $1.7 billion of deployable capital, which was factored into the $5 billion share repurchase program currently being executed.
Turning to slide 14.
Let's finish with a longer-term view of Allstate's focus on execution, innovation and sustainable value creation.
Allstate has an excellent track record of serving customers, earning attractive returns on risks and delivering for shareholders, as you can see by the industry-leading statistics on the upper right.
F Innovation is also critical to the execution, and our proactive implementation of Transformative Growth has positioned us well to address the macroeconomic challenges facing our business today and in the future.
Sustainable value creation also requires excellent capital management and governance.
As an example, Allstate is in the top 15% of S&P 500 companies and cash returns to shareholders by providing an attractive dividend and repurchasing 25% and 50% of outstanding shares over the last five and 10 years, respectively.
Execution, innovation and long-term value creation will continue to drive increased shareholder value.
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qtrly adjusted earnings per share $0.73.
total revenues of $12.5 billion in the third quarter of 2021 increased 16.9% compared to the prior year quarter.
compname reports q3 revenue of $12.5 billion.
q3 adjusted earnings per share $0.73.
q3 revenue $12.5 billion.
auto insurance had underwriting loss in quarter as supply chain disruptions drove rapid price increases for used cars and original equipment part.
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PMT produced another strong quarter of financial results with net income attributable to common shareholders of $65.4 million or diluted earnings per share of $0.67.
These strong results were driven by strong correspondent production results and the continued improvement in the fair value of its GSE credit risk transfer investments.
Additionally, PMT's CRT investments continued to benefit from the elevated prepayment speeds we are seeing across the industry.
MSR fair value gains were more than offset by fair value declines on Agency MBS and interest rate hedges due to significant prepayment activity and elevated hedge costs driven by market volatility.
PMT paid a common dividend of $0.47 per share.
Book value per share increased 3% to $20.90 from $20.30 at the end of the prior quarter, partially due to strong earnings and partially due to the issuance of senior exchangeable notes.
In the current and evolving market environment, PMT is uniquely positioned as the largest correspondent lender in the country to continue to create organic investments in MSRs sourced from the high-quality conventional production of loans it delivers to the GSEs.
In addition to benefiting from the historically large origination market we are currently in, PMT also benefits from the investments in technology and fulfillment capacity made by its manager and services provider, PennyMac Financial.
Further, PMT's investments in MSR and CRT benefit from PFSI's expertise in managing credit risk utilizing a variety of loss mitigation strategies.
Our high-quality loan production in the quarter resulted in the creation of more than $400 million in new, low‐rate mortgage servicing rights, and PMT ended the quarter with approximately $2.4 billion in fair value of MSRs, which we expect will perform well in a rising rate environment.
Also, this quarter, we further strengthened PMT's balance sheet, issuing senior exchangeable notes and term asset‐backed financing to replace less favorable short‐term securities repurchase agreements.
We issued $659 million of three‐year term notes associated with PMT's sixth CRT transaction and the entirety of PMT's CRT investments is now financed with term notes that do not contain margin call provisions, providing stable financing throughout much of the expected life of the asset.
We also issued $350 million in five-year Fannie Mae MSR term notes to support the growing MSR portfolio.
This term financing also more closely aligns to the expected life of the asset.
And finally, we issued $345 million of five‐year senior exchangeable notes, upsized from an initial $200 million offered with strong support from institutional investors.
This issuance with an initial conversion price of $21.69 represents an attractive premium to PMT's book value per share at issuance.
In addition, the option value of the conversion premium contributed partially to the increase in PMT's book value during the quarter.
I will discuss the mortgage origination landscape and how we believe we have positioned PMT to continue delivering attractive risk‐adjusted returns to our shareholders.
The origination market continues to be historically strong as mortgage rates remain near record lows despite the increases in the 10‐year treasury yield since the start of the year.
Recent economic forecasts for 2021 originations range from $3.3 trillion to $4 trillion, while average forecasts for 2022 originations remain strong at $2.6 trillion.
It is worth noting that in each of 2021 and 2022, purchase originations are expected to total $1.7 trillion, almost 40% higher than 2019 levels.
So, while refinance origination volumes are expected to decline significantly over time as a result of higher interest rates, we believe PMT is well-positioned to continue organically creating investments, especially as we are one of the largest producers of purchase money loans in the U.S.
We believe favorable dynamics continue to drive significant opportunities for PMT in correspondent production.
Additionally, we expect the $1.5 billion annual limit per client on cash window deliveries into each of the GSEs to drive more volume into the correspondent channel.
Finally, we expect limitations placed on the GSEs' ability to guarantee certain types of loans to create a heightened need for private capital over time, providing opportunities for increased investment from companies like PMT that have established expertise in the mortgage capital markets and private label securitizations.
PMT's capital deployment is currently focused on the large opportunity in conventional correspondent production and the related high‐quality mortgage servicing rights.
As David mentioned, PMT's position as an industry‐leading producer of mortgage loans gives us a unique ability to create attractive, high‐quality organic investments in MSRs at low interest rates.
Furthermore, PennyMac Financial's history in successfully executing loss mitigation strategies in its role as the servicer of the loans underlying these investments creates a strong alignment of interests.
On Slide 9, we illustrate the run‐rate return potential from PMT's investment strategies, which represents the average annualized return and quarterly earnings potential that PMT expects over the next four quarters.
In total, we expect a quarterly run‐rate return for PMT's strategies of $0.50 per share or a 9.5% annualized return on equity.
This run‐rate potential estimate is down slightly from what we showed last quarter.
In our credit-sensitive strategies, a slight reduction in our expected CRT returns reflects credit spreads that have tightened.
In contrast, the return potential for our interest rate-sensitive strategies has improved modestly, driven by expectations for higher carry-on agency MBS.
The change in PMT's run‐rate expected return is also driven by a shift in equity allocation toward the interest rate-sensitive strategies from the correspondent production segment as a result of expectations for lower origination market volumes over the next year.
Let's begin with highlights in our correspondent production segment.
Total correspondent acquisition volume in the quarter was $51.2 billion in UPB, down 10% from the prior quarter and up 72% year over year.
Sixty-six percent of PMT's acquisition volumes were conventional loans, essentially unchanged from the prior quarter.
We maintained our leadership position in the channel as a result of our consistency, competitive pricing, and the operational excellence we continue to provide to our correspondent partners.
PMT ended the quarter with 727 correspondent seller relationships, up from 714 at December 31.
Conventional lock volume in the quarter was $34 billion in UPB, down 14% from the prior quarter and up 78% year over year.
Margins in the channel have normalized and PMT's correspondent production segment pre-tax income as a percentage of interest rate lock commitments was 10 basis points, down from 13 basis points in the prior quarter.
Acquisition volumes remained strong in April, with $18.5 billion in UPB of total acquisitions and $15.6 billion in UPB of total locks.
PMT's interest rate-sensitive strategies consists of our investments in MSR sourced from our correspondent production, and investments in agency MBS, non‐agency senior MBS, and interest rate hedges with offsetting interest rate exposure.
The fair value of PMT's MSR asset at the end of the first quarter was $2.4 billion, up from $1.8 billion at the end of the prior quarter.
The substantial increase in the fair value of our MSR investments reflects both new MSR investments and fair value gains that resulted from higher interest rates.
Notably, during the quarter PMT sold its remaining investment in ESS back to PFSI at fair value.
The capital that resulted from the sale of this investment is expected to be redeployed into attractive MSR investments.
Now, I would like to discuss the drivers of performance in PMT's credit-sensitive strategies, which primarily consist of investments in CRT.
The total UPB of loans underlying our CRT investments as of March 31 was $48 billion, down significantly quarter over quarter as a result of elevated prepayments.
Fair value of our CRT investments at the end of the quarter was $2.58 billion, down slightly from $2.62 billion at December 31 as fair value gains largely offset the decline in asset value that resulted from prepayments.
The 60-day delinquency rate underlying our CRT investments was essentially unchanged quarter over quarter as the overall number of delinquent loans declined roughly in proportion with prepayments.
PFSI's position as the manager and servicer of loans underlying PMT's CRT investments gives PMT a strategic advantage given we can work directly with borrowers who have loans underlying PMT's investments and have experienced hardships related to COVID‐19.
PFSI uses a variety of loss mitigation strategies to assist delinquent borrowers, and because of the scheduled loss transactions, notably PMTT1‐3 and L Street Securities 2017‐PM1, trigger a loss if a borrower becomes 180 days or more delinquent, we have deployed additional loss mitigation resources and continue to assist those borrowers at risk.
With respect to PMTT1‐3, which comprises 6% of the fair value of PMT's overall CRT investment, if all presently delinquent loans proceeded unmitigated to 180 days or more delinquent, additional losses would be approximately $34 million.
Through the end of the quarter, losses to date totaled $7 million.
As a reminder, mortgage obligations underlying PMTT1‐3 become credit events at 180 days or more delinquent regardless of any grant of forbearance.
Moving on to L Street Securities 2017‐PM1, which comprises 18% of the total fair value of PMT's CRT investment, such losses will become reversed credit events if the payment status is reported as current after a forbearance period due to COVID‐19.
PMT recorded $14 million in net losses reversed in the first quarter as $43 million of losses reversed more than offset the $29 million in additional realized losses.
We believe the majority of the remaining losses have the potential to reverse if the payment status of the related loan is reported as current after the conclusion of the CARES Act forbearance.
We estimate that an additional $32 million of these losses were eligible for reversal as of March 31 subject to review by Fannie Mae and we expect this amount to increase as additional borrowers exit forbearance and reperform.
We estimate that only $6 million of the losses outstanding had no potential for reversal.
This market expectation of significant future loss reversals resulted in the fair value of L Street Securities 2017‐PM1 exceeding its face amount by $46 million at the end of the quarter.
The most common method for borrowers to exit forbearance to date has been a COVID‐19 payment deferral.
This allows the borrower to defer the amount owed of the payment deferral to the end of the loan term and the loan is deemed current after the borrower makes a specified number of mortgage payments.
PMT reports results through four segments: credit-sensitive strategies, which contributed $134.3 million in pre-tax income; interest rate sensitive strategies, which contributed $64.6 million in pre-tax loss; correspondent production, which contributed $35.6 million in pre-tax income; and the corporate segment, which had a pre-tax loss of $14.2 million.
The contribution from PMT's CRT investments totaled $135.7 million.
This amount included $98.1 million in market‐driven value gains, reflecting the impact of credit spread tightening and elevated prepayment speeds.
As a reminder, faster prepayment speeds benefit PMT's CRT investments as payoffs of the associated loans reduce potential for realized losses and return principal at par for investments currently held at a discount.
Net gain on CRT investments also included $42.7 million in realized gains and carry, $13.3 million in net losses reversed, primarily related to L Street Securities 2017‐PM1, which Vandy discussed earlier, $200,000 in interest income on cash deposits, $15.9 million of financing expenses, and $2.5 million of expenses to assist certain borrowers in mitigating loan delinquencies they incurred as a result of dislocations arising from the COVID‐19 pandemic.
PMT's interest rate sensitive strategies contributed a loss of $64.6 million in the quarter.
MSR fair value increased $338 million during the quarter.
$380 million in fair value gains as a result of lower expectations for prepayment activity in the future driven by higher mortgage rates was partially offset by $42 million in other valuation losses, primarily driven by elevated levels of prepayment activity.
Fair value declines on Agency MBS and interest rate hedges totaled $448 million and included $29 million in hedge costs driven by market volatility that also impacted hedge effectiveness in the quarter.
Valuation-related losses in the quarter were somewhat offset by income excluding market‐driven value changes, as servicing fees increased from the prior quarter primarily due to a larger servicing portfolio and as PMT continues to benefit from increasing recapture income from PFSI.
We believe, over time, our results have demonstrated successful hedging of mortgage servicing rights in volatile markets.
PMT's Correspondent Production segment contributed $35.6 million to pre-tax income for the quarter, down from $52.7 million in the prior quarter as gain on sale margins normalized.
PMT's corporate segment includes interest income from cash and short‐term investments, management fees, and corporate expenses.
The segment's contribution for the quarter was a pre-tax loss of $14.2 million.
Finally, we recognized a provision for tax expense of $19.4 million in the first quarter, compared to a tax benefit of $9 million in the prior quarter.
As we look at the evolving mortgage landscape, we believe PMT remains uniquely positioned to capitalize on the current environment characterized by elevated production volumes.
Additionally, we expect changes to the GSE preferred stock purchase agreements limiting cash window deliveries to make the role of well‐capitalized correspondent lenders like PMT increasingly important to a healthy mortgage market.
Finally, we look forward to further discussing our outlook for the business at our upcoming Investor Day for PennyMac Mortgage Investment Trust and PennyMac Financial.
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sees 2021 core ffo per share of $4.11 to $4.13.
qtrly core ffo per diluted share was $1.04 versus $0.90 for same period in 2020.
q3 cash same store noi per prologis share up 6.7%.
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Joining the call today are Gary Coleman and Larry Hutchison, our co-chief executive officers; Frank Svoboda, our chief financial officer; and Brian Mitchell, our general counsel.
Some of our comments may also contain non-GAAP measures.
In the fourth quarter, net income was $187 million or $1.69 per share, compared to $165 million or $1.45 per share a year ago.
Net operating income for the quarter was $188 million or $1.70 per share, a per share increase of 9% from a year ago.
On a GAAP reported basis, return on equity for the year was 11.6%, and book value per share was $66.02.
Excluding unrealized gains and losses on fixed maturities, return on equity was 14.5%, and book value per share grew 9% to $48.26.
In our life insurance operations, premium revenue increased 5% to $631 million, and life underwriting margin was $177 million, up 6% from a year ago.
In 2020, we expect life underwriting income to grow around 4% to 5%.
On the health side, premium revenue grew 7% to $275 million, and health underwriting margin was up 5% to $61 million.
Growth in premium exceeded underwriting margin growth, primarily due to lower margins at Liberty National.
In 2020, we expect health underwriting income to grow around 4% to 6%.
Administrative expenses were $61 million for the quarter, up 7% from a year ago.
As a percentage of premium, administrative expenses were 6.7%, the same as a year ago.
For the full year, administrative expenses were $240 million or 6.7% of premium, compared to 6.5% in 2018.
In 2020, we expect administrative expenses to grow approximately 6%, and to be around 6.7% of premium.
I want to go through the fourth-quarter results at each of our distribution channels.
I'll start out by saying I'm pleased with the sales growth in our agencies in 2019.
I'm particularly pleased with the agent count growth and middle management increase we have seen across all of our exclusive agencies in 2019.
At American income, life premiums were up 8% to $297 million.
And life underwriting margin was up 9% to $98 million.
Net life sales were $59 million, up 9%.
The average producing count for the fourth quarter was 7,631, up 10% from the year-ago quarter and up 1% from the third quarter.
The producing agent count at the end of the fourth quarter was 7,551.
Net life sales for the full-year 2019 grew 6%.
The sales increase was driven by increases in agent count.
At Liberty National, life premiums were up 3% to $72 million, and underwriting margin was up 4% to $18 million.
Net life sales increased 13% to $15 million, and net health sales were $7 million, up 12% from the year-ago quarter.
The average producing agent count for the fourth quarter was 2,534, up 17% from the year-ago quarter and up 6% from the third quarter.
The producing agent count at Liberty National ended the quarter at 2,660.
Net life sales for the full-year 2019 grew 9%.
Net health sales for the full-year 2019 grew 11%.
The sales increase was driven by increases in agent count.
To better describe our nonagency business at Globe Life management insurance company, we have begun replacing the term direct response to direct-to-consumer.
And our direct-to-consumer division at Globe Life, life premiums are up 4% to $209 million, and life underwriting margin was flat at $39 million.
Net life sales were $30 million, up 2% from the year-ago quarter.
For the full-year 2019, net life sales were flat, due primarily to a decrease in juvenile mailing volume resulting from a decline in the response rates from our juvenile mailing offers.
At Family Heritage, health premiums increased 8% to $76 million, and health underwriting margin increased 7% to $19 million.
Net health sales were up 19% to $18 million due to an increase in both agent productivity and agent count.
The average producing agent count for the fourth quarter was 1,228 up 9% from the year-ago quarter and up 8% from the third quarter.
The producing agent count at the end of the quarter was 1,286.
Net health sales for the full-year 2019 grew 9%.
The sales increase was primarily driven by an increase in agent count.
At United American General Agency, health premiums increased 11% to $108 million, while margins increased 12% to $15 million.
Net health sales were $32 million, up 7% compared to the year-ago quarter.
To complete my discussion of margin operations, I will now provide some projections.
We expect the producing agent count for each agency at the end of 2020 to be in the following ranges: American Income, 5% to 7% growth; Liberty National, 5% to 13% growth; Family Heritage, 2% to 7% growth.
Net life sales for the full-year 2020 are expected to be as follows: American Income, 5% to 9% growth; Liberty National, 8% to 12% growth; direct-to-consumer, down 2% to up 2%.
Net health sales for the full-year 2020 are expected to be as follows: Liberty National, 9% to 13%; Family Heritage, 8% to 12%; United American individual Medicare Supplement, relatively flat.
I want to spend a few minutes discussing our investment operations.
First, excess investment income.
Excess investment income, which we define as net investment income less required interest on net policy obligations and debt was $63 million, a 1% increase over the year-ago quarter.
On a per share basis, reflecting the impact of our share repurchase program, excess investment income increased 6%.
For the year, excess investment income grew 5%, while on a per share basis, it grew 8%.
In 2020, due to the impact of lower interest rates, we expect excess investment income to decline by 2% to 3%, but on a per share basis, be flat to up 1%.
Now regarding the investment portfolio, invested assets are $17.3 billion, including $16.4 billion of fixed maturities and amortized cost.
Now the fixed maturities $15.7 billion are investment-grade with an average rating of A-, and below investment-grade bonds were $674 million, compared to $666 million a year ago.
The percentage of below investment-grade bonds to fixed maturities is 4.1%, compared to 4.2% a year ago.
Overall, the total portfolio is rated A- compared to BBB+ a year ago.
Bonds rated BBB are 55% of the fixed maturity portfolio, down from 58% at the end of 2018.
While this ratio is in line with the overall bond market, it is high relative to our peers.
However, we have less exposure than our peers to higher risk assets such as derivatives, equities, commercial mortgages and asset-backed securities.
We believe that the BBB securities that we acquire, provide the best risk-adjusted, capital adjusted returns due in large part to our unique ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets.
Finally, we had net unrealized gains in the fixed maturity portfolio of $2.5 billion, $97 million lower than the previous quarter.
Now as to investment yield.
In the fourth quarter, we invested $449 million in investment-grade fixed maturities, primarily in the municipal, industrial and financial sectors.
We invested at an average yield of 4.11%, an average rating of A+ and an average life of 31 years.
For the entire portfolio, the fourth-quarter yield was 5.41%, down 15 basis points from the yield of fourth-quarter 2018.
As of December 31, the portfolio yield was approximately 5.41%.
For 2020, at the midpoint of our guidance, we assumed an average new money yield of 4.10% for the full year.
While we would like to see higher interest rates going forward.
Global Life can thrive in a lower for longer interest rate environment.
The extended low interest rates will not impact the GAAP or statutory balance sheets under the current accounting rules, since we sell noninterest-sensitive protection products.
While our net investment income, and to a lesser extent, our pension expense will be impacted in the continuing low interest rate environment, our excess investment income will still grow, it just won't grow at the same rate as the investors' assets.
Fortunately, the impact of lower new money rates on our investment income is somewhat limited as we expect to have an average turnover of less than 2% per year in our investment portfolio over the next five years.
First, I want to spend a few minutes discussing our share repurchases and capital position.
The parent began the year with liquid assets of $41 million.
In addition to these liquid assets, the parent generated excess cash flow in 2019 of $374 million, as compared to $349 million in 2018.
The parent company's excess cash flow, as we define it, results primarily from the dividends received by the parent from its subsidiaries, less the interest paid on debt and the dividends paid to Globe Life shareholders.
Thus, including the assets on hand at the beginning of the year, we had $415 million available to the parent during the year.
As discussed on our prior calls, we accelerated the repurchase of $25 million of Globe Life shares into December of 2018, with commercial paper and parent cash.
We utilized $20 million of the 2019 excess cash flow to reduce the commercial paper for those repurchases, that left $395 million available for other uses, including the $50 million of liquid assets we normally retain as a parent.
In the fourth quarter, we spent $93 million to buy 930,000 Globe Life shares at an average price of $99.82.
For the full-year 2019, we spent $350 million of parent company cash to acquire 3.9 million shares at an average price of $89.04.
So far in 2020, we have spent $33.5 million to buy 322,000 shares at an average price of $104.20.
The parent ended the year with liquid assets of approximately $45 million.
In addition to these liquid assets, the parent will generate excess cash flow in 2020.
While our 2019 statutory earnings have not yet been finalized, we expect excess cash flow in 2020 to be in the range of $375 million to $395 million.
Thus, including the assets on hand at January 1, we currently expect to have around $420 million to $440 million of cash and liquid assets available to the parent in 2020.
As noted on previous calls, we will use our cash as efficiently as possible.
It should be noted that the cash received by the parent company from our insurance operations is after they have made substantial investments during the year to issue new insurance policies, expand our information technology and other operational capabilities and acquire new long-duration assets to fund future cash needs.
With the parent company excess cash flows, if market conditions are favorable and absent alternatives with higher value to our shareholders, we expect that share repurchases will continue to be a primary use of those funds.
We believe a yield to return that is better than other available alternatives and provides a return that exceeds our cost of equity.
Now regarding capital levels at our insurance subsidiaries.
Our goal is to maintain capital at levels necessary to support our current rating.
As noted on previous calls, Globe Life has targeted a consolidated company-action-level RBC ratio in the range of 300% to 320% for 2019.
Although we have not finalized our 2019 statutory financial statements, we anticipate that our consolidated RBC ratio for 2019 will be toward the higher end of this range.
For 2020, we will continue to target a consolidated company-action-level RBC ratio in the range of 300% to 320%.
Finally, with respect to our earnings guidance.
As Gary previously noted, net operating income per share for the fourth quarter of 2019 was $1.70.
In addition, net operating income per share for the full-year 2019 was $6.75.
This was $0.01 above the midpoint of our previous guidance.
Primarily due to greater-than-anticipated life underwriting income at Liberty National and higher excess investment income.
For 2020, we are projecting that net operating income per share will be in the range of $7.03 to $7.23.
The $7.13 midpoint of this guidance is slightly lower than previous guidance due to higher-than-expected employee pension and healthcare costs in 2020.
Those are my comments.
Those are our comments.
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compname reports q4 earnings per share $1.69.
q4 operating earnings per share $1.70.
sees fy 2020 operating earnings per share $7.03 to $7.23.
q4 earnings per share $1.69.
sees net operating income per share will be in range of $7.03 to $7.23 for year ending dec 31, 2020.
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Actual results may differ materially from these statements.
For more information about the factors that can adversely affect Company's results, please see our SEC filings, including our most recent 10-K.
Today's remarks also include certain non-GAAP financial measures.
They worked tirelessly to ensure the successful combination of these 2 high-quality and complementary real estate platforms.
For those of you that were with us before the transaction, please know that if it wasn't for all of the remarkable things that we've accomplished together over the past several years, none of this would have been possible.
I've enjoyed getting to know many of you over the past several months and I have consistently been impressed with your positive attitude and exceptional professionalism.
We're so excited to have you join us as we embark on this new era of excellence.
This merger has been transformative for all of us yet our model remains unchanged.
We are one team with one focus.
As we began to come out of the depths of the pandemic, we talked about how KRG was positioned to seize upon any opportunities that may present themselves.
It was that very same posture that made the merger with RPAI possible resulting in one of the largest open-air owners in the country.
Yet despite the unprecedented stress and dislocation caused by COVID and despite the immense undertaking of completing the merger that impacted every single person at KRG, we were still able to produce a phenomenal quarter of results.
It all goes back to our 3 Ps, Properties, Processes and People and we absolutely excel on all 3 fronts.
The quality of our results also speaks volumes about the health of the retail environment.
The long-term viability of open-air retail real estate and the durability of our cash flows.
Our property serve not only as a last-minute last mile fulfillment hub for retailers but as an access point for consumers and communities.
The demand for our great real estate is evident, not only in traffic which is up versus 2019, but also in the accelerated leasing volumes and resulting spreads.
We signed approximately 5,000 square feet in the third quarter including 7 anchor leases, 3 lease for grocers.
In the past 2 quarters, we leased over 1.2 million square feet which are unprecedented levels for our legacy portfolio.
Blended lease spreads were 20.7% and 13.4% on a GAAP and cash basis respectively.
Our lease rate continues to rebound.
It is now at 92.8% for the portfolio.
This 130 basis point increase from last quarter is another indication of the continuing recovery in our operation and -- operational and financial performance.
The outsize leasing volume continues to widen our total retail portfolio leased to occupied spread to 400 basis points with current sign not-open NOI of approximately $14 million.
Together with the legacy RPAI portfolio, we have signed not-open NOI of approximately $33 million.
Said another way, our stock is significantly undervalued.
One of the drivers behind the widening lease to occupied spread is the success, we are experiencing in our Anchor Acceleration program.
We signed another 5 anchor leases this quarter for a cumulative total of 12 anchor leases since the program's inception.
These 12 leases are expected to generate average cash yields of over 26% with comparable spreads of 14% on a cash basis.
While the program as far from over, I'm very pleased with the progress we've made.
Let's turn to a topic I'm sure you're all focused on.
The merger of RPAI and KRG is a great strategic match that lines up perfectly with many of the macro trends we're seeing impacting our industry.
First, as is with everything in KRG, it's about the real estate.
As you can see from our operating results, our top quality assets are benefiting from being in high-growth, warmer and cheaper markets.
These low tax and business-friendly geographies continue to benefit from the highest population growth and corporate relocations.
This merger more than doubled the GLA and ABR that KRG owns in those markets.
We now have nearly 60% of our ABR in warmer and cheaper markets, 40% of which belongs in Texas and Florida alone.
An added benefit of the merger is that establishing a significant presence in select strategic gateway markets.
The combined portfolio now has 26% of value in superzip [Phonetic] neighborhoods, the second highest percentage in the sector.
Additionally, our portfolio of mix of predominantly grocery-anchored neighborhood and community centers are now complemented by a vibrant mixed use assets, thereby providing greater optionality to help serve both retailers and consumers.
Many of these mixed-use and lifestyle assets have experiential components that were disproportionately impacted by COVID and now are seeing a significant resurgence in demand, while customers reembrace the live, work and play environment.
A final benefit, I'd like to point out is that KRG is now a top 5 open-air shopping center REIT.
The increased scale provide numerous operational and capital market benefits.
On the operational side, we'll be better able to serve retailers by having a balanced variety of additional high-quality assets.
We also believe the combined operations platform will lead to increased NOI margins across the portfolio.
On the capital market side, KRG will become a serial issuer of public bonds that will lower our debt cost and improve our risk profile.
Likewise, the larger equity market cap will make our stock more liquid and expand the universe of potential equity investors.
In addition to the accretion from the merger, synergies will create a significant economic impact from the merger and Heath will address those momentarily.
That being said, we are just as excited about the value of our new entitled land.
Our development philosophy has never been nor will it ever be a mandate.
We evaluate each project based on the needs of the underlying real estate, the timing of the development cycle and the resulting risk-adjusted returns.
Given this mantra, there are times where we may decide it's better to wait or take on a partner to pursue alternatives.
One example is The Corner.
We entered into a 50-50 joint venture to develop 285 apartment units and 24,000 square feet of ground floor retail.
In doing so KRG sold the land to the venture, will earn development fees and is expected to contribute no additional capital.
We will use this discipline to examine all of our real estate included -- including the newly acquired entitled land and determine the best course of action for each opportunity to maximize shareholder value.
No matter what of course of action -- course of action we will take, we will always keep in mind our best-in-class balance sheet.
As part of our due diligence, we had a third party value each of the entitled land parcels.
We believe the approximate value of this entitled land as is with no additional spend is between $125 and $180 million.
That represents a tremendous opportunity for KRG to showcase our capital allocation part.
Regarding the integration of the merger, we are making excellent progress.
We were able to hit the ground running on day 1 due to our pre-close planning.
We not only determine what the combined team would look like, but each business unit had multiple meetings and established both how to integrate the team, their systems and how to operate going forward.
No integration of 2 companies is flawless but we are very pleased where we are to date.
This is a testament to our people.
We are a premier open-air shopping center REIT and I'm proud of the progress our team has made.
KRG remains committed to its primary focus of continuing to grow operating cash flows.
The completed merger paired with a strong quarter of operational results is another step in the right direction.
I can't emphasize enough how excited I am about the processes, properties and especially the people of KRG.
I want to echo John's gratitude for all the hard work that's gone into completing the transaction and the ongoing integration activities.
We are confident that when the dust settles, KRG will have a best-in-class platform across every single business unit.
We are looking forward to doing great things together.
To say this transaction has been full circle for me is an understatement, suffice to say that life works in mysterious ways.
Turning to KRG's stand-alone third quarter results, we generated $0.25 of NAREIT FFO and $0.33 of FFO as adjusted.
As a reminder, we were reporting 2021 FFO on an as adjusted basis so as to reduce the noise associated with 2020 receivables, 2020 bad debt and the cost associated with the merger.
As set forth on page 19 of our supplemental, the net 2022 collection impact in the third quarter was minimal with the collection of $2.4 million of prior bad debt, offset by $300,000 of accounts receivable we now deemed uncollectible.
Our same property NOI growth for the third quarter is 10.8% primarily driven by a reduction in bad debt as compared to the prior year period.
This includes the benefit of approximately $2.1 million of previously written-off bad debt that we collected in the third quarter.
Excluding those amounts, our same-store NOI growth would be 6%.
It is also important to note that when evaluating our same-store results for 2021, keep in mind that KRG consistently achieved the highest levels of rent collections in 2020, thereby trading more challenging comparable period.
With respect to outstanding accounts receivable items as of last Friday, the balance on our outstanding deferred rent stands at $1.7 million as compared to $6.1 million as of December 31, 2020.
Our small business loan program has been extremely successful and not a single borrower under the program is delinquent or has defaulted.
Our balance sheet and liquidity profile not only remain solid but continue to improve.
Our net debt to EBITDA was 6.1 times, down from 6.4 times last quarter.
Pro forma for the merger, third quarter net debt to EBITDA is 6 times along with roughly $1 billion of liquidity, adding in $33 million of signed not-open NOI for the combined portfolio, our net debt to EBITDA would be 6 times.
We are in a great position to not only weather any storm, but to also take advantage of any opportunities that present themselves.
We are also proud to announce our inaugural credit rating from Fitch Ratings of triple B with a stable outlook.
We believe, along with our investment grade ratings from Moody's and S&P, the KRG is well positioned to establish itself as a serial public bond issuer.
I know many of you are anxious to understand the full earnings accretion associated with the merger and we are equally anxious to share with you the details behind our growing enthusiasm.
However, in light of the fact that we just closed the merger last week and that we are in the middle of our budget season prudence dictates that we wait until we give our combined fourth quarter results and 2022 guidance early next year.
What I can share is that with each day our conviction regarding the merger grows exponentially.
In the meantime, to help with your modeling, we can provide some additional detail regarding synergy savings.
As a reminder, we estimated stabilized cash synergies of $27 million to $29 million and stabilized GAAP synergies of $34 million to $36 million.
As of today, we are still comfortable with that range.
In fact, as of the closing approximately $21 million of annualized GAAP savings have already been achieved.
It is important to note that we anticipate realizing on the additional annualized $13 million to $15 million of GAAP synergies over the next 12 to 18 months.
We will provide updated detail with respect to the timing of the remaining synergies when we report our combined fourth quarter results and 2022 guidance.
Finally, due to the timing of the closing of the merger and the challenge in -- challenge of determining correct guidance for a partial quarter we are suspending our 2021 guidance.
We are confident based on performance to date that KRG's stand-alone 2021 results are on track to outperform our last published guidance.
I will further share that based on our initial review of the preliminary operating results for RPAI in the third quarter, it would be safe to assume that they were also on track to outperform the last published guidance.
We look forward to reporting combined fourth quarter results and issuing 2022 guidance in February.
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q3 ffo per share $0.25.
due to timing of merger, which closed in q4, krg is withdrawing 2021 guidance.
qtrly funds from operations, as adjusted, of operating partnership (ffo) $0.33 per share.
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Let's begin with the highlights on the Slide 4.
Our sales for the quarter were $296 million.
We had a significant headwind in our automotive segment, due to the ongoing supply chain disruptions, particularly the semiconductor shortage.
That shortage led to Auto OEM production slowdowns and some cases production shutdowns.
This in turn led directly to lower sales in our Automotive segment, especially in North America.
Helping to offset that auto headwind were near record sales in our Industrial segment.
There was strength in sales across all our industrial product categories, but in particular, we saw growth in electric vehicle busbars, commercial vehicle lighting and radio remote controls.
Respectively, these products are benefiting from the macro growth trends of electrification, e-commerce and automation.
The industrial sales in our portfolio relative our Automotive sales continue to grow.
As I mentioned, our team continuing to face supply chain challenges.
These include the ongoing semiconductor chip shortage, pandemic-related supply chain disruptions and port congestion, all of which are increasing costs and consequently negatively impacting margins.
Our team has worked diligently to mitigate these challenges, which in many cases require remedial actions such as expedited shipping and premium component pricing.
In addition, we are working relentlessly with our customers to share in the absorption of these costs.
The timing of these cost recoveries is not certain.
At this point, our expectation is that these conditions will last until the end of our fiscal year.
This extended period of demand recovery and margin pressure is a driver of our revised guidance for the full fiscal year.
The situation is fluid and our mitigation efforts are ongoing, but we are confident that we will continue to execute and meet our customers' requirements.
Ron will provide more detail on our guidance later in the call.
On the new order front, we were encouraged by the diversity of awards across key applications.
In addition to our traditional automotive market, we secured awards of cloud computing, commercial vehicle and EV applications.
Focusing on EV, last quarter, we reported that sales into EV applications were 16% of the consolidated sales.
This quarter, EV sales were again 16% of consolidated sales.
However, on a dollar basis, they were higher and in fact, we were a record for Methode.
Our expectation for that percentage for the full year continues to be in the mid-teens.
In the quarter, we further reduced debt, generated positive operating cash flow and continued to return capital to shareholders.
Our free cash flow was positive even though we invested in inventory to support our deliveries to customers and to help mitigate supply chain disruptions.
While our debt was down, we did have an increase in net debt as we utilized a portion of our available cash to execute a $35 million share buyback in the quarter.
We have now executed half of $100 million stock buyback authorization since it was announced last March.
Before I provide detail on our business awards, I want to provide some information on an existing program.
I can now share with you a little more detail on our largest truck center console program.
We expect a small portion of that sales from this program to start to roll off late this fiscal year, which was included in our original full-year guidance.
Then in fiscal 2023, we expect the bulk of the remaining truck program sales to roll off in the range of $90 million to $100 million.
The fiscal 2024 impact is negligible.
As I've mentioned in recent quarters, our business awards over the last couple of years have put us on track in aggregate to replace the sales from the roll off of this truck program.
Moving to Slide 5.
Methode had another solid quarter of business awards.
These awards continue to capitalize in key market trends like cloud computing and vehicle electrification.
The awards identified here represent some of the key business wins in the quarter and represent $25 million in annual sales at full production.
In non-EV automotive, we're awarded programs for lighting and user Interface applications.
In cloud computing, we saw demand for our power distribution products in data center applications.
In commercial vehicles where signs of an upcycle continue, we were awarded programs for exterior lighting solutions.
In EV, we want awards for switch, lighting and power distribution programs.
Overall, our business are delivering on our strategic priority to drive customer product and geographic diversity.
To conclude, despite the ongoing demand fluctuations and supply chain challenges, we are still in a position to deliver solid organic growth sales for fiscal 2022, while generating positive free cash flow.
Second quarter net sales were $295.5 million in fiscal year '22 compared to $300.8 million in fiscal year '21, a decrease of $5.3 million or 1.8%.
The year-over-year quarterly comparisons included a favorable foreign currency impact on sales of $2.8 million in the current quarter.
Sequentially, sales increased by $7.7 million or 2.7% from the first quarter of fiscal year '22.
The decrease in second quarter sales was mainly due to lower automotive sales, especially in North America as compared to the same period in fiscal '21, which benefited from the rebound from the depths of the impact of COVID-19 pandemic experience in our first quarter of fiscal year '21.
The sales decrease was partially offset by higher sales of electric hybrid vehicle products, which amounted to 16% of sales in the second quarter of fiscal 2022, which was in line with our previous communication at electric and hybrid vehicles sales would comprise a mid-teens percentage of our fiscal year '22 consolidated sales.
In addition, stronger commercial vehicle sales contributed to the robust industrial segment sales growth.
Second quarter net income decreased $11.1 million to $27.5 million or $0.72 per diluted share from $38.6 million or $1.01 per diluted share in the same period last year.
Net income was negatively impacted from decreased sales, the impact of higher materials and logistics costs and other operating costs in the efficiencies, due to the global supply chain shortages and logistics challenges, higher stock-based compensation cost, and lower other income, partially offset by lower restructuring costs and favorable foreign currency translation.
Second quarter gross margins were lower in fiscal year '22 as compared to fiscal year '21, mainly due to higher material and logistics costs, including freight and supply chain shortages and unfavorable product mix.
Fiscal year '22 second quarter margins were 23.4% as compared to 26.9% in the second quarter of fiscal year '21.
The negative impact of supply chain disruption and higher logistics costs, including freight on the second quarter fiscal year '22 gross margin was approximately 250 basis points.
Unfavorable product mix also impacted gross margins.
These higher costs that were experienced in the second quarter are expected to continue and further into fiscal year '22.
In addition, we had anticipated a degree of cost inflation in the remainder of the current fiscal year.
Fiscal year '22 second quarter selling and administrative expenses, as a percentage of sales, increased to 10.6% compared to 10.2% in the fiscal year '21 second quarter.
The minor fiscal year '22 second quarter percentage increase was achieved, but all to higher stock-based compensation, partially offset by lower professional fees and restructuring costs.
The second quarter of fiscal year '22 selling and administrative expenses percentage is in line with our historical norm, which should yield an efficient flow-through from gross margin to operating income.
In addition to the gross margin and selling and administrative items mentioned above, one other non-operational items significantly impacted net income in the second quarter of fiscal year '22 as compared to the comparable quarter last fiscal year.
Other income net was down by $1.7 million, mainly due to lower international government assistance between the comparable quarters and increased foreign exchange losses from remeasurement.
The effective tax rate in the second quarter of fiscal year '22 was 16.7% as compared to 16.5% in the second quarter of fiscal year '21.
The fiscal year '22 full-year estimate, which does not include any discrete items, is estimated to be between 17% and 18%, tightening the high end of the range down from 19% to 18%.
Shifting to EBITDA, a non-GAAP financial measure, fiscal year '22 second quarter EBITDA was $47.4 million versus $60.2 million in the same period last fiscal year.
EBITDA was negative negatively impacted by lower operating income and lower other income.
In the second quarter of fiscal year '22, we reduced gross debt by $12.3 million, and we ended the second quarter with $177.2 million in cash.
During the first six months of fiscal year '22, net debt a non-GAAP financial measure, increased by $39 million, mainly due to the share repurchases of $42.4 million and unfavorable working capital changes, especially related to inventory, which increased by nearly $26 million due to the supply chain-related challenges.
Regarding capital allocation on March 31, we announced a $100 million share repurchase program, which we executed nearly $35 million of purchases during the second quarter of fiscal year '22.
Since the authorization's approval, we purchased nearly 50 million worth of shares at an average price of $44.04.
Free cash flow, a non-GAAP financial measure as defined as net cash provided from operating activities, minus capex.
For the fiscal year '22 second quarter, free cash flow was $21.6 million compared to $36.7 million in the second quarter of fiscal year '21.
The decrease was mainly due to negative working capital changes, especially from the inventory items we discussed prior.
We experienced sequentially improved free cash flow in the second quarter of fiscal '22 as compared to the first quarter of fiscal '22.
We anticipate our proven history of generating reliable cash flows, which allows for ample funding of future organic growth, inorganic growth and continued return of capital to the shareholders.
In the second quarter of fiscal year '22, we invested approximately $5.4 million in capex as compared to $3.6 million in the second quarter of fiscal year '21.
The higher capex is in line with our expectation that capex in fiscal year '22 would be higher than the investment in the prior fiscal year.
We now estimate fiscal year '22 capex to be in the $45 million to $50 million range, which is lower than the prior estimates for the current fiscal year of $50 million to $55 million we provide earlier.
The decrease is simply the result of the timing of the cash outflows of approved projects as opposed to a concerted effort to slow or reduce the guidance of capital investment.
Investing for future organic growth and vertical integration remains a key priority from a capital allocation strategy perspective.
We do have a strong balance sheet, and we'll continue to utilize it by continuing investment in our businesses to grow them organically.
In addition, we continue to pursue opportunities for inorganic growth in a measured return of capital to the shareholders.
Regarding guidance, it is managed -- it is based on management's best estimates.
External events and the related potential impact on our financial results remain an ongoing challenge.
As Don mentioned in his remarks, we lowered our previously issued revenue and earnings per share guidance, largely due to the persistent headwinds from the ongoing negative impact of the chip shortage and logistics challenges.
As you recall in our September conference call, we noted that the persistent headwinds could call our performance to be below the midpoint of the ranges of our original guidance as a situation was fluid and would likely remain challenging.
These headwinds continue to adversely impact our second quarter results and will likely be with us for the remaining six months of our fiscal year.
The revenue range for full fiscal year '22 is between $1.14 billion and $1.16 billion, down from a range of $1.175 billion to $1.235 billion.
Diluted earnings per share range is now between $3 per share and $3.20 per share, down from $3.35 to $3.75 per share.
The range is due from the uncertainty from the supply chain disruption for semiconductors and other materials on both Methode and as customers.
From a sales perspective, lower sales could result from a supply disruptions to us or our customers, which could result in lesser demand for our products or our ability to meet customer demand.
Continued supply chain disruption would also negatively impact gross margins, due to additional costs incurred from premium freight, factory inefficiencies and a lesser extent, other logistic factors such as port congestion.
Higher costs for materials, freight and labor are a constant and a dynamic battle, and we remain uncertain as to when things will stabilize.
Don, that concludes my comments.
Matt, we are ready to take questions.
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q2 earnings per share $0.72.
q2 sales $295.5 million.
sees fy earnings per share $3.00 to $3.20.
sees fy sales $1.14 billion to $1.16 billion.
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I know many of you have had the opportunity to speak with Amber, our new Director of Investor Relations.
Ken has a proven track record of leading high-performing teams and delivering results at several diverse global organizations.
We are excited to have Ken on our team.
Ken will then provide additional financial details on the third quarter and then I'll come back to discuss our outlook for the fourth quarter.
Our global team continues to demonstrate tremendous resiliency, adapting the changing market conditions and working hard to service the demands of our customers.
I'm incredibly proud of how our teams have worked together during these challenging times to achieve such strong financial results, delivering record quarterly EBIT, double-digit EBIT margins in all three businesses and record free cash flow.
All of this was accomplished while maintaining our focus on keeping each other as well as our customers and suppliers healthy and safe, ramping up manufacturing operations throughout the quarter to service increasing customer demand and supporting our communities as we continue to operate through this global health crisis.
Before discussing our markets and financial results in more detail, I'll start with safety.
As you know, safety is a top priority for our company.
Year-to-date 57% of our global facilities remain injury free.
In the third quarter, while we continue to perform at a high level with a recordable incident rate of 0.73, this result was above our third quarter 2019 performance and reminds us of the daily focus we must have on safety in order to achieve an injury free workplace.
Turning to financial results, our performance this quarter was better than what we outlined during our last earnings call as we saw customer demand continue to improve throughout the quarter in most of our end markets.
Revenues were $1.9 billion, up 1% compared with the same period last year and adjusted EBIT was $289 million, up 4%.
These results continue to demonstrate the strength of our company's market leading position, broad product offering and improved operating efficiencies to generate substantial free cash flow and deliver sustainable shareholder value.
On our last two calls, I've discussed four key areas, we have focused on this year to ensure the strength and continuity of our business.
First, keeping our employees and other key stakeholders healthy and safe, second, staying closely connected to our customers, our suppliers and our markets, third, rapidly adapting our businesses to near-term changes in market conditions, while remaining focused on positioning us for long-term success, and fourth, ensuring a strong balance sheet with access to capital as needed.
We have managed these four priorities well through the pandemic and expect to finish the year strong, while we position ourselves for 2021.
Overall, we continue to see our end markets recover during the quarter, but at different rate.
Our residential markets, especially, in the United States are being fueled by robust demand for new single-family housing as well as increased repair and remodeling investments as owners upgrade their homes and expand their living spaces.
Our commercial and industrial markets are also seeing improvements, but we continue to expect these to recover at a slower pace as we finished 2020.
In the third quarter, our Roofing business delivered revenue and earnings growth.
Increased storm activity and continued remodeling growth drove significantly higher market demand in the quarter.
While our manufacturing and supply chain teams worked hard to service the higher demand, our volumes trail the overall market growth due to limited inventory levels entering the quarter.
We remain focused on improving our service cycles and plan to continue running our facilities at full capacity to meet near-term demand, while ensuring we are positioned to support our customers and service expected market demand in 2021.
In composites, volumes also continue to improve throughout the quarter with revenues down just 2%.
Our focus on specific end markets, such as building and construction and wind energy combined with our local supply chain model in specific geographic regions, continues to pay dividends as we grow our volumes.
This along with our continued focus to drive operational efficiencies through manufacturing productivity and network optimization led to double-digit EBIT margins in the quarter.
And in insulation, revenues also finished down 2% with EBIT margins of 11% driven primarily by the additional growth we saw in our North American residential fiberglass business.
As I stated earlier, we continue to see the U.S. housing market strengthening with demand around 1.4 million units on a seasonally adjusted basis for the last three consecutive months.
Given the market demand we are currently seeing and that is forecasted for 2021, we have initiated work to restart our batt & roll insulation line at our Kansas City facility.
We would expect to have this line back up and running during the second quarter of next year.
Our focus in this business has been to operate the most efficient and most flexible manufacturing network, which positions us to quickly respond to changing market conditions to service our customers and deliver strong financial performance.
As we continue to adapt our operations to service the changing market environment, we remain focused on generating strong free cash flow and maintaining an investment grade balance sheet.
Last quarter, we discussed our focus on evaluating our liquidity needs, prioritizing deleveraging the balance sheet and maintaining our dividend.
In the third quarter, given our cash flow, we were able to execute on all these areas, finishing the quarter with more than $1.7 billion of liquidity.
Before turning it over to Ken to discuss our third quarter financial results in more detail, there is one other item I would like to cover.
She will become the Senior Vice President of Corporate Affairs and General Counsel at Whirlpool Corporation.
During her five years with Owens Corning, Ava played a key role in shaping the direction of our company and driving our success.
We are currently exploring alternatives to identify her successor, and we'll make an announcement when our evaluation is complete.
First, let me say that I'm honored by the opportunity to join the OC team and to contribute to the future success of this company.
While only on day number 50, I'm already impressed with the resilience of the company and the dedication of our people.
Every day reaffirms for me that OC is truly global in scope and human in scale.
His leadership during this unprecedented time was crucial, and the company's financial strength is a testament to the quick and decisive actions taken by Prith and the leadership team.
Now turning to our results.
On Slide 5, the company's third quarter performance demonstrates the strength of Owens Corning and its ability to generate strong financial results in an improving, but still challenging environment.
The company has reduced its debt position and retains ample liquidity in light of the continued market uncertainty.
For the third quarter, we reported consolidated net sales of $1.9 billion, up approximately 1% over 2019.
In the quarter we saw solid revenue growth in our Roofing business while revenues in our Composites and Insulation businesses declined slightly.
Through the quarter, the residential recovery in the U.S. has continued to accelerate while commercial, industrial and non-U.S. residential markets have recovered at a slower pace as expected.
Adjusted EBIT for the third quarter of 2020 was $289 million, up $12 million compared to the prior year, highlighted by the continued recovery in residential end markets, primarily in the U.S. All three businesses achieved double-digit EBIT margins as a result of the company's market-leading positions and continued focus on our key operating priorities.
Net earnings attributable to Owens Corning for the third quarter of 2020 was $206 million, compared to $150 million in Q3 of 2019.
Adjusted earnings for the third quarter were $186 million or $1.70 per diluted share compared to $176 million or $1.60 per diluted share in Q3 2019.
Depreciation and amortization expense for the quarter was $120 million, up $8 million as compared to last year.
Our capital additions for the third quarter were $68 million, down $114 million versus 2019.
On Slide 6, you see adjusted items reconciling our third quarter 2020 adjusted EBIT of $289 million to our reported EBIT of $296 million.
During the third quarter, we recognized $7 million of gains on the sale of certain precious metals.
We've excluded these gains from our adjusted EBIT.
I would also like to highlight one item related to adjusted EPS.
We've adjusted out a $13 million non-cash income tax benefit related to regulations that were issued during the third quarter associated with U.S. corporate tax reform.
This adjustment is described in more detail in the notes of our 10-Q.
Slide 7 provides a high level overview of the changes in third quarter adjusted EBIT from 2019 to 2020.
Adjusted EBIT of $289 million increased $12 million as compared to the prior year.
Roofing EBIT increased by $53 million, insulation EBIT decreased by $11 million and composites EBIT decreased by $12 million.
General corporate expenses of $35 million were up $18 million versus last year, primarily due to higher incentive compensation expense associated with our improved financial outlook.
In addition, the timing of smaller one-time items more than offset benefits from our ongoing cost control initiatives.
Now I'll provide more details on each of the business results, beginning with Insulation on Slide 8.
Insulation sales for the third quarter were $681million down 2% from Q3 2019.
During the quarter, volume growth in North American residential fiberglass insulation was more than offset by lower selling prices for the overall segment and lower volumes and technical and other building insulation.
Volumes were down in technical and other due to the impacts of COVID-19, however, we saw some sequential improvement within the quarter.
EBIT for the third quarter was $73 million, down $11 million as compared to 2019.
The decline was driven by lower year-over-year selling prices, the negative impact of lower volumes in technical and other, and slightly higher delivery costs.
The benefit of higher sales volumes from the recovery in North American residential and favorable manufacturing performance, partially offset these impacts.
For the Insulation business overall, our sequential operating leverage from Q2 to Q3 was 48%, in line with the outlook provided on the Q2 call.
Sales in composites for the third quarter were $521 million, down 2% as compared to the prior year due to lower selling prices and unfavorable product mix.
Overall, sales volumes were flat year-over-year.
During the third quarter we saw certain regional markets began to recover and continued to see strong performance in our wind and roofing downstream specialty applications.
EBIT for the quarter was $55 million, down $12 million from the same period a year ago but up significantly from EBIT of $6 million reported in Q2 of 2020.
Our results continue to be impacted by COVID-19 demand variability.
The EBIT decline in the quarter was primarily driven by the negative impacts of production curtailments and lower selling prices, partially offset by favorable manufacturing performance.
Unfavorable customer mix and negative foreign currency translation were largely offset by lower selling, general and administrative expenses, input cost deflation and lower delivery costs.
Sequentially, from Q2 to Q3, we generated operating leverage of 40%.
Slide 10 provides an overview of our Roofing business.
Roofing sales for the quarter were $761 million, up 7% compared with Q3 of 2019, driven by 12% volume growth, which was partially offset by lower year-over-year selling prices and lower third-party asphalt sales.
In the third quarter, the U.S. asphalt shingle market grew significantly as compared to the prior year, primarily due to continued strength in repair and remodeling as well as increased storm activity.
EBIT for the quarter was $196 million, up $53 million from the prior year, producing 26% EBIT margins for the quarter.
The EBIT improvement was driven by higher sales volumes, input cost deflation and favorable manufacturing performance, partially offset by lower selling prices.
The current pricing environment has improved sequentially with the realization of our August increase, partially offsetting the year-over-year headwind from the lack of a spring price increase.
In addition, the benefit of asphalt cost deflation and slightly lower delivery cost more than offset the negative impact of lower year-over-year selling prices.
As a result, we maintained a favorable price-cost relationship in the quarter and cash contribution margins were solid, as we exited the quarter.
Turning to Slide 11, I'll discuss significant financial highlights for the third quarter of 2020.
We continue to manage our working capital balances, operating expenses and capital investments.
As a result of disciplined actions taken and the recovery of U.S. residential markets, our third quarter free cash flow reached a record quarterly level and our year-to-date free cash flow of $514 million was $232 million higher than the same period last year.
In the last earnings call, we highlighted the company's focus on strengthening liquidity, deleveraging the balance sheet and maintaining the dividend.
Based on our strong cash flow performance and deleveraging activities, we're operating within our target debt to adjusted EBITDA range of 2 to 3 times with ample liquidity.
I'd like to highlight our progress and evolution in this space.
During the quarter, we repaid the remaining $190 million that was drawn on our revolver at the end of the first quarter.
We also repaid the remaining $150 million balance of the term loan in advance of the February 2021 due date.
We maintained our dividend in the third quarter and have returned $159 million to shareholders so far this year through dividends and share repurchases.
As of September 30th, the company had liquidity of more than $1.7 billion, consisting of $647 million of cash and cash equivalents and nearly $1.1 billion of combined availability on our revolver and receivable securitization facilities.
We continue to focus on maintaining an investment grade balance sheet and are evaluating additional U.S. pension contributions in the range of $50 million to $100 million to further delever the balance sheet and improve our credit metrics.
Through our teamwork and consistent execution, we are positioned well to capitalize on both the near-term market recovery as well as longer-term secular trends.
However, we continue to face uncertainties with the pandemic and potential government responses and expect our financial performance to be impacted by market disruptions caused by COVID-19.
Broadly speaking, we have experienced a much faster recovery in our residential end markets, while commercial and industrial end markets are following at a slower pace.
Given this continued market performance, we would expect the company to deliver revenue and adjusted EBIT in the fourth quarter at or above last year, driven by our innovative product offering and broad market reach.
Based on trends we are seeing in October, I'll provide some additional details by business, starting with Insulation.
Within our North American residential business, we saw continued strengthening in U.S. new residential construction.
While lagged housing starts in Q4 will be higher versus prior year, we expect our volumes will be relatively flat based on current supply constraints and limited inventories.
In our technical and other building Insulation businesses, October volumes are trending down mid-single-digits versus prior year.
We expect year-over-year volumes will continue this trend through the fourth quarter based on a steady but slower recovery in commercial and industrial end markets.
Prices through the third quarter remained relatively stable in both our North American residential and our technical and other Insulation businesses, however, we continued to face a negative year-over-year price carryover.
While we are seeing positive traction from the mid-September residential insulation price increase, we don't expect to come positively yet in the fourth quarter.
As we move into 2021, we recently announced an 8% price increase for our U.S. residential Insulation business effective January 11th.
Overall for our Insulation business in the fourth quarter, we expect results to be slightly better than our EBIT in Q3.
In Roofing, third quarter industry shingle shipments were up about 25% with our volumes tracking below the market due to supply constraints driven by low inventories entering the quarter.
Our October shipments have started the quarter higher than prior year.
Based on current trends we could see year-over-year market volumes for the fourth quarter up a similar percentage to what we saw in the third quarter, depending on the timing of winter weather.
Given our third quarter volumes, we would expect to outperform the market in Q4 to service out-the-door demand and improve distributor inventory positions of our products.
In the fourth quarter, we should continue to see realization from our August price increase, offsetting the year-over-year headwind from the lack of a spring price increase.
However, we expect to see some continued pricing headwinds in the quarter driven by higher rebates versus 2019, due to this year's increased Roofing demand.
Deflation from expected seasonal declines of asphalt costs should result in another quarter of positive price cost mix.
Based on all these factors, roofing EBIT margins in the fourth quarter should remain strong, but could be slightly lower than Q3 due to seasonally lower shipping volumes.
In Composites, Q3 shipments improved throughout the quarter.
Given this trend, we could see volumes in Q4 similar to the first quarter with overall demand continuing to recover.
While transactional pricing remains relatively stable, we continue to expect a similar pricing headwind in Q4 as we realized in Q3.
As we work through our annual contract negotiations with customers, we've announced price increases in most of the regions we serve, which could impact 2021.
We remain committed to tightly managing our inventory levels, which will continue to impact our manufacturing performance in the fourth quarter as we curtail production to meet demand.
Similar to the last several years, we expect to see our overall fourth quarter revenue and EBIT performance similar to what we saw in the first quarter with an additional $5 million headwind related to rebuild costs.
With that view of our businesses, I'll discuss a few key enterprise focus areas.
We continue to closely manage our operating expenses and capital investments.
We expect corporate expenses for the company to be approximately $125 million, primarily due to additional incentive compensation tied to our earnings outlook.
And we expect capital investments to be at the high end of the range we previously provided of $250 million to $300 million.
In terms of our capital allocation, we remain committed to generating strong free cash flow into our target of returning at least 50% to investors over time.
So far this year we have returned $159 million through share repurchases and dividends and we'll pay our third quarter dividend of approximately $26 million next week.
In our last call, we said we would focus on deleveraging the balance sheet and maintaining our dividend, we increased liquidity to over $1.7 billion, paid down the revolver and term loan and paid our dividend in the quarter.
Going forward, we will continue to manage our liquidity needs, remaining focused on supporting the dividend, while evaluating additional pension contributions and potential share repurchases.
As I stated at the beginning of the call, our team continues to execute very well, adapting to changing market conditions while remaining committed to operating safely, servicing our customers and creating value for our shareholders.
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compname reports q3 adjusted earnings per share $1.70.
q3 adjusted earnings per share $1.70.
q3 sales $1.9 billion versus refinitiv ibes estimate of $1.81 billion.
expects covid-19 pandemic will continue to create uncertainty in its end markets.
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For today's call, I will provide opening comments, followed by Preston with an update on the Wright Medical integration.
Glenn will then provide additional details regarding our quarterly results before opening the call to Q&A.
For the quarter, we posted organic sales growth of 9.3%, reflecting growth versus 2019 for all our major businesses.
This strong result was driven by standout performances from Neurovascular, Mako, emergency care, sports medicine and our U.S. shoulder and total ankle products.
Each of these posted very strong double-digit growth.
International organic growth outpaced the U.S. at 14.2% despite COVID challenges in some countries.
We posted double-digit growth in most regions, including excellent results in South Pacific, China, Canada, South Korea and many countries in Western Europe.
We were also pleased to see the continued rebound in elective procedures as both hips and knees saw quarter-over-quarter sequential improvement and both returned to growth.
Also, now that we have a fuller appreciation of Wright Medical, we are delighted to have it within the Stryker family.
With our first half organic growth of 7.1%, combined with continued recovery of electric procedures, a strong order book across our capital businesses and new product innovations, we have increased confidence in the full year outlook.
This is reflected in our upward narrowing of organic sales guidance to 9% to 10% compared to 2019.
Our sales performance carried through the rest of our results with strong margin performance and adjusted earnings per share growth and cash flow conversion of over 100% in the quarter.
Through the remainder of the year, we do expect a disciplined increase in spending to support our future growth expectations.
Our bullish sales outlook, combined with ongoing execution on margins and continued progress on Wright Medical integration has resulted in a raised full year adjusted earnings per share guidance of $9.25 to $9.40 a share.
I continue to be impressed with the resiliency of our people and culture, which positions us well for a successful 2021 and beyond.
My comments today will focus on the second quarter performance of our combined Trauma and Extremities business, including an update on the ongoing integration of Wright Medical.
During the quarter, our combined worldwide Trauma and Extremities business, including Wright Medical had a strong performance, growing 7% compared to 2019.
The performance in the quarter was driven by double-digit growth in our U.S. Trauma and Upper Extremities businesses.
U.S. businesses were benefited by the recovery from COVID-related restrictions, which continues to outpace the rest of the world as well as the ongoing execution of the U.S. selling integration.
The Trauma business unit was positively impacted by the reopening of economies and the continued strong performance of key products, including T2 Alpha, and the mini-frag plating system.
Our U.S. upper extremities business, which remains number one in shoulder arthroplasty, grew strong double digits in the quarter behind continued strength within reverse ARPA plastic portfolio with Perform reverse and revision driving the growth.
The upper extremities performance in the quarter was enhanced by the continued adoption of our BLUEPRINT planning software with approximately 50% of total shoulder cases completed using BLUEPRINT.
As a result of the strong performance of our Trauma and Extremities business, which grew approximately 5% in the first half of the year, we are confident in the combined business to grow at least 6% for the full year when compared to 2019.
We are now about nine months into the integration of Wright Medical and we remain very pleased with the progress and efficiency at which the team is moving through the integration.
The U.S. integration is pacing ahead of our expectations and cross-selling has begun in a limited capacity.
We expect to continue to execute on our cross-selling priorities during the second half of the year as we work to fortify the supply chain and processes to support cross-selling activities.
Outside the U.S., the teams have successfully executed integration plans in several key markets, including the U.K., Germany, France, Japan and China with further countries to follow into 2022.
In addition to the commercial activities, we are also executing on the integration of other operational areas, including the consolidation of distribution and sales offices, harmonization of key operational processes and executing on our manufacturing site strategy.
Within R&D, the team also continues to make progress on aligning the long-term portfolio, pipeline strategies and harmonized design processes.
While the team has moved through the integration, they have also remained focused on executing the critical existing projects in the pipeline.
This includes the recent launch of the new Tornier Perform humeral system, which offers clinical solutions for the simplest and most complex arthroplasty procedures and delivers on our mission to make healthcare better for surgeons and the patients they serve.
Today, I will focus my comments on our second quarter financial results and the related drivers.
As a reminder, we are providing our comments in comparison to 2019 as it is a more normal baseline given the variability throughout 2020.
Our organic sales growth was 9.3% in the quarter.
The second quarter included the same number of selling days as Q2 2019 and Q2 2020.
Compared to 2019, pricing in the quarter was unfavorable, 0.6% versus Q2 2020, pricing was 5% unfavorable.
Foreign currency had a favorable 1.5% impact on sales.
During the quarter, we saw a recovery ramp of elective procedures and accelerated sales momentum as the impact of the COVID-19 pandemic has eased in most geographies.
However, the recovery ramp of elective procedures continues to be variable by region and geography and has a more pronounced impact on our orthopedic and spine implant businesses.
For the quarter, U.S. organic sales increased by 7.5%, reflecting the recovery of our procedural business and continued strong demand for Mako, medical products and neurovascular products.
During the quarter, we had strong sequential improvement in all our U.S. businesses.
International organic sales showed strong growth of 14.2%.
Our adjusted quarterly earnings per share of $2.25 increased 13.6% from 2019, reflecting sales growth and operating margin expansion, partially offset by higher interest charges resulting from the Wright Medical acquisition and a somewhat higher quarterly effective tax rate.
Our second quarter earnings per share was positively impacted from foreign currency by $0.04.
Now I will provide some highlights around our segment performance.
Orthopaedics had constant currency sales growth of 26% and an organic sales growth of 6.7%, including an organic growth of 8% in the U.S.
This reflects a ramp-up in elective procedures, especially in knees and trauma and extremities.
Our knees business grew 7.5% in the U.S., reflecting the strong bounce back as the COVID-related restrictions were lifted.
Other Orthopaedics grew 26.5% in the U.S., primarily reflecting strong demand for our Mako robotic platform, partially offset by declines in bone cement.
Internationally, Orthopaedics grew 4% organically, which reflects sequential improvement as the COVID-19 impacts have started to ease in Europe, strong momentum in Mako internationally and strong performances in Australia.
For the quarter, our Trauma and Extremities business, which includes Wright Medical, delivered 7% growth on a comparable basis.
In the U.S., comparable growth was 12.5%, and which included double-digit growth in our Upper Extremities and Trauma businesses.
In the quarter, MedSurg had constant currency and organic sales growth of 8.3%, which included 6.4% growth in the U.S. Instruments had a U.S. organic sales growth of 0.9%, primarily related to growth in smoke evacuation, lighted instruments and skin closure products partially offset by slower growth in power tools.
As a reminder, during the second quarter of 2019, Instruments had a very strong growth of approximately 19%.
Endoscopy had U.S. organic sales growth of 6%, reflecting strong performances in our Sports Medicine, general surgery and video products.
The Medical division had U.S. organic growth of 13.4%, reflecting continued double-digit performance in our emergency care business.
Internationally, MedSurg had organic sales growth of 15.9% and reflecting strong growth in the Endoscopy, Instruments and Medical businesses across Europe, Canada and Australia.
Neurotechnology and Spine had organic growth of 15.5%.
This growth reflects double-digit performances in all four of our Neurotech businesses: CMF, Neurovascular, Neurosurgical and ENT.
It also reflects very strong growth in our neurovascular business of approximately 30%.
Our U.S. Neurotech business posted an organic growth of 17.3% and highlighted by strong product growth in Sonopet IQ, bipolar forceps, max space, cryotherapy and nasal implants.
Additionally, our U.S. Neurovascular business had significant growth in all categories of our products, including hemorrhagic, flow diversion and ischemic.
Internationally, Neurotechnology and Spine had organic growth of 28.8%.
This performance was driven by strong demand in China and other emerging markets as well as Europe and Australia.
Now I will focus on operating highlights in the second quarter.
Our adjusted gross margin of 66% was a favorable approximately 15 basis points from second quarter 2019 compared to the second quarter in 2019, gross margin was primarily impacted by business mix and acquisitions, primarily offset by price.
Adjusted R&D spending was 6.6% of sales, reflecting our continued focus on innovation.
Our adjusted SG&A was 33.4% of sales, which was slightly better than the second quarter of 2019.
The reflects our continued cost discipline and fixed cost leverage, offset by the impact of the Wright Medical acquisition.
In summary, for the quarter, our adjusted operating margin was 25.9% of sales, which is five basis points improvement over the second quarter of 2019.
This performance primarily resulted from our positive sales momentum combined with the disciplined ramp-up in costs offset by the dilutive impact of acquisitions.
Based on our positive momentum, we continue to reiterate our op margin guidance for the year of 30 to 50 basis points improvement over 2019, excluding the impact of Wright Medical.
Related to other income and expense, as compared to the second quarter in 2019, we saw a decline in investment income earned on deposits and an increase in interest expense resulting from the additional debt outstanding for the funding of the Wright Medical acquisition.
Our second quarter had an adjusted effective tax rate of 17% and was impacted by our mix of U.S. non-U.S. income and some adverse discrete tax items included in our provision to return adjustments.
Our year-to-date effective tax rate is 15.2%.
For the full year, we expect an adjusted effective tax rate of 15% to 15.5% with some variability in the remaining quarters, including a slightly lower rate in the third quarter and a more normalized rate in the fourth quarter.
Focusing on the balance sheet, we ended the first quarter with $2.3 billion of cash and marketable securities and total debt of $12.7 billion.
During the quarter, we fully repaid the $400 million of term loan debt related to the borrowings incurred for the acquisition of Wright Medical.
Year-to-date, we have paid down $1.15 billion of debt.
Turning to cash flow.
Our year-to-date cash from operations was approximately $1.3 billion.
This performance reflects the results of earnings and continued focus on working capital management.
And now I will provide a summary of our revised guidance.
Based on our performance in sales ramp in the second quarter as well as our capital orders pipeline, we expect 2021 organic net sales growth to be in the range of 9% to 10%.
As it relates to sales expectations for Wright Medical, we now expect comparable growth for Trauma and Extremities to be at least 6% for the full year when compared to the combined results for 2019.
If foreign currency exchange rates hold near current levels, we expect net sales in the full year will be positively impacted by approximately 1%.
Consistent with the upper range of our previous guidance, net earnings per diluted share will be positively impacted by foreign exchange by approximately $0.10 in the full year, and this is included in our revised guidance range.
Based on our performance in the first six months and including consideration of our improved full year Wright Medical performance impact, controlled spend ramp to facilitate growth and continued positive recovery outlook, we now expect adjusted net earnings per diluted share to be in the range of $9.25 to $9.40.
And now we will open up the call up for Q&A.
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q2 adjusted earnings per share $2.25.
expect 2021 organic net sales growth to be in range of 9% to 10% from 2019.
expect 2021 adjusted net earnings per diluted share to be in range of $9.25 to $9.40.
expect continued unfavorable price reductions of approximately 1% in 2021.
stryker - if foreign currency exchange rates hold near current levels, expect earnings per share will be positively impacted by approximately $0.10 for full year.
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com under the Investor Relations tab and will remain available after the call.
On our call today is our CEO, Hikmet Ersek; and our CFO, Raj Agrawal.
During the call, we will discuss some items that do not conform to generally accepted accounting principles.
We have reconciled those items in the most comparable GAAP measures on our website, westernunion.com, under the Investor Relations section.
We will also discuss certain adjusted metrics.
The expenses that have been excluded from adjusted metrics are specific to certain initiatives but may be similar to the types of expenses that the company has previously incurred and can reasonably expect to incur in the future.
Our second quarter performance was strong, and we are on track to achieve our adjusted 2021 financial outlook with revenue growth, reflecting sequential improvement in underlying trends and a favorable comparison to the prior year period, which was impacted by COVID-19 pandemic.
Profit trended as expected in the quarter as we continue to make strategic technology investments to strengthen our market-leading platform and digital capabilities.
Our business remained resilient despite global uncertainties related to ongoing COVID-19 resurgences from the delta variant and the potential risk this poses to economic recovery.
Our strategy to be a leader in cross-border, cross-border, cross-currency, money movement and payments, serving consumers, businesses and financial institutions remains unchanged.
We remain confident in our ability to exceed $1 billion of digital revenue in 2021, supported by continued strong growth in our wu.com business and our digital partnership business.
The expansion of our wu.com customer base position us well as we look to build a consumer ecosystem, deepening engagement with our customers and providing them access to a wider array of products and services.
We will discuss more on our consumer ecosystem strategy in just a moment.
But first, I'd like to highlight another important strategic development, which is the Business Solutions transaction we announced today.
Today, we separately announced that, we reached a definitive agreement to sell our Business Solutions business to Goldfinch Partners and the Baupost Group for $910 million.
Small- and medium-sized businesses and organizations around the world to rely on Western Union Business Solutions, as they are global payments, foreign exchange and hedging partner, and we believe that, Goldfinch Partners and The Baupost Group are well positioned to invest in the business to deliver good value and innovation to these clients.
With the planned sale of Western Union Business Solutions, which was approximately 7% of total company revenue during the last 12 months ended June 30th, 2021, now we will be fully focused on increasing our penetration of the global cross-border consumer payments market, expanding our digital partnership business and increasing our total addressable market, through our Western Union branded ecosystem strategy.
The company will benefit by having a single global payments platform capable of serving multiple use cases and customer segments, including Fintech companies like, Google Pay, telecom companies like, STC Pay and banks and other financial institutions like Spare.
This requires a modern, adaptable platform that provides a strong user experience for our customers, agents and partners.
And we are well on our way in this regard with significant recent progress in our cloud migration, pricing, automated marketing and customer support built, on the foundation of advanced machine learning and omnichannel engagement.
These developments enable us to be more efficient, but most importantly, improve the customer experience and identify incremental revenue opportunities.
Continuing technology investment and our unique global platform remains a key area of focus for us.
We also remain focused on enhancing our market-leading network by improving our coverage, cost and quality.
On a year-to-date basis, our new agent signings will expand our network by approximately 18,000 retail locations.
We have also renegotiated contracts with over 50 agents' year-to-date, reflecting our commitment to optimize commissions.
Finally, we continue to enhance our global account payout capabilities, which is now available in over 125 countries with real-time capabilities in approximately 100 countries.
Over 60% of our global account payout transaction volume was delivered real-time.
Turning back to our consumer ecosystem strategy, we are excited about our plan to pilot through our Western Union International Bank as WU-branded multicurrency bank account, debit card and integrated money transfer solution in a couple of European countries later this year.
Our initial focus will be testing and learning and then we will evaluate how we expand from there.
Longer term, we see significant opportunity for our consumer ecosystem strategy.
We are a trusted provider to a large, unique customer segment, the global migrant community, which has many needs beyond money transfer, such as insurance, lending and travel.
And it's often not well served in the market.
Western Union with its trusted brand, large and growing digital customer base, and global platform is well positioned to execute on this opportunity.
While we are fully focused on the implementation of our profitable growth strategy, we also remain committed to advance environmental, social and governance, or ESG, at Western Union.
I would encourage you to read our 2020 ESG report released in June to learn more about our 2020 impact and our ESG strategy and goals, which are closely aligned to our business, our values and our purpose.
Now turning back to second quarter results.
We see pricing stability in the market and varying levels of recovery from the effects of the ongoing pandemic, particularly outside the US, where economic activity and government policies are more mixed.
This was evident in my recent tours in Europe where agents, customers and business leaders confirmed that while local economies are reopening and travel was sections are being lifted, the pace of economic recovery is being impacted by labor shortages and the spike in cases from the delta variant.
Fortunately, for our customers around the globe, we offer remarkable choice with our omnichannel offering with a comprehensive set of funding and payout options, so they can transfer and receive money in a way that it's most convenient for them.
During the quarter, we saw continued strength in principal per transaction or PPT with growth over 11% and cross-border total principal growth of 29%, benefiting from continued demand for support in received markets and improving economic and employment trends in central regions like the U.S. and Western Europe.
Total company revenue grew 16% or 13% on a constant currency basis, with underlying trends aided by continued growth in our digital business and sequential improvement in the retail business.
C2C revenues and transactions, each grew 15% in the quarter with C2C revenue growing 12% on a constant currency basis.
Digital revenues were up from the first quarter and grew 22% year-over-year to over $265 million with quarterly highs for revenue, transactions and principal.
Digital comprised 36% of transactions and 24% of revenues for the C2C segment.
As expected, we are beginning to see digital growth ease after exceptionally strong performance during the height of the COVID-19 pandemic.
Wu.com results were healthy with transaction growth over 18%, driven by 14% growth in average monthly active users.
Wu.com continue to lead money transfer appears in mobile app downloads by a wide margin and grow principle over 30%.
Our customer engagement trends remained favorable year-over-year with positive trends in retention, transaction per customer and principal by customer.
We continue to expand in the new market launch in Chile and Peru in the second quarter and enhancing the customer experience with new futures and tools, including the rollout of additional electronic Know Your Customer options across European and transaction reminders.
Improving the customer experience not only supports the continued growth in westernunion.com, but also provides a growing customer base for the consumer ecosystem strategy that I mentioned earlier.
Retail revenue achieved strong year-over-year growth, cycling over the disruption from the pandemic in the prior year period and is growing sequentially.
We remain focused on ramping up our partnership with Walmart in the US.
Our domestic and international money transfers, bill payments and money order services are now available in nearly 4,700 Walmart stores across the US.
Trends in the Business Solutions segment continued to move in the right direction with strong improvement in the new business and stable trends in hedging and across most segment verticals.
While we have announced, a definitive agreement to divest Western Union Business Solutions, it will be business as usual until the transaction closes.
Now, overall, we are pleased with the announcement of the Western Union Business Solution today.
I'm excited for the Business Solutions management team to receive strong support from the new ownership.
Additionally, with our healthy second quarter results, we are confident in our ability to execute to include market conditions and our strategy, with our resilient retail channel, strong growth of our digital channel, building a WU branded ecosystem with additional products and serving multiple enterprises with our unique and agile cross-border platform positions the company well for long-term incremental growth opportunities.
I'll now pass it over to Raj, to review our financial results in more detail.
Let me first summarize second quarter performance.
And then, I will provide more color on the Business Solutions divestiture, the planned termination of our defined benefit plan, and finally, our 2021 full year outlook.
Moving to the second quarter results, revenue of $1.3 billion increased 16%, on a reported basis or 13% constant currency.
Currency translation, net of the impact from hedges benefited second quarter revenues by approximately $29 million compared to the prior year.
In the C2C segment, revenue increased 15%, on a reported basis or 12% constant currency, with transaction growth partially offset by mix.
B2C transactions grew 15% for the quarter led by 33% transaction growth in digital money transfer, and supported by growth in retail money transfer, which improved sequentially, particularly in North America and Europe and CIS.
In line with our expectations, spread between C2C transactions and revenue growth moderated this quarter and was flat on a reported basis or three percentage points constant currency, as we cycled through the mix impact from the high growth of digital partnership transactions, which represents a lower revenue per transaction category.
We expect the spread will remain fairly tight during the remainder of the year.
Globally, we continue to see pricing environment as stable.
Total C2C cross-border principal increased 29% on a reported basis or 25% constant currency driven by growth in retail and digital money transfer.
Total C2C Principal per Transaction or PPT was up 11% or 8% constant currency.
Both, retail and wu.com continued to experience higher average PPT, due to mix and changes in consumer behavior.
Digital money transfer revenues which include wu.com and digital partnerships increased 22% on a reported basis or 19% constant currency.
Wu.com revenue grew 18% or 15% constant currency on transaction growth of 18%.
Wu.com cross-border revenue was up 23% in the quarter.
Digital partnerships continued to show, strong growth across revenue, transactions and principal in the quarter.
Trends in our digital business moderated somewhat as expected, from the exceptional growth we experienced from the second quarter onwards last year, as demand for our digital services grew significantly, adding incremental revenue, profit and transactions to our business.
While we expect this moderating trend will continue the remainder of the year, we are now growing off a much larger base.
Moving to the regional results, North America revenue increased 4% on both a reported and constant currency basis, on transaction growth of 3%.
The increase in constant currency revenue and transaction growth was driven by US outbound, partially offset by current US regulations in Cuba that limit our ability to operate and declines in US domestic money transfer.
US domestic money transfer represented approximately 4% of total C2C revenue in the quarter.
Revenue in the Europe and CIS region increased 18% on a reported basis or 10% constant currency on transaction growth of 26%.
Constant currency revenue growth was led by the United Kingdom, France and Russia with the spread between transaction and constant currency revenue growth driven by the digital partnership business in Russia.
Revenue in the Middle East, Africa and South Asia region increased 19% on a reported basis or 18% constant currency, while transactions grew 22%.
The digital partnership business in Saudi Arabia led constant currency revenue growth in the quarter, followed by Kuwait and Qatar.
The impact of the digital partnership business on the spread between transaction and constant currency revenue growth diminished in the quarter but was still the primary contributor.
Revenue growth in the Latin America and Caribbean region was up 70% or 68% constant currency on transaction growth of 42%.
Constant currency revenue growth was broad-based across the region, led by Chile, Ecuador and Mexico.
Much higher average principal amount resulted in constant currency revenue growth greatly exceeding transaction growth in the quarter.
Revenue in the APAC region increased 20% on a reported basis or 13% constant currency led by the Philippines and Australia.
Transactions increased 3% with the Philippines driving the difference between constant currency revenue and transaction growth.
Business Solutions revenue increased 25% on a reported basis or 16% constant currency, benefiting from favorable comparisons to prior year.
Revenue trends remained on a positive course with the continuing recovery in cross-border trade.
The segment represented 8% of company revenues in the quarter.
Other revenues represented 5% of total company revenues and increased 8% in the quarter.
Other revenues primarily consist of retail bill payments in the US and Argentina and retail money orders.
Turning to margins and profitability.
The consolidated GAAP operating margin in the quarter was 19.8% compared to 19.
9% in the prior year period.
While the consolidated adjusted operating margin was 20.2% in the quarter compared to 20.4% in the prior year period.
Adjusted operating margin excludes M&A expenses in both the current and prior year periods and last year's restructuring expenses.
The decrease in consolidated operating margin continues to reflect how COVID-19 impacted the level and timing of certain expenses and investments as the company curtailed spending last year.
Compensation-related expenses and strategic investments in marketing and technology were the primary contributors to the slight margin decrease in the quarter.
Foreign exchange hedges had a negative impact of $2 million on operating profit in the current quarter and a benefit of $7 million in the prior year period.
Moving to segment margins.
Note that M&A expenses are included in other operating margins for both the current and prior year period, and segment margins exclude last year's restructuring charges.
B2C operating margin was 20.7% compared to 21.8% in the prior year period.
Given that our C2C segment comprises most of total company operating income, the decrease in operating margin was driven by the same factors that impacted total company margin.
Business Solutions operating margin was 10.9% in the quarter compared to 1.6% in the prior year period.
The increase in operating margin was largely due to increased revenue, partially offset by increased compensation-related expenses.
Other operating margin was 16.2%, compared to 21.9% in the prior year period, with the decrease driven by higher M&A expenses, related to the divestiture of Western Union Business Solutions announced today.
The GAAP effective tax rate in the quarter was 14.5%, compared to 16.2% in the prior year period, while the adjusted effective tax rate in the quarter was 14.2%, compared to 15.7% in the prior year period.
The decrease in the company's GAAP and adjusted effective tax rates was due to changes in pre-tax earnings, including differences in the composition between high tax and low tax jurisdictions.
GAAP Earnings per Share or earnings per share was $0.54 in the quarter compared to $0.39 and in the prior year period, while adjusted earnings per share was $0.48 in the quarter compared to $0.41 in the prior year period.
The increase in GAAP earnings per share reflects benefits of revenue growth, the gain on an investment sale and a lower effective tax rate, partially offset by debt retirement expenses, compensation-related expenses and strategic investments in marketing and technology.
Both the gain on an investment sale and the debt retirement expenses are excluded from adjusted EPS, in addition to the expenses we noted earlier during the operating margin discussion.
The net impact of these two items was a $0.07 benefit to GAAP earnings per share in the quarter.
Turning to our cash flow and balance sheet, year-to-date cash flow from operating activities was $349 million.
Capital expenditures in the quarter were approximately $48 million.
At the end of the quarter, we had cash of $1.1 billion and debt of $3 billion.
We returned $171 million to shareholders in the second quarter, consisting of $96 million in dividends and $75 million in share repurchases.
The outstanding share count at quarter end was 407 million shares.
And we had $633 million remaining under our share repurchase authorization, which expires in December of this year.
As Hikmet highlighted previously, today we announce the divestiture of Western Union Business Solutions.
The sales price of $910 million is expected to generate in excess of $800 million in proceeds, net of tax in 2022 and result in a gain on sale.
Our net proceeds estimate is based on current tax policy and is subject to certain regulatory and working capital adjustments.
The transaction is expected to close in two stages with the majority of the business and the entire proceeds, transferring in early 2022 and the European business transferring by late 2022.
Both closings are subject to requisite work council consultations, regulatory approvals and other customary closing conditions.
Following the transaction, we will evaluate options for the use of proceeds based on market conditions and opportunities and in accordance with our established capital allocation priorities, which include reinvestment in the business to drive organic growth, dividends, acquisitions, including technological capabilities that support our growth strategy and share repurchases.
As a reference point, during the last 12 months ended June 30th, 2021, the Business Solutions segment generated revenue, EBITDA and operating profit of $374 million, $64 million and $33 million, respectively.
Turning to our outlook for 2021, the outlook we provided today assumes moderate improvement in macroeconomic conditions as the quarters' progress in line with current prevailing macroeconomic forecast with no material changes related to the COVID-19 pandemic.
We reaffirmed our expectations for revenue growth, including our expectation that the digital business will achieve over $1 billion in revenue this year.
We also affirmed our remaining metrics on an adjusted basis while updating our full-year GAAP financial outlook for pension plan termination expenses and M&A costs related to the sale of the Business Solutions business.
The pension plan termination is expected to accelerate the recognition of approximately $110 million of non-cash expenses on a pre-tax basis, lowering GAAP earnings per share by approximately $0.22 in the fourth quarter and will be recorded to other expense in the P&L.
With our plan over funded by more than $35 million as of June 30, we believe it is a good time to transition the plan to an annuity provider.
We continue to expect full-year 2021 revenues will grow mid- to high single digits on a GAAP basis or mid-single digits on a constant currency basis, which also excludes the impact of Argentina inflation.
GAAP operating margin is expected to be approximately 21% and adjusted operating margin is expected to be approximately 21.5% with the difference attributable to M&A costs.
We anticipate our effective tax rate will be in the mid-teens range on a GAAP and adjusted basis.
GAAP earnings per share for the year is now expected to be in a range of $1.82 to $1.92, which now reflects the impact of pension plan termination expenses and M&A costs.
Adjusted earnings per share is still expected to be in the range of $2 to $2.10.
As we move into the second half of the year, let me provide some context for how we think the results may progress over the remaining quarters.
Starting with revenue, our underlying assumption for revenue progression includes moderate improvement in the global macroeconomic environment in line with the current prevailing economic forecast.
However, as Hikmet discussed earlier, global uncertainties remain, especially related to the emergence of the delta variant and the potential risks this poses to broader economic recovery.
As the quarters progress, we expect moderate improvement in our business similar to the current prevailing economic forecast, although overall company growth rates will be lower than we have seen in the second quarter due to the grow-over impacts from last year.
We continue to expect to generate over $1 billion in digital revenue this year, along with a relatively stable retail business.
Lastly, we expect that the Business Solutions and other segments will continue to rebound this year as global macroeconomic conditions improve.
With respect to margins, we expect the margin for the second half of the year will be above our full-year adjusted margin outlook of approximately 21.5%, primarily driven by expected higher revenue levels.
To wrap up, we delivered a solid second quarter performance and are on track to achieve our financial outlook for the year.
With the planned divestiture of the Business Solutions business, we are also sharpening our focus on the strategy that Hikmet laid out.
And operator, we are now ready to take questions.
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q2 adjusted earnings per share $0.48.
q2 gaap earnings per share $0.54.
q2 revenue $1.3 billion versus refinitiv ibes estimate of $1.25 billion.
reaffirms 2021 adjusted financial outlook.
qtrly consumer-to-consumer transactions increased 15%, while revenues increased 15% on a reported basis, or 12% constant currency.
sees fy 2021 adjusted earnings per share in a range of $2.00 - $2.10 (no change from previous outlook).
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There are certain risks and uncertainties, including those disclosed in our filings with the SEC that may impact our results.
During our call today, we'll make reference to non-GAAP financial measures.
Our first quarter results reflect an exceptional performance by our company and our entire team as the momentum that began in the third quarter of last year continued throughout our business.
On a companywide basis, we achieved an all-time EBITDAR record of $292.6 million.
While this is up considerably from the prior year, we also exceeded our first quarter 2019 performance by more than 30% and surpassed our previous record by over 20%.
Companywide margins for the quarter were 38.8%.
This is nearly 1,200 basis points better than the first quarter of 2019 and 220 basis points higher than the previous record we set in the third quarter of 2020.
We also achieved new EBITDAR records in each of our two largest operating segments.
In the Las Vegas Locals segment EBITDAR exceeded our previous record by 11% and was up 22% over 2019.
And when excluding The Orleans, which is heavily reliant on destination business, our same-store locals EBITDAR was up 46% from 2019 levels.
Operating margins in our Las Vegas Locals segment were nearly 50% for the quarter, 360 basis points higher than the record we set just two quarters ago.
In our Midwest and South region, EBITDAR grew nearly 40% over 2019 beating the previous record by almost 20%.
Segment margins were nearly 40% this quarter and overall gaming revenues were up more than 2% from 2019 levels.
Most important, this operating segment -- this operating strength was broad-based as 15 of our 17 properties in this segment grew EBITDAR at a double-digit pace over their 2019 performance.
Throughout the quarter, strengthening consumer confidence, limited entertainment options and our disciplined operating strategy, all contributed to produce record results across our portfolio.
Starting in January and February, business returned to the levels we saw in the third quarter.
But it was March where we really benefited from improving trends.
From February to March, daily rated play increased over 18% across all age and worth segments and was up nearly 25% in our 65 and up segment.
As vaccinations continue to roll out, customers are clearly growing more comfortable with resuming their pre-pandemic activities including regular visits to our properties.
We also experienced an impressive increase in unrated play, which grew more than 33% on a comparable basis from February to March, a reflection of a strengthening consumer confidence across the country.
This strong unrated play is providing us the opportunity to grow our database as we leverage our enhanced tools and capabilities to identify high-value unrated players on our gaming floors and then enroll them into our B Connected loyalty program.
In the first quarter, new player sign-ups rose 35% over the fourth quarter.
But beyond the sheer increase in quantity, it is the quality of these guests that is far more impressive.
On an overall basis, the worth of our first quarter sign-ups was over 50% higher than the first quarter of 2019.
Across the business, the strong trends of March are continuing into April.
Rated guest counts are running well ahead of the third and fourth quarters of 2020 and unrated play remains at very high levels.
While we are very encouraged by April's business trends as other entertainment options become increasingly available, we do expect unrated play levels will normalize.
But even as unrated play normalizes, we are confident we can keep delivering strong performances as we pursue additional growth opportunities within our growing rated customer base.
One of these opportunities is the 65-and-over segment.
While we have seen strong growth from this demographic in the last several months, many are still on the sidelines.
And as our country continues to make progress against the pandemic, we are confident that more of these guests will return to our properties as the year progresses.
We also see opportunities to grow our destination business.
While business from local guest segments remain strong, guest counts from destination travelers remain well below pre-pandemic levels.
The softness has been particularly noteworthy at The Orleans, which draws a significant amount of business from destination travelers.
This has also impacted our downtown Las Vegas segment, where visitation from our core Hawaiian customers has been severely restrained by travel restrictions.
As COVID vaccinations continue to roll out and restrictions lift, we expect visitation among our rated destination customers to improve.
We also expect to see improvements in midweek business as restrictions on conventions and meetings are eased and capacity limits are increased.
Over the last several weeks, we've started to see the first indications that this destination business is returning.
Hotel reservations have increased to their highest level in more than a year.
And our booking window is rapidly improving.
At the same time, we are experiencing growing demand for non-gaming amenities.
We are encouraged by the opportunity for growth on the non-gaming side of the business and we'll take a thoughtful and disciplined approach in reintroducing these amenities.
We remain committed to our disciplined operating strategy that has delivered outstanding results over the last several quarters.
On top of organic growth opportunities within our portfolio, we continue to make progress with our strategic growth initiatives.
For example, our interactive gaming presence and offerings continue to expand.
After introducing Stardust as our social casino brand last year, we have now entered the world of real money online gaming launching our first Stardust online casinos in Pennsylvania and New Jersey last week.
We're also excited by the performance and the ongoing potential of our partnership with FanDuel Group.
Together, we have established market-leading sports betting products in Pennsylvania, Illinois, Indiana, Iowa and Mississippi with significant future opportunities yet to come in states like Ohio, Louisiana, Missouri and Kansas.
And with our recently announced partnership with the NFL, FanDuel's brand will be significantly enhanced through its association as one of the League's official sports wagering partners for this coming football season.
FanDuel will have rights to include endgame and postgame highlights directly into its Sportsbook app further separating our partner from the competition in a crowded sports betting landscape.
We are also making good progress on the Wilton Rancheria Tribes Resort near Sacramento, California.
Construction is now under way on the Sky River Casino and the project is set to go vertical next month.
I had the pleasure of joining the Tribal council, community leaders and hundreds of tribal members for groundbreaking in early March.
This was a true celebration by the entire Wilton community as they saw their vision of self-sufficiency finally come to life.
We are proud to call the Wilton tribe our friends and are honored to be their partners in this project.
We look forward to joining them and opening the doors with Sky River Casino in the second half of 2022.
Before concluding, I wanted to take a note -- to take note of our company's ongoing progress on our corporate responsibility initiatives.
Last week, we were honored to be recognized as the highest rating gaming company in Forbes Magazine's listing of America's Best Employers for diversity.
We are a company that takes pride in promoting a welcoming culture for all team members.
Being recognized by Forbes as a leader in workplace diversity is a great honor and reflects our ongoing efforts to create and support an environment where team members feel valued and appreciated.
We also released our company's first comprehensive environmental, social and governance report last week.
While our company has been committed to the principles of ESG for decades, this report is the first time we have compiled this information into a single document.
Within this report, you will see detailed data on the progress we are making to conserve natural resources, reduce our carbon footprint, enhance the lives of our team members, build strong communities and promote good corporate governance.
We are pleased with our performance against key ESG benchmarks to-date and look forward to sharing our continued progress with you in the future.
In conclusion, this was truly an outstanding quarter for our company.
Our business model is allowing us to make the most of an improving environment by delivering exceptional EBITDAR growth and margin improvement throughout the portfolio.
Throughout the country, our property leaders are successfully maintaining higher margins and a disciplined operating philosophy as restrictions lift and visitation grows, and we continue to make significant progress on our strategic initiatives.
Throughout all of this, our team members have kept their commitment to delivering personal and memorable service to our guests.
That service is what makes Boyd Gaming stand out from the competition, and it will continue to draw customers back to our properties as the pandemic recovery continues.
Together we are achieving new heights as a company and it is an honor to be part of such an incredible team.
Before I provide comments on the quarter, I want to point out that we have included our 2019 results and the financial tables accompanying today's release.
We believe that 2019 is a more relevant comparison period to this year's results since our entire property portfolio was closed during the second half of March of last year.
As Keith noted, this was an incredible quarter for our company.
As you have seen from our results in the third and fourth quarter of last year, our operating strategy delivers on growing EBITDAR with enhanced margins.
And this was also the case in January and February.
January and February were very good months, and resembled third quarter of last year in terms of business levels and margins.
Compared to 2019, revenues were down nearly 11% during the February year-to-date period, while companywide EBITDAR after corporate expense rose 34% and margins improved nearly 1,200 basis points.
The month of March was even stronger.
March benefited from our more efficient operating model, but was enhanced by stronger revenues particularly from higher-margin unrated play.
In March revenues were down just 6% from 2019 levels, while companywide EBITDAR margins after corporate expense approached 44%.
During the first quarter, guest counts and spend both increased from the levels we saw in the third and fourth quarter of last year.
We saw improvements across all age and worth segments including the 65-and-over age segments.
In terms of gaming revenues, our Midwest and South segment rose more than 2% from 2019.
While on the Las Vegas Locals segment, gaming revenues were up approximately 4% from 2019.
In addition, we are experiencing increased demand for non-gaming amenities and growing demand for hotel capacity from both rated and unrated customers.
Looking forward, we believe there is continued opportunity to grow our business among upper age segments of our database that have yet to fully return, as well as destination business.
And we have the opportunity to build relationships with higher worth customers we have added to our database during the last several quarters.
Our enhanced tools and capabilities combined with a more disciplined operating philosophy have allowed us to execute our business with much greater efficiency.
This philosophy will continue to be our focus, as customer demand continues to return and we successfully -- selectively restore additional amenities.
We believe that our operating strategy is sustainable, and we are confident that we can maintain a significantly more efficient business model over the long run.
Touching on a few additional points from the quarter.
We generated over $200 million in cash during the quarter, resulting in approximately $730 million of cash on the balance sheet at quarter end.
And we currently have no borrowings outstanding under our $1 billion revolving credit facility.
As we continue to grow out of this pandemic, we believe, it is most prudent to maintain our financial flexibility with respect to our cash balances and our free cash flow.
In terms of our online business, we continue to be excited by the opportunity represented by sports and iGaming.
As we previously indicated we expect to generate over $20 million in EBITDAR from online this year.
And we are on track to achieve that result.
We believe our strategic partnership and equity stake in FanDuel is the right approach, generating positive cash flow in a highly promotional capital-intensive and competitive landscape.
And as more states legalize sports betting and FanDuel leads the way as one of the long-term winners in this space, our 5% equity stake will only continue to grow in value for our shareholders.
We are also continuing to expand our online gaming presence under the Stardust brand that leverages our customer database and geographic distribution.
We just launched the Stardust brand in New Jersey and Pennsylvania.
And we continue to explore opportunities to expand and grow our capabilities and presence online, particularly in the iGaming space.
So in summary, this was a great quarter.
January and February were good.
March was exceptional and that strength is continuing into April.
Going forward, we will stay firmly committed to our operating strategy, driving increased EBITDAR, as a result of a continued operating discipline and a tight focus on the right customer.
And finally, our strategic partnership with FanDuel and our online iGaming business will be growing components of our business.
Matt that concludes our remarks and we're now ready to take any questions.
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compname reports earnings per share of $0.05 and ffo per share of $1.37.
q4 ffo per share $1.37.
sees q1 ffo per share $1.53 to $1.57.
signs 1.2 million square feet of leases in q4.
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I'll now discuss the financial results.
We reported revenue of $267 million during the first quarter of 2022, which represents an increase of 16%, compared to $230.1 million during the first quarter of 2021.
The increase was largely attributable to volume increases in our Fenestration segment, combined with higher prices related to the pass-through of raw material cost inflation.
More specifically, we realized net sales growth of 14.5% in our North American fenestration segment, 15.5% in our North American cabinet components segment, and 18.6% in our European fenestration segment, excluding the foreign exchange impact.
We reported net income of $11.2 million or $0.34 per diluted share for the three months ended January 31st, 2022, compared to $7.9 million or $0.24 per diluted share during the three months ended January 31st, 2021.
On an adjusted basis, net income increased by 25.9% to $11.3 million or $0.34 per diluted share during the first quarter of 2022, compared to $9 million or $0.27 per diluted share during the first quarter of 2021.
The adjustments being made to earnings per share are for restructuring charges, loss on the sale of a plant, foreign currency transaction impacts, and transaction and advisory fees.
On an adjusted basis, EBITDA for the quarter was essentially flat year over year at $24.4 million, compared to $24.3 million during the same period of last year.
The increase in earnings for the three months ended January 31st, 2022, was attributable to continued strong demand, operational efficiency gains, and increased pricing.
However, the decrease in margin percentage was driven by inflationary pressures and time lags on material index pricing mechanisms.
Moving on to cash flow and the balance sheet.
Cash used for operating activities was $21.7 million for the quarter, compared to $3.4 million for the same period of last year.
Due to the typical seasonality in our business, free cash flow was negative in the first quarter of this year.
In addition, the value of our inventory increased further due to inflationary pressures, which had a negative impact on working capital.
As a reminder, we usually generate most of our cash in the second half of each year.
Our balance sheet continues to be strong.
Our liquidity position is solid, and our leverage ratio of net debt to last 12 months adjusted EBITDA was at 0.4 times as of January 31st, 2022.
We will remain focused on generating cash, paying down debt, and opportunistically repurchasing stock as the year progresses.
However, based on improvements in labor performance, the expected continuation of our pass-through pricing strategy, conversations with our customers, and the latest macro data, we're now comfortable providing the following guidance for fiscal 2022.
Net sales of $1.13 billion to $1.15 billion, adjusted EBITDA of $135 million to $140 million; depreciation of approximately $31 million, amortization of approximately $15 million; SG&A of $115 million to $120 million, interest expense of $2 million to $2.5 million, tax rate of 28%, capex of $30 million to $35 million; and free cash flow of $55 million to $60 million.
While we do expect some level of volume growth in our Fenestration segments for the remainder of the year, note that our current expectation is that revenue growth for the remainder of the year should be driven more by price, as opposed to volume, and we expect margin expansion to be second-half weighted.
From a cadence perspective for Q2, we expect net sales to be up mid to high single digits year-over-year in each segment.
However, due to inflation and the time lag associated with passing on price increases for most of our raw materials, we believe it will be a challenge to realize margin expansion in any segment in Q2.
Looking ahead into the second half of the year, on a consolidated basis, we currently expect mid-single-digit net sales growth year over year in Q3 and Q4.
In addition, due to easier comps and the expected benefit from our pricing strategy, coupled with some volume growth in our fenestration segments, we expect to realize some margin expansion in Q3 and Q4.
Joe's guidance was key during our transition into a pure-play building products company several years ago, and more recently, his mentorship and support proved invaluable, as I transitioned into the CEO role.
I will now discuss results for the quarter and then conclude with a discussion on the macro environment and guidance.
Demand was healthy across all product lines during the first quarter of 2022.
Volume growth in our fenestration segments and higher prices in all segments, mostly related to the pass-through of raw material cost inflation resulted in revenue growth of 16% year over year.
On a consolidated basis, we estimate that revenue growth for the quarter was weighted approximately 10% due to an increase in volume and approximately 90% due to an increase in price.
The first quarter began with continued supply chain challenges and significant labor disruption caused by COVID absenteeism driven by the omicron variant.
However, these issues started to subside toward the end of the quarter.
The rate of raw material cost inflation remains a challenge, as we typically see a 30 to 90-day time lag in passing these increases through to our customers.
Looking at the individual segments, I will start with the North American fenestration.
This segment generated revenue of $146.6 million in Q1, which was $18.5 million or 14.5% higher than prior year Q1.
Strong demand in our IG spacer and screen product lines, volume growth in vinyl fencing components, and price increases across all product lines were the main drivers of the growth.
We estimate that revenue growth in this segment was weighted approximately 45% due to an increase in volume and approximately 55% due to an increase in price.
Adjusted EBITDA of $16.3 million in this segment was essentially flat versus prior year Q1.
The improved pricing, volume-related efficiency gains, and productivity-related improvements were more than offset by inflationary pressures on raw materials, which caused margin erosion of approximately 170 basis points for the quarter.
However, our current expectation is for margin expansion in this segment later in the year, assuming that the rate of inflation subsides.
Our European fenestration segment generated revenue of $58.9 million in the first quarter, which was $9.8 million or 20% higher than prior year.
Excluding foreign exchange impact, this would equate to an increase of 18.6%.
We estimate that revenue growth in this segment was weighted approximately 20% due to an increase in volume and approximately 80% due to an increase in price.
Strong demand in both IG spacers and vinyl extrusions combined with material-related price increases accounted for the strong performance year over year.
These favorable volume-related impacts and pricing actions were more than offset by inflationary pressure on raw material costs and by inefficiencies caused by the COVID-related absenteeism early in the quarter.
As such, adjusted EBITDA came in at $10.4 million for the quarter, which was $300,000 less than prior year and yielded margin compression of approximately 420 basis points.
Similar to our expectations for other segments, we do anticipate that margins will improve, as the year progresses, again, assuming that the rate of inflation subsides.
Our North American cabinet components segment reported net sales of $62.4 million in Q1, which was $8.4 million or 15.5% higher than prior year.
Volumes decreased in this segment year over year, mainly as a result of customers' decisions to reduce overtime hours worked in their plants.
Increases in hardwood index pricing as well as discretionary pricing actions offset the volume and resulted in revenue growth year over year.
Adjusted EBITDA was $2 million for the quarter, which was $1.2 million less than prior year and resulted in margin compression of approximately 280 basis points.
Improvements in lumber yield and labor efficiency were more than offset by a significant increase in hardwood lumber costs during the quarter.
Weather-related challenges in the Appalachian wood region, as well as increases in maple demand, were the main drivers of the increases in lumber costs.
As a reminder, we have material index pricing mechanisms in place, but they typically have a 90-day lag, and we will require a period of flat or declining wood pricing before we're able to catch up on our margin performance in this segment.
As we look forward through the remainder of the year, we feel good about the demand environment across all of our product lines.
In North America, the housing market remains strong, and our customers continue to have high levels of backlog, which we anticipate will slowly dwindle throughout the year.
The rate of inflation and the potential for further interest rate hikes could impact demand at some point in the future, but we do not expect this to occur in the near term due to the high backlog levels.
In Continental Europe and the U.K., the demand environment remains healthy, although consumer confidence could ultimately be impacted if inflation continues to ramp and energy costs continue to increase.
From a Quanex perspective, we have seen enough improvements in our supply chain and stabilization in our labor force to say that the main challenge we now face is the rate of inflation and the ability to pass through price in an expedited manner.
As Scott mentioned earlier, we have enough data points and adequate visibility into our customers' backlog to give us confidence in providing full year guidance.
Again, we expect to generate revenue of $1.13 billion to $1.15 billion and adjusted EBITDA of $135 million to $140 million.
If we execute to plan and are able to post results within these ranges, it will mark the third straight year of record performance for the Quanex team.
Moving on to a more recent tragic subject, which is the Russian invasion of Ukraine.
It is difficult to see these events unfold in real time and watch what you believe to be unfathomable turn into reality.
We have employees and business partners with personal ties to Ukraine and our hearts are with them, their families, and all the Ukrainian people being affected by this pointless and horrific war.
At this point, it is too early for anyone to accurately predict or estimate the impact that this war will have on the European or global economies or what supply chain disruptions or other impacts this may have on our industry.
We anticipate there will be challenges, especially if the situation worsens substantially.
However, at this point, it is much too early to predict or forecast those impacts.
Nonetheless, our team has managed through COVID and numerous global supply chain challenges over the past two years, and we are very confident in our ability to navigate this event as well.
And with that, operator, we are now ready to take questions.
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compname posts quarterly earnings per share of $0.34.
q1 sales rose 16 percent to $267 million.
qtrly earnings per share $0.34.
qtrly adjusted earnings per share $0.34.
sees net sales of $1.13 billion to $1.15 billion for 2022.
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Before we begin, let me remind you that the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 apply to this conference call.
In addition, management may also discuss non-GAAP operating performance results during today's call, including earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA.
I will begin with highlights for the quarter, and Dave and Nick will follow up with additional operating detail.
I will then open up the call to questions.
Operating two distinct business units during our global pandemic has been exceptionally challenging.
Fortunately, we have begun to return to normalcy.
The pandemic had created unique problems, logistical hurdles and forced our operations to make significant changes in field and home office procedures.
Many of these changes have been institutionalized and will become part of our normal operating procedures post-pandemic.
I could not be prouder of our management team.
Both VITAS and Roto-Rooter met these pandemic challenges head-on, produced excellent operating results that are well positioned for growth in the coming years.
In April 2020, the first full month of the pandemic, Roto-Rooter experienced an immediate and severe drop in demand for all plumbing and drain cleaning services.
This drop was short-lived.
Starting in May 2020, Roto-Rooter saw a spike in residential plumbing and drain cleaning demand.
This increase in demand was sustained throughout 2020 and has continued unabated in the first six months of 2021.
Commercial demand has also improved up pandemic lows and have now normalized close to pre-pandemic levels.
For the remainder of 2021, I anticipate Roto-Rooter's residential demand to remain at the current run rate, coupled with increased commercial demand as the country returns to normalized pre-pandemic consumer behavior.
The Great Recession, and now a global pandemic.
In each of these crises, Roto-Rooter remained operating and materially increased market share, revenue and operating margin.
Just as important, Roto-Rooter has held on to the increases in revenue market share and margins in past crisis.
Roto-Rooter is well positioned post-pandemic, and we anticipate continued expansion of market share by pressing our core competitive advantages in terms of brand awareness, customer response time and 24/7 call centers and Internet presence.
For VITAS, the most significant issue remaining from the pandemic is the disruption to senior housing occupancy and the related hospital referrals.
Recent admissions' data suggest senior housing has entered into the early stages of recovery, and our updated guidance anticipates steady improvement in the senior housing referred hospice admissions in the second half of 2021, with a further acceleration in senior housing admissions anticipated in the fourth quarter.
With that, I would like to turn this teleconference over to David.
Let's turn to VITAS.
VITAS' net revenue was $312 million in the second quarter of 2021, which is a decline of 4.7% when compared to the prior year period.
This revenue decline is comprised primarily of a 6.3% reduction in our days of care, offset by a geographically weighted Medicare reimbursement rate increase of approximately 1.8%.
Acuity mix shift did have a net impact of reducing revenues approximately $3.8 million in the quarter or 1.2%.
The combination of a lower Medicare Cap billing limitation and other contra-revenue charges offset a portion of the revenue decline by roughly 90 basis points.
VITAS did accrue $2 million in Medicare Cap billing limitations in the second quarter of 2021, and this compares to a $5.7 million Medicare Cap billing limitation in the second quarter of 2020.
Of our 30 Medicare provider numbers, right now 27 of these provider numbers have a Medicare Cap cushion of 10% or greater.
One of our provider numbers has a cap cushion between 0% and 5%, and two of our provider numbers currently have a fiscal 2021 Medicare Cap billing limitation liability.
Let's take a look at Roto-Rooter.
Roto-Rooter generated revenue of $220 million in the second quarter of 2021, which is an increase of $45.6 million or 26.1% over the prior year quarter.
Total Roto-Rooter branch commercial revenue totaled $50.3 million in the quarter, an increase of 31.8% over the prior year.
The aggregate commercial revenue growth consisted of our drain cleaning revenue increasing 39.8%, plumbing increased 32.4% and excavation expanding 25.8%.
Water restoration also increased 8.3% on the commercial side.
On the residential side, total residential revenue in the quarter totaled $149 million, an increase of 23.7% over the prior year period.
The aggregate residential growth consisted of drain cleaning increasing 20.6%, plumbing expanding 30.7% and excavation increasing 22.4%.
Water restoration also increased 23.1%.
Basically increases across the board, all segments, both commercially and residential.
Now let's look at Chemed on a consolidated basis.
During the quarter, Chemed repurchased 250,000 shares of stock for roughly $122 million, which equates to a cost per share of $487.53.
As of June 30, 2021, there was approximately $312 million of remaining share repurchase authorization under this plan.
We've also updated our 2021 earnings guidance as follows: VITAS' full year 2021 revenue prior to Medicare Cap is estimated to decline approximately 4.5% when compared to 2020.
Our average daily census in 2021 is estimated to decline approximately 5%.
This guidance anticipates senior housing occupancy will begin to normalize to pre-pandemic occupancy, starting in the second half of calendar year 2021.
VITAS' full year adjusted EBITDA margin prior to Medicare Cap is forecasted to be 18.3%, and we are currently estimating $7.5 million for Medicare Cap billing limitations in calendar year 2021.
That's an improvement from the initial $10 million of Medicare Cap we estimated at the start of this year.
Roto-Rooter is forecast to achieve full year 2021 revenue growth of 15% to 15.5%.
Roto-Rooter's adjusted EBITDA margin for 2021 is estimated to be between 28% and 29%.
So based upon this discussion, our full year 2021 adjusted earnings per diluted share, excluding noncash expense or stock options, any tax benefits we receive from stock option exercises as well as costs related to litigation and other discrete items, is estimated to be in the range of $18.20 to $18.50.
The revised guidance compares to our initial 2021 guidance of adjusted earnings per diluted share of $17 to $17.50.
In the second quarter, our average daily census was 17,995 patients, a decline of 6.3% over the prior year.
This decline in average daily census is a direct result of pandemic-related disruptions across the entire healthcare system.
This negatively impacted traditional hospice admission patterns, starting in March of 2020.
Our hospital generated admissions have largely normalized to pre-pandemic levels.
Referrals from senior housing, specifically nursing home and assisted living facilities continue to be disrupted.
During the second quarter, we have seen admission stabilization and pockets of improvements in senior housing admissions.
However, it remains too early to accurately project the pace and timeline for senior housing admissions to fully return to pre-pandemic levels.
In the second quarter of 2021, total VITAS admissions were 16,840.
This is a slight improvement when compared to the second quarter of 2020 admissions.
More importantly, admissions in the second quarter of 2021 exceeded discharges by 315 patients.
This is the first quarter since the pandemic began that our patient admissions have exceeded patient discharges.
This is the strongest indication to date that we are now beginning the process of rebuilding census to pre-pandemic levels.
In the second quarter, our hospital directed admissions expanded 7.8% and emergency room admits decreased 9%.
Total home-based preadmit admissions decreased 9.3%, nursing home admits declined 9.9%, assisted living facility admissions declined 17.5% when compared to the prior year quarter.
Our average length of stay in the quarter was 94.5 days.
This compares to 90.9 days in the second quarter of 2020 and 94.4 days in the first quarter on 2021.
Our median length of stay was 14 days in the quarter, which is equal to the second quarter of 2020 and is a 2-day improvement when compared sequentially to the first quarter of 2021.
It's now time for us to consider any questions that come before the teleconference.
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sees fy 2020 adjusted earnings per share $16.20 to $16.40 excluding items.
roto-rooter is forecasted to achieve full-year 2020 revenue growth of 9% to 10%.
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I'm Charlotte Rasche, Executive Vice President and General Counsel of Prosperity Bancshares.
Tim Timanus, our Chairman, is unable to join us today.
David Zalman will lead off with a review of the highlights for the recent quarter.
He will be followed by Asylbek Osmonov, who will review some of our recent financial statistics, and Randy Hester, who will discuss our lending activities, including asset quality.
During the call, interested parties may participate live by following the instructions that will be provided by our call moderator, Sean.
Before we begin, let me make the usual disclaimers.
For the second quarter of 2021, Prosperity had strong earnings, core loan growth, deposit growth, continued sound asset quality, impressive cost controls, our return on average tangible common equity of 17.49% and remains well reserved.
Prosperity Bank has been ranked as the number two Best Bank in America for 2021 and has been in the top 10 of Forbes America's Best Banks since 2010.
The unemployment rates continue to increase and GDP growth continues at a high level as forecasted last year with the reopening of the economy.
We are seeing increased oil and gas prices as well as increased farm commodity prices, both of which are positive for Texas and Oklahoma economies.
Further, businesses and individuals continue to move to Texas for lower tax rates and a better quality of life.
Our earnings were $130.6 million in the second quarter for 2021 and compared with $130.9 million for the same period in 2020.
The second quarter of 2020 included a tax benefit for net operating losses of $20.1 million or $0.22 per diluted common share as a result of the enactment of the CARES Act.
Diluted earnings per share were $1.41 for the second quarter of 2021 and for the same period in 2020.
Earnings per share for the second quarter of 2020, included the $0.22 tax benefit, partially offset by a $0.06 charge merger-related expense and a $0.03 charge for the write-down of fixed assets related to the merger and some CRA investment funds.
The net effect was a positive $0.13 in earnings per share for the second quarter of 2021, a 10.2% increase after considering the adjustments in the second quarter of 2020.
Loans on June 30, 2021, were $19.2 billion, a decrease of $1.7 billion or 8.4% compared with $21 billion on June 30, 2020.
Our linked quarter loans decreased $387 million or 2% from $19.6 billion on March 31, 2021, primarily due to $359 million decrease in the PPP loans.
On June 30, 2021, the company had $780 million of PPP loans compared with $1.4 billion of the PPP loans on June 30, 2020, and $1.1 billion of PPP loans on March 31, 2021.
The linked quarter loans, excluding the Warehouse Purchase Program and PPP loans increased $148 million or nine basis points, 3.7% annualized from the $16.2 billion on March 31, 2021.
Our deposits on June 30, 2021, were $29.1 billion, an increase of $2.9 billion or 11.3% compared with $26.1 billion on June 30, 2020.
Our linked quarter deposits increased $347 million or 1.2%, 4.8% annualized from the $28.7 billion on March 31, 2021.
We believe that the deposit inflows are starting to normalize as people are spending money again and stimulus payments have been reduced.
However, the child tax credit payments should again add deposits to the banks.
Our asset quality has always been one of the primary focuses of our bank.
Our nonperforming assets totaled $33.7 million or 11 basis points of quarterly average interest-earning assets as of June 30, 2021, compared with $77.9 million or 28 basis points of quarterly average interest earning assets as of June 30, 2020, a 56.8% decrease from last year.
Nonperforming assets were $44.2 million or 15 basis points of quarterly average interest-earning assets as of March 31, 2021.
M&A seems to be regaining momentum.
We've had more conversations with bankers considering opportunities this quarter.
The continued net interest margin pressure, the higher technology costs, the salary increases, loan competition, succession planning concerns, and increased regulatory burden, all point to a continued consolidation.
As mentioned in my opening comments, we believe the U.S. economy is starting to normalize, which has helped reduce unemployment and cause above normal growth rates in GDP.
We are seeing higher prices for gas and groceries, labor shortages, inventory shortages and more.
We believe that Prosperity is well positioned to grow along with the Texas and Oklahoma economies.
We have a deep bench of associates with a passion to help Prosperity and our customers succeed.
Prosperity continues to focus on building core customer relationships, maintaining sound asset quality and operating the bank in an efficient manner while investing in ever-changing technology and product distribution channels.
We continue to grow the economy, both -- we intend to continue to grow the company both organically and through mergers and acquisitions.
We're helping to make it the success it has become.
Let me turn over our discussion to Asylbek Osmonov, our Chief Financial Officer, to discuss some of the specific financial results we achieved.
Net interest income before provision for credit losses for the three months ended June 30, 2021, was $245.4 million compared to $259 million for the same period in 2020, a decrease of $13.6 million or 5.2%.
The current quarter net interest income includes $12.2 million in fair value loan income compared to $24.3 million in the second quarter 2020, a decrease of $12.1 million.
Net interest income also continues to be impacted by the Paycheck Protection Program and Warehouse Purchase Program.
The second quarter 2021 net interest income, excluding the impacts of PPP loans, Warehouse Purchase Program loans and fair value loan income improved compared to the same results in the first quarter 2021.
The net interest margin on a tax equivalent basis was 3.11% for the three months ended June 30, 2021, compared to 3.69% for the same period in 2020 and 3.41% for the quarter ended March 31, 2021.
Excluding purchase accounting adjustments, the net interest margin for the quarter ended June 30, 2021, was 2.96% compared to 3.33% for the same period in 2020, and 3.19% for the quarter ended March 31, 2021.
The decrease was primarily due to a change in the mix of interest-earning assets and excess liquidity.
Noninterest income was $35.6 million for the three months ended June 30, 2021, compared to $25.7 million for the same period in 2020 and $34 million for the quarter ended March 31, 2021.
Noninterest expense for the three months ended June 30, 2021, was $115.2 million compared to $134.4 million for the same period in 2020.
On a linked-quarter basis, noninterest expense decreased $3.9 million from $119.1 million for the quarter ended March 31, 2021.
The current quarter benefited from gains on sale of ORE assets of $1.8 million and a decrease in salary and benefits.
The decrease in salary and benefits is primarily due to lower employment-related taxes for restricted stock vested during the first quarter 2021 and lower discretionary incentives.
For the third quarter 2021, we expect noninterest expense of $118 million to $120 million.
The efficiency ratio was 41% for the three months ended June 30, 2021, compared to 46.6% in for the same period in 2020, which included $7.5 million in merger-related expenses and 41.3% for the three months ended March 31, 2021.
During the second quarter 2021, we recognized $12.2 million in fair value loan income.
This amount includes $4.3 million from anticipated accretion, which is in line with the guidance provided last quarter and $7.9 million from early payoffs.
We estimate fair values -- sorry, we estimate fair value loan income for the third quarter of 2021 to be around $3 million to $4 million.
This estimate does not account for any additional fair value loan income that may result from early loan paydowns or payoffs.
Looking forward, we expect the income from early paydowns and payoffs will continue to slow down as we approach the end of life for many of these loans, including most of the PCD loans with large discounts.
The remaining discount balance is $25 million.
Also, during the second quarter 2021, we recognized $10.3 million in fee income from PPP loans.
As of June 30, 2021, PPP loans had a remaining deferred fee balance of $28.3 million.
The bond portfolio metrics at 6/30/2021, showed a weighted average life of 3.9 years and projected annual cash flows of approximately $2.3 billion.
Our NPAs at quarter end June 30, '21 totaled $33,664,000 or 0.17% of loans and ORE compared to $44,162,000 or 0.22% at March 31, '21.
This represents approximately a 24% decline in NPAs.
The June 30, '21 NPA total was comprised of $33,210,000 in loans, $310,000 in repossessed assets and only $144,000 in ORE.
Of the $33,664,000 in NPAs, $8,378,000 or 25% are energy credits, all of which are service company credits.
Since June 30, '21, 1,448 -- I'm sorry, $1,448,000 in NPAs have been put under contract for sale.
It doesn't necessarily mean they're guaranteed to close, but they are under contract and expected to close.
Net charge-offs for the three months ended June 30, '21 were $4,326,000 compared to $8,858,000 for the quarter ended March 31, '21.
No dollars were added to the allowance for credit losses during the quarter ended June 30, '21, nor were any dollars taken into income from the allowance.
The average monthly new loan production for the quarter ended June 30, '21, was $641,000.
This includes a total of $73.8 million in PPP loans booked during the second quarter.
Loans outstanding at June 30, '21 were approximately $19.3 billion, which includes approximately $780 million in PPP loans.
The June 30, '21 loan total is made up of 39% fixed-rate loans, 36% floating and 25% variable resetting at specific intervals.
Sean, can you please assist us with questions?
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prosperity bancshares, inc q2 earnings per share $1.41.
q2 earnings per share $1.41.
loans increased $1.898 billion or 9.9% during q2 2020.
qtrly net interest income before provision for credit losses was $259.0 million compared with $154.8 million.
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We'll begin with a brief strategic overview from Randy.
Mike will review the Title business.
Chris will review F&G.
And Tony will finish the review of the financial highlights.
There is significant uncertainty about the duration and extent of the impact of this pandemic.
Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected.
It will also be available through phone replay beginning at 3:00 p.m. Eastern Time today through Wednesday, November 10.
We are very pleased with our record-setting third quarter results as we increased revenues 31% to $3.9 billion, which resulted in adjusted net earnings growth of 39% to $604 million, both as compared with the 2020 third quarter.
Our Title business continued to deliver record results, while F&G expanded into new institutional channels, which position us well for strong asset growth.
Importantly, we grew our holding company cash balance by 25% to $1.5 billion as compared to $1.2 billion at the end of the second quarter of 2021.
Cash on our balance sheet grew despite our continued activity, returning capital to our shareholders through share buybacks and our quarterly dividend.
As Tony will discuss in more detail, the cash growth was delivered primarily through our organic business results.
During the quarter, we took advantage of exceptional interest rates and issued $450 million of 3.2% senior notes with a 30-year maturity.
We also funded a $400 million intercompany loan with F&G to fund their growth.
Overall, our results this quarter speaks to the dynamic business model that we have created and which we believe positions us for success through varying market cycles.
Turning to our Title results.
We delivered adjusted pre-tax title earnings of $669 million, with an adjusted pre-tax title margin of 21.7% in the 2021 third quarter compared with adjusted pre-tax title earnings of $528 million and an adjusted pre-tax title margin of 21.2% in the 2020 comparable quarter.
Our third quarter margins and earnings were the strongest third quarter results in our company's history, which speaks to our market-leading position combined with outstanding execution by our entire team.
We continue to be very pleased with the results this quarter as we open new channels of distribution and accelerate our sales growth, driving assets under management at the end of the third quarter to nearly $35 billion, an increase of 9% in the quarter.
This growth was driven by strong retail annuity sales and F&G's interest into institutional markets.
Total assets under management have grown 31% since we closed the acquisition, and we are well on our way toward our goal of more than doubling assets under management in five years.
As F&G's assets continue to grow, they provide an increasingly important component of our overall earnings.
Looking forward, we will continue to evaluate our capital allocation strategy as we remain committed to long-term value creation for our shareholders while also focusing on supporting the future growth of our businesses.
Share buybacks are an important component of our strategy, and we were active once again, having purchased 1.3 million shares for $61 million at an average price of $46.29 per share through the third quarter.
In the first week of October, we reached our $500 million share buyback target, which we announced in the fourth quarter of 2020.
Lastly, we announced yesterday a quarterly cash dividend of $0.44 per share, an increase of 10% from our previous quarterly dividend.
This is the second consecutive quarter that we have increased our dividend, given our strong earnings and cash flows through the first three quarters of the year.
As Randy highlighted, our third quarter results were the best third quarter in the company's history.
For the third quarter, we had generated adjusted pre-tax title earnings of $669 million, a 27% increase over the third quarter of 2020.
Our adjusted pre-tax title margin was 21.7%, a 50 basis point increase over the prior year quarter.
The results were driven by a 25% increase in average fee per file, a 9% increase in daily purchase orders closed and a 31% increase in total commercial orders closed, partially offset by a 21% decrease in daily refinance orders closed.
Total commercial revenue was a record $366 million compared with the year-ago quarter of $216 million due to the 31% increase in closed orders and a 28% increase in total commercial fee per file.
For the third quarter, total orders opened averaged 10,800 per day, with July at 11,000, August at 11,000 and September at 10,300.
For October, total orders opened were 9,300 per day, as we saw solid demand and purchase activity, while the refinance market continues to moderate as compared with last year's robust levels.
Daily purchase orders opened were up 1% in the quarter versus the prior year.
And for October, daily purchase orders opened were up 4% versus the prior year.
Refinance orders opened decreased by 33% on a daily basis versus the third quarter of 2020.
For October, daily refinance orders opened were down 38% versus the prior year.
Lastly, total commercial orders opened per day increased by 15% over the third quarter of 2020.
Commercial opened orders per day were just under the record levels we saw in the second quarter.
For October, total commercial opened orders per day were up 15% over October of 2020.
Importantly, commercial opened orders per day have exceeded 1,000 orders each of the last nine months, having consistently been in record territory and will provide momentum as we close out 2021 and begin 2022, given the longer tail for closings in commercial as compared with residential.
Our Title business has performed very well through the third quarter with commercial and purchase volumes more than offsetting the decline in refinance activity.
Looking forward, while refinance volumes may continue to moderate, it is important to note that direct refinance revenue only contributed approximately 19% of total direct revenue in the third quarter compared with 27% in the third quarter of last year.
On a sequential basis, refinance revenue contributed 21% of total direct revenue in the second quarter and 33% in the first quarter of this year.
Additionally, refinance fee per file in the third quarter was approximately $1,000 as compared with nearly $3,400 for purchase, providing a strong counterbalance to declines in refinance revenue.
We will also continue to watch our expenses closely and react to changes in our opened and closed order volumes.
Another critical aspect of our business has been our longer-term focus on integrating and leveraging automation, which has significantly improved our performance, as can be seen by our profitability this cycle.
During the quarter, we reached a significant milestone as more than two million consumers have now been invited to begin their transactions on our digital inHere Experience Platform through Start inHere, and more than 1.3 million have chosen to do so.
As we have discussed, inHere transforms the real estate transaction by improving the safety and simplicity needed to start, track, notarize and close real estate transactions.
We are very pleased with our customers' adoption of our digital platform, as we believe it will not only improve their satisfaction with our service and product, but also improve our efficiency.
Ultimately, we believe the inHere Experience Platform, combined with our scale and our history and expertise in building market-leading technology solutions, positions FNF to grow market share.
At F&G, we're fully executing on our product and channel diversification strategy while leveraging our core capabilities and modernizing our operating platform.
This year has demonstrated our transformation from a previously monoline business into a well-diversified and leading provider of solutions in both retail and institutional markets.
We achieved record sales in the third quarter, surpassing $3 billion in total sales for the quarter and $7 billion in total sales for the first nine months of the year, which in turn have boosted ending assets under management to nearly $35 billion as of September 30, as Randy mentioned previously.
In the third quarter, annuity sales in our retail channel were $1.5 billion, up 43% from the third quarter of 2020 and down slightly from the record sequential quarter.
We see ongoing success with our independent agent distribution and continue to expand our bank and broker-dealer channels.
We are now distributing through a dozen active bank and broker-dealer distribution partners.
We are very pleased that our recent expansion into institutional markets has been exceptionally strong.
Let me provide a few brief details.
F&G has issued $1.2 billion of funding agreement-backed notes in September, following our inaugural $750 million issuance in June.
Both issuances saw extremely strong market demand and attractive pricing.
F&G has also successfully entered the pension risk transfer market, closing $371 million of transactions in the third quarter and securing an additional $564 million of transactions in the fourth quarter.
Based on transactions secured to date, F&G will assume approximately $900 million in pension liabilities and provide annuity benefits to over 22,000 retirees.
Overall, institutional sales were $2.6 billion for the first nine-month period.
And with the additional $500 million pension risk transfer volume secured in the fourth quarter, we're on track to achieve $3 billion of institutional sales in 2021.
With these strong top line results, average assets under management, or AAUM, has reached $32.7 billion, driven by approximately $2.3 billion of net new business flows in the third quarter.
We are focused on generating scale benefits by increasing assets under management while continuing to leverage Blackstone's unique investment management capabilities to deliver consistent spread.
Our results continue to be strong.
Total product net investment spread was 285 basis points in the third quarter and FIA net investment spread was 335 basis points.
Adjusting for favorable notable items, total product spread was 248 basis points and FIA spread was 293 basis points, both in line with our historical trends and consistent with our disciplined approach to pricing.
Let me wrap up with a few thoughts on earnings.
First, F&G's net earnings attributable to common shareholders of $373 million for the third quarter included a $224 million onetime favorable adjustment from an actuarial system conversion, reflecting modeling enhancements and other refinements and represents less than 1% of reserves.
This conversion was a significant milestone in our multiyear effort to deliver a modern, scalable platform, which will provide operating leverage with scale over time.
This onetime favorable adjustment was excluded from adjusted net earnings along with other standard items.
Next, F&G's adjusted net earnings for the third quarter were $101 million.
Strong earnings were driven by record AAUM and strong spread results from disciplined pricing actions on both new business as well as our in-force book.
Net favorable items in the period were $27 million.
Adjusted net earnings, excluding notable items, were $74 million, up from $70 million in the second quarter.
In summary, during the third quarter, we've delivered record sales and strong earnings for F&G.
Our profitable growth strategy is firing on all cylinders, and we have successfully diversified our sources of premiums.
We remain excited about the opportunity to further contribute to the overall FNF strategy in the years ahead.
We generated $3.9 billion in total revenue in the third quarter, with the Title segment producing $2.9 billion, F&G producing $927 million and the Corporate segment generating $44 million.
Third quarter net earnings were $732 million, which includes net recognized losses of $154 million versus net recognized gains of $73 million in the third quarter of 2020.
The net recognized gains and losses in each period are primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether the securities were disposed of in the quarter or continue to be held in our investment portfolio.
Excluding net recognized gains and losses, our total revenue was $4 billion as compared with $2.9 billion in the third quarter of 2020.
Adjusted net earnings from continuing operations were $604 million or $2.12 per diluted share.
The Title segment contributed $521 million.
F&G contributed $101 million.
And the Corporate segment had an adjusted net loss of $18 million.
Excluding net recognized losses of $169 million, our Title segment generated $3.1 billion in total revenue for the third quarter compared with $2.5 billion in the third quarter of 2020.
Direct premiums increased by 22% versus the third quarter of 2020.
Agency premiums grew by 34%.
And escrow title-related and other fees increased by 14% versus the prior year.
Personnel costs increased by 15%.
And other operating expenses increased by 17%.
All in, the Title business generated a 21.7% adjusted pre-tax title margin, representing a 50 basis point increase versus the third quarter of 2020.
Interest and investment income in the Title and Corporate segments of $27 million declined $4 million as compared with the prior year quarter due to decreases in bond interest, dividends received on preferred stock and a slight decrease in income from our 1031 Exchange business.
In September, we closed an issuance of $450 million of 3.2% senior notes due September of 2051.
We're very pleased with the market's receptivity to our issuance as well as the very attractive rate that we were able to secure.
We also put in place a $400 million intercompany loan to fund F&G's growth and to better optimize their capital structure.
FNF debt outstanding was $3.1 billion on September 30 for a debt-to-total capital ratio of 24.9%.
Our title claims paid of $55 million, were $45 million lower than our provision of $100 million for the third quarter.
The carried reserve for title claim losses is currently $95 million or 5.9% above the actuary's central estimate.
We continue to provide for title claims at 4.5% of total title premiums.
Our title and corporate investment portfolio totaled $6.7 billion at September 30.
Included in the $6.7 billion are fixed maturity and preferred securities of $2.2 billion with an average duration of 2.8 years and an average rating of A2, equity securities of $1.2 billion, short-term and other investments of $500 million and cash of $2.8 billion.
We ended the quarter with $1.5 billion in cash and short-term liquid investments at the holding company level.
Let me end with a few thoughts on capital allocation.
Our capital allocation strategy remains a key focus of the Board.
We're focused on returning capital to shareholders while making strategic investments in our businesses.
Our current level of cash generation supports the following: first, FNF's $500 million annual common dividend; next, our $100 million annual interest expense on F&F debt; third, our $400 million 5.5% senior notes, which are due in September of 2022; and finally, our share repurchases.
We've continued to make share repurchases throughout the third quarter and into the fourth.
During the quarter, we purchased 1.3 million shares at an average purchase price of $46.29 per share.
And in the first week of October, we completed our previously announced $500 million share repurchase plan.
In total, we repurchased 12 million shares at an average price of $41.62 since announcing the plan in October of last year.
With regard to F&G, at the time of the merger last year, we stated that we expected F&G to double assets and earnings over five years through organic growth.
Given current momentum, we foresee that F&G's growth is running about one year ahead of schedule.
For 2021, F&G is on a trajectory to double its annual sales and has materially diversified its business with channel expansion in new retail and institutional markets.
Capital funding for this growth includes $400 million in debt capital from FNF in the third quarter as well as third-party financial reinsurance with an existing partner in the fourth quarter.
Based on current forecasts, we expect to contribute $200 million to $300 million of new equity capital in 2022.
And with F&G's 25% debt-to-capital target, we believe F&G has ample financial flexibility to execute on our growth strategy and capture market opportunities.
Beyond that horizon and subject to ongoing sales momentum, there may be an additional capital investment required in 2023, which could take the form of converting our existing $400 million term loan to equity capital.
But we believe at that point, we will be reaching a level where F&G is self-funding.
Given the compelling growth prospects, it is more attractive to defer any immediate return of capital from F&G in order to support its growing and stable source of earnings and target a return of capital a few years down the line.
FNF has enough capital generation to do all of the above, and we view the marginal return on capital into F&G as attractive and strategically important to our dynamic business model to achieve long-term value creation and attractive shareholder returns.
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compname reports third quarter 2021 diluted earnings per share from continuing operations of $2.58 and adjusted diluted earnings per share from continuing operations of $2.12.
compname reports third quarter 2021 pre-tax title margin of 16.6% and adjusted pre-tax title margin of 21.7%.
q3 adjusted earnings per share $2.12 from continuing operations.
q3 revenue $3.9 billion versus $3.0 billion.
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And the company undertakes no obligation to update or revise these statements.
In addition, on the call we will discuss non-GAAP financial measures.
Investors can find both a detailed discussion of business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's annual reports, quarterly reports, and other forms filed or furnished with the SEC.
Over the past few weeks, I have been energized by visiting our parks and spending time with so many of our team members.
It has been great to witness firsthand our team's resilience and their dedication to serving our guests.
We have divided our call today into three parts.
First, I will provide an overview of our operating performance and the strong demand trends we are seeing.
Second, Sandeep will go into more detail about our financial results.
Finally, I will return to provide some comments about the progress we've made on our three long-term strategic focus areas.
Despite the challenging environment in the third quarter, we continue to experience strong consumer demand at all of our parks.
We benefited from delivering exactly what consumers are looking for thrilling and affordable entertainment for the whole family that is outdoors, and only a short drive from home.
Attendance during the quarter indexed 92% of 2019 levels excluding pre-booked group sales our parks index 95% in the third quarter compared to the same period in 2019.
Fourth quarter to-date trends through this past weekend, ending October 24 have accelerated versus the 92% index.
We also continue to make steady progress with our revenue management initiatives.
During the third quarter, guest spending per capita was up 23% versus 2019.
In addition, season pass sales trends have accelerated.
As of October 3, 2021, our Active Pass Base was up 3% compared to the third quarter 2019.
While demand trends are encouraging, we continue to face a tight labor market, and we continue to incur additional costs while operating in this unprecedented environment.
Looking back on the past two quarters, the speed and magnitude of the resurgence of demand was even stronger than we expected which exasperated the stress on our costs and operations.
We are working on several initiatives to alleviate some of these cost pressures.
Sandeep will discuss this in more detail.
Overall, we are encouraged by our continued progress yet, we are still in the early stages of transforming our operating model.
We are confident that our efforts to improve all aspects of the guest experience will fundamentally reshape the future earnings power of our business.
I would like to start by reminding you that results for the third quarter and year-to-date trends are not comparable to prior year because we closed all of our parks in mid-March last year and several of our parks remained closed or had curtailed operations through third quarter 2020.
For that reason, I will provide comparisons to 2019.
Total attendance for the third quarter was 12 million guests, a 14% decline from 2019.
Reflecting capacity restrictions at some of the parks that were open, the loss of a significant portion of our pre-booked group sales and an unfavorable calendar shift due to our fiscal year change which benefited the second quarter at the expense of the third quarter.
Group sales, which includes school groups and company buyouts continued to experience downward pressure.
As Mike stated attendance at open parks in the third quarter index at 92% of 2019.
Excluding pre-booked group sales, our parks indexed 95%.
During the months of the quarter, our attendance indexed 97% in July, 89% in August and 86% in September.
Concerns about the delta variants increased over the summer, and we experienced a decline in group sales in the second half of August through September.
However as Mike stated, fourth quarter to-date trends have accelerated versus the 92% index we achieved in the third quarter.
Looking ahead, we don't plan to share monthly attendance trends.
However, because of the extraordinary environment, we thought it would be helpful to share this detail.
Attendance from our single day guests in the third quarter represented 39% of the attendance mix, the same as in the third quarter of 2019 despite the negative impact of lower pre-book sales on single day attendance.
Excluding pre-booked group sales, our mix of single day guests increased by three percentage points.
Because of our reporting calendar change, our third quarter fiscal quarter 2021 ended on October 3, instead of September 30 as it did in 2019.
As a result, third quarter 2021 includes three calendar days in October.
This was more than offset by four days in July, which shifted out of the third quarter and into the second quarter of this year including most of the July 4th weekend.
The net reduction due to these calendar shifts in third quarter 2021 was 437,000 of attendance and approximately $24 million of revenue.
We expect group sales to have less of an impact in the fourth quarter, when groups typically represent a smaller portion of our attendance than in the second and third quarters.
However, our new fiscal calendar will continue to create attendance shifts in the fourth quarter, which will include an extra weekend in January compared to 2019.
We expect this reporting calendar change to shift approximately 200,000 of attendance out of first quarter 2022 into fourth quarter 2021.
When netted against the shift of the October weekend out of the fourth quarter into the third quarter, we expect the changes in our fiscal operating calendar to negatively impact the fourth quarter's attendance compared to 2019 by approximately 270,000 guests.
Total guest spending per capita increased 23% in the third quarter versus 2019.
Admissions spending per capita increased 20% and in-park spending per capita increased 26%.
The increase in admissions spending per capita compared to 2019 was primarily driven by our new approach to revenue management as we saw double-digit growth in admissions per capita for both our Active Pass Base and single day tickets.
Our new approach includes pricing our tickets based on a demand curve.
It also includes a new pricing architecture that allows us to optimize relative pricing among our various ticket types and to significantly reduce the debt of discounted promotions.
In addition, as much of our season pass sales are occurring later in the season than the historical pattern, we recognize season pass revenue over fewer visits which boosted our admissions per capita in the third quarter.
As expected, admissions per capita growth versus 2019 moderated in the third quarter.
We expect to continue growing our admissions per capita over time, but we expect the growth rate to continue to moderate.
The increase in in-park spending per capita compared to 2019 was due to early progress on several of our transformation initiatives, as well as a stronger overall consumer spending environment.
Highlights from our in-park initiatives include our new food and beverage strategy featuring a new food pricing architecture and the introduction of more premium offerings, our QR code-enabled FLASH Pass program, which has increased FLASH Pass adoption, our improved merchandise mix resulting in higher retail sales, and a higher mix of single day ticket visitors whose tickets, do not include parking.
The acceleration of our in-park per capita spending during our highest attendance quarter gives us confidence that our transformation initiatives are providing a sustainable lift.
Revenue in the quarter were $638 million, up $17 million or 3% compared to 2019.
Excluding the impact of the fiscal calendar change and the impact of reduced sponsorship international agreements and accommodations revenue, our base business revenue increased by $55 million or 9% compared to the third quarter 2019.
On the cost side, cash operating and SG&A expenses increased by $45 million or 19% in the third quarter compared to 2019.
The increase was driven by several factors.
First higher wage rates and incentive costs to attract and retain teams members.
Second, an increase in litigation reserves primarily related to an increased estimate of the probable outcome of the settlement of legacy class action lawsuit.
Third, increase security in our parks, and finally, a shift in the timing of our repair and maintenance costs based on our parks leader opening dates.
As we sit here today, the operating environment remains challenging with the tight labor market and ongoing supply chain constraints.
We believe that approximately half of the additional costs we are incurring are transitory and will normalize over time.
However some of these costs, particularly wage inflation may prove to be more permanent.
In terms of labor if current wage rates were to persist, we would incur additional labor expenses of $40 million annually compared to 2019 inclusive of the $20 million we called out in the EBITDA baseline we gave during our fourth quarter 2019 earnings call.
This $40 million is consistent with what we called out in our previous earnings call.
Our team is working on potential opportunities to alleviate many of these cost pressures in case they persist over time.
Adjusted EBITDA for the third quarter was $279 million, down $28 million or 9% versus third quarter 2019.
This included the negative impact of the fiscal quarter change which shifted attendance out of the quarter, the reduction of international sponsorship and accommodations revenue, and roughly half of the $45 million cost increase in the quarter that we believe to be transitory.
We are pleased with the growth of our Active Pass Base.
At the end of the third quarter we had 7.6 million passholders up 3% from the end of the third quarter 2019.
This is especially encouraging because we elected to not hold a highly promotional FLASH sale that we conducted around Labor Day, the last several years before the pandemic.
We expect to continue to increase our Active Pass Base through the spring while achieving higher ticket yields.
Our very large Active Pass Base sets us up for a solid fourth quarter and positions us well as we head into the 2022 season.
Deferred revenue as of October 3, 2021 was $224 million, up $26 million or 13% compared to third quarter 2019.
The increase was primarily due to the deferral of revenue for members whose benefits were extended.
Year-to-date capital expenditures were $62 million.
We expect capital expenditures of $120 million to $130 million in 2021 as we make investments to improve the guest experience and to increase capacity on our rights.
Our capex this year is heavily weighted in the fourth quarter due to our cautious approach toward capital spending in the early part of 2021.
We continue to believe 9% to 10% of revenue is an appropriate level of annual capital expenditures in a normalized environment.
As the recovery continues, we are focused on maximizing cash flow.
Year-to-date net cash flow through the third quarter was $232 million, an increase of $26 million compared to the first three quarters of 2019.
Our balance sheet is very healthy, with no borrowings under our revolver and no debt maturities before 2024.
Our liquidity position as of October 3 was $851 million.
This included $461 million of available revolver capacity, net of $20 million of letters of credit and $390 million of cash.
Our capital allocation priorities remain the same, first, to invest in our base business.
Second, to pay down debt until we reach our target leverage range of three to four times net debt to adjusted EBITDA.
Third, to consider strategic acquisition opportunities.
Finally, to return excess cash to shareholders by our dividends or share repurchases.
Moving to our transformation plan as previously discussed, we expect the plan to generate an incremental $80 million to $110 million in annual run-rate adjusted EBITDA.
In 2021, we expect to achieve $30 million to $35 million from our fixed cost reductions.
We have already realized over $23 million through the first nine months of this year.
Based on year-to-date trends, we now expect to reach the high end of $80 million to $110 million range once the plan is fully implemented and attendance returns to 2019 levels.
Thus far, our revenue management initiatives have overdelivered on our original plan.
However, our cost initiatives have been negatively impacted by labor and supply chain inflationary pressures.
For that reason, we expect our revenue initiatives to provide a greater proportion of the $110 million.
Relative to the midpoint of the company's pre-pandemic guidance range of $450 million, we are well positioned to achieve our adjusted EBITDA baseline of $560 million once our transformation plan is fully implemented, and attendance returns to 2019 levels.
This EBITDA level assumes the current wage rate environment persists.
We are laying the groundwork for sustainable earnings growth and once the base line is achieved, we expect to grow revenue by low to mid-single-digits and EBITDA by mid-to-high single-digits annually thereafter.
Now, I will pass the call back to Mike.
I'd like to take a few minutes to review some of the progress we have made on our three strategic focus areas to drive long-term, sustainable earnings growth.
Our first strategic focus area is modernizing the guest experience through technology.
We want to create more personalized and customized experiences for our guests, putting them in control of their time and activities.
This will result in our guests spending less time wait in line, and more time having fun and enjoying activities during each visit.
We believe that improving the guest experience will be the most important driver of our earnings growth.
On past calls, I've discussed a number of the exciting long-term initiatives that are underway including our new CRM platform, cash to card kiosks, ride reservations and an improved mobile app to name a few.
Today, I would like to provide some detail on three additional initiatives that are already starting to have an impact.
First, digital fright passes.
Instead of guests having to wait in long lines to pick up hundred attraction wrist bands, this Fright Fest season they able to go right to the honored attractions using their season pass card, membership card for e-tickets.
Guests are able to purchase digital fright passes on their phone from anywhere in the park by scanning QR codes.
This has increased our fright pass sales while eliminating wait times for our guests.
Second, expanding our mobile dining locations across our parks and enhancing our food and beverage offerings.
We continue to see the adoption of mobile dining leading to higher average transactions and improved guest satisfaction.
Third, culinary partnerships, to elevate the guest dining experience we have launched two we probably serve Starbucks locations that serve a variety of the premium Starbucks drinks beloved by our guests.
Early findings reveal that selective partnerships with third-party brands, improves guest satisfaction, and increases in-park spend.
Our partnership with Starbucks is only the first of several initiatives centered on enhancing our guest dining experience through strategic partnerships.
Our second focus area is to continuously improve operational efficiency.
We continue to make progress in this area in particular on our centralized back office and procurement efforts.
Our cost progress is currently being obscured by the labor cost and supply chain headwinds, but over time, we expect our cost savings to show up in our financial results as we scale our business, get closer to full attendance capacity and pursue additional cost opportunities.
Finally, our third focus area is driving financial excellence.
While we are keeping a close eye on the delta and other variants, we are optimistic that the global recovery will continue.
Timelines are hard to predict and progress will continue to vary by region, but we believe we are fast on our way to stronger guest attendance beyond the levels of 2019.
As we implement more of our transformation program and as our attendance recovers at 2019 levels, we expect to deliver $560 million in adjusted EBITDA.
Even more important, once we achieve that new EBITDA baseline, we expect to sustainably grow adjusted EBITDA from our base business mid to high single-digits over time.
In conclusion, these have been challenging times, but we are looking forward to a bright future.
With a clear focus on improving the guest experience through technology and a talented and dedicated team to execute our strategy, we are well positioned to accelerate growth in 2022.
Catherine, at this point, could you please open the call for any questions.
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compname reports q3 revenue of $638 mln.
q3 revenue $638 million.
qtrly total revenue was $638 million, an increase of $17 million compared to q3 2019.
six flags entertainment - expects transformation plan announced in march 2020 to generate incremental $80 million to $110 million annual run-rate adjusted ebitda.
qtrly increase in operating costs was driven by higher wage rates & incentive costs to attract and retain team members.
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These factors are detailed in the company's financial reports.
You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data.
Our core performance measures are non-GAAP measures used by management to analyze the business.
For the fourth quarter, the largest difference between our GAAP and core results stems from restructuring charges which are primarily noncash as well as noncash mark-to-market losses associated with the company's currency hedging contracts.
With respect to mark-to-market adjustments, GAAP accounting requires earnings translation, hedge contracts, and foreign debt settling in future periods to be mark-to-market and recorded at the current value at the end of each quarter, even though these contracts will not be settled in the current quarter.
For us, this reduced GAAP earnings in Q4 by $63 million.
To be clear, this mark-to-market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth, and our future shareholder distributions.
Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty it provides.
We've received one $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
A reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com.
You may also access core results on our website with downloadable financials in the interactive analyst center.
Today, we reported an outstanding finish to the year.
Each of our segments grew sales and profits year over year and we continue to progress our strategic initiatives.
For the fourth quarter, sales were $3.3 billion, up 11% sequentially, and 17% year over year.
Our operating margin expanded 500 basis points year over year to 19.4%.
Operating income grew 18% sequentially and 58% year over year.
EPS of $0.52 cents was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the fourth quarter, $948 million for the full year, and we finished the year with $2.7 billion in cash on our balance sheet.
It goes without saying, 2020 was an incredibly difficult year.
We joined the rest of the world to confront the pandemic, economic uncertainty, and social unrest.
Throughout the year, we focused on our customers and executed on strategic priorities while protecting our people.
For more perspective on our performance, I'll share three observations: first, we demonstrated our ability to adapt rapidly and remain resilient in the face of uncertainty; second, our more Corning content strategy clearly contributed to our growth and our performance against our end markets; and finally, throughout this difficult period, we're embracing the opportunity to make a difference wherever we are with what we had to contribute.
Now, I'll expand on my first observation.
Our decisive actions and strong operational execution have resulted in continued leadership in the capabilities that make Corning distinctive.
Like many companies, we focused on bolstering our financial strength, reducing production levels and operating costs, carefully managing inventory, reducing capital expenditures, and pausing share buybacks.
However, it's not about what we cut but what we kept.
While we adjusted production, we didn't reduce capacity keeping us positioned to meet increasing demand when the economy improved.
We continued to make strategic investments and advance major innovations with our customers to capture the growth playing out across our market-access platforms.
And we developed multifaceted programs to protect our talent and preserve our capabilities.
Our first-half actions generated significant cost savings in the second half of the year.
And as the economy started showing signs of green shoots, we effectively adjusted our operations, keeping pace as demand started to recover in many of the markets we serve.
Our results tell the story.
Our sales were down 12% in the first half as most economies were impacted by pandemic-related lockdowns.
But in the second half, we improved sales 24% over the first, while growing operating income, 122%, returning to year-over-year growth and generating very strong free cash flow.
For the year, we generated almost $1 billion of free cash flow and our balance sheet remains very strong.
We expect this strong momentum to continue heading into 2021.
We will continue to adapt and focus on execution as we have proven that our approach is working.
Turning to my second observation.
In all the industries we serve, important market trends continue to offer new challenges that Corning is just uniquely qualified to address and new opportunities to integrate more Corning content into our customers' products.
In this difficult year, we have proven that this is an especially powerful value creation letter.
We aren't relying exclusively on people buying more stuff, we're putting more Corning into the products that people are already buying.
In the fourth quarter, this strategy paid off as we grew sales year over year in every one of our businesses.
At the top were specialty materials with sales up 20% year over year, and environmental technologies up 19% year over year, both significantly outperforming their end markets.
Last quarter, I described our innovations in mobile consumer electronics.
Looking at how we're investing to create additional revenue streams and capture content opportunities.
Today, our focus on our automotive market access platform.
The auto industry is undergoing major disruptions.
Automakers are designing cleaner and safer vehicles while featuring technology that provides immersive experiences were uniquely suited to address these trends.
And for us, the opportunities are large.
In the range of $100 per car in Corning content, we're collaborating with more OEMs and we're offering more solutions to help move the industry forward.
Let's look at two of our biggest successes right now starting with our automotive glass solutions business.
We're building strong momentum.
Our advantaged solutions are enabling the very rapid shift toward in-vehicle displays that are interactive, that are integrated, and shaped.
We're collaborating with industry leaders across the auto ecosystem, including Visteon, LGE, BOE, and VIA Optronics to accelerate the adoption of our patented 3D ColdForm technology which enables lower-cost-shaped auto interiors.
Our large-scale facility in Hefei, China is now fully operational and servicing our growing demand.
And we continue to see strong adoption of our technology by auto OEMs. Our recent proof point is the new Mercedes-Benz Hyperscreen dashboard display, which features a Gorilla Glass cover nearly 5 feet wide.
Similarly, in environmental technologies, in a year when a global pandemic temporarily shut down OEM production, our proprietary gasoline particulate filter business still grew sales year over year.
When we introduced GPF, we said our technology increased our content opportunity per car by three to four times.
Like most of our innovations, it started with the customer challenge.
Europe and China are addressing fine particular pollution with new emissions regulations.
We applied our expertise in ceramic science with our advanced manufacturing capabilities and extrusion to rapidly develop filters that efficiently trap ion particulates.
And today, we're effectively helping automakers reduce these harmful emissions, meet new regulations, and produce some of the cleanest gasoline vehicles you can buy.
Demand for our GPF has grown quickly.
And with our market-leading product, we continue to win the majority of platforms awarded to date.
We're well on our way to building a $0.5 billion business.
We're actually ahead of schedule, and the content opportunity continues to grow.
We expect our GPF technology to migrate beyond Europe and China as other regions focus on improving air quality.
And many new car models will soon be required to get even closer to near-zero particulate emissions.
In response, we recently introduced our next-generation GPF, featuring enhanced filtration capabilities.
They're launching in upcoming models as automakers prepare for the next wave of regulations.
Across our markets, we see a similar content story playing out as we respond to key industry challenges with more Corning solutions.
Let me share some other accomplishments across our market-access platforms.
In life sciences, pandemic-related demand has highlighted our strength in the industry.
And we achieved major milestones toward building a significant Valor Glass franchise in 2020.
At the start of the year, we entered a long-term supply agreement to provide Valor Glass vials for a portion of the currently marketed Pfizer drug products.
Soon after, we were awarded $204 million in funding from the U.S. government to substantially expand domestic manufacturing capacity for Valor vials.
Today, we're supplying Valor Glass to several leading COVID vaccine manufacturers.
We produce millions of Valor vials and shipped enough for more than 100 million doses, supporting multiple vaccine developers.
In our life sciences segment, the global health fight is driving strong demand for our consumable products.
We're supporting the development of treatments in vaccines, as well as mass testing efforts.
We received $15 million from the U.S. government to expand domestic capacity for robotic pipette tips which are used for COVID diagnostic testing.
BioNTech recently recognized our contribution to their successful COVID vaccine development.
Turning to mobile consumer electronics.
We launched the toughest Gorilla Glass yet, Victus.
And it's already featured on six Samsung devices.
Corning also invented the world's first transparent color-free glass-ceramic which is featured on the front cover of the latest iPhone.
Apple and Corning partnered to develop and scale the manufacturing of Ceramic Shield.
It offers unparalleled durability and toughness.
I noted that specialty materials sales were up 20% year over year in Quarter 4.
They were up 18% for the full year in a smartphone market that declined 7%.
In optical communications, we returned to growth and we expect this growth to continue as customers increase spending to support growing bandwidth requirements.
In 2020, we introduced new and innovative solutions that help speed the deployment of 5G.
We launched our outdoor 5G-ready connectivity solutions, featuring compact easy-to-install terminals that can be deployed in any conceivable architecture.
Operators can actually save up to $500 per terminal location, dramatically lowering installation cost and speeding up deployment.
We're also collaborating with Verizon to enable 5G millimeter-wave indoor deployments for their enterprise customers.
We're also working with Qualcomm Technologies to deliver indoor networks that are 5G ready, easy-to-install, and affordable.
And we're collaborating with EnerSys to simplify the delivery of fiber and electrical power to small-cell wireless sites.
Retail demand for TV and IT products remains strong.
Demand for large-sized TVs continues to grow.
75-inch sets were up more than 60% for the full year.
Large TVs are most efficiently made on Gen 10.5 plants.
Corning is well-positioned to capture that growth with its Gen 10.5 plants in China including the two newest Gen 10.5 facilities in Wuhan and Guangzhou, which are now expanding production to meet customer demand.
Ramping these sites has been no small feat in the midst of a pandemic.
We are very proud of our innovative and dedicated expert engineering teams that rose to a host of unprecedented challenges to start-up tanks in both facilities.
Looking ahead, Corning's long-term growth drivers and content opportunities are strong in each of our markets.
And we believe some secular trends could accelerate as consumer lifestyles continue to change in the aftermath of the health crisis.
And that leads to my third observation.
We're living through the kind of moment that tends to bring true character to light.
At Corning, our values are evident in our actions.
We've unleashed our capabilities to help combat the virus.
And we're proud to be creating life-changing technologies that contribute to keeping people safe and help society address the challenges of the pandemic.
We also recognize, in these unprecedented times, that we have the opportunity to share resources and leadership on a range of important issues.
We've launched racial and social quality programs, and our Unity Campaign supports vital human services and emergency relief in our communities around the world.
In conclusion, on all fronts, Corning is executing well.
We're delivering outstanding results and making important progress across our strategic priorities.
I am confident that we are entering the year with solid momentum and we expect to grow in 2021.
Our more Corning strategy will continue to drive outperformance across the diverse industries that we serve.
We're not just counting on consumers buying more cars, TVs, or smartphones to grow.
And I'm excited about how we're bringing our capabilities to bear in optical and life sciences, as operators expand their networks and we continue to support vital drug and vaccine development.
We feel good about our fourth-quarter results.
On a year-over-year basis, we grew sales and earnings.
We expect to grow again in the first quarter, and we expect to grow for the full year, driven by improving markets and our more Corning strategy.
We are building a bigger, stronger company that delivers sustainable results while remaining agile in our ability to respond to changing market factors.
Now let me walk you through our fourth-quarter performance.
In the fourth quarter, we grew sales 11% sequentially and 17% year over year to $3.3 billion, exceeding expectations.
Excluding the consolidation of Hemlock Semiconductor, sales grew 11% year over year, with every segment growing sales and net income.
Specialty materials and environmental technologies deli -- delivered particularly strong year-over-year sales growth, up 20% and 19%, respectively, both outperforming their underlying markets.
Optical communications returned to year-over-year growth, and we expect that growth to continue.
Our operating margin was 19.4%.
That is an improvement of 500 basis points on a year-over-year basis.
We grew operating income 18% sequentially and 58% year over year.
EPS of $0.52 was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the quarter.
Cumulative free cash flow for the full year was $948 million.
We ended the year with a cash balance of $2.7 billion.
We entered 2021 in an excellent financial position.
Now let's review the business segments.
In display technologies, fourth-quarter sales were $841 million, up 2% sequentially and 6% year over year.
And net income was $217 million, up 11% sequentially and 21% year over year.
Retail demand for TV and IT products remain strong remained strong during the promotional season in Q4.
Display's full-year sales were $3.2 billion, and net income was $717 million.
Our full-year price declines in 2020 were mid-single-digits.
The glass market and our glass volume were up mid-single-digits for the year.
The retail market was more robust than the industry -- than the industry expected, resulting in panel supply being tight for the second half of 2020.
Panel makers ran at high utilizations and the industry drew down inventory to satisfy demand.
These dynamics also resulted in glass supply being tight, and more recently in shortage due to a power outage at a competitor's glass plant.
Now let's look at 2021.
We expect the TV and IT retail markets to remain strong.
We remain confident that large-size TVs will continue to grow, and we are well-positioned to capture that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing.
We expect the glass market to grow a mid-single-digit percentage in 2021.
We expect glass supply to remain tight in the upcoming quarters.
As a result of these supply/demand dynamics, we are experiencing a very favorable pricing environment.
We expect Q1 2021 glass prices to be flat with Q4 2020.
This is significantly better than the sequential declines we've seen in any other first quarter over the last decade.
Glass prices for some customers in some gen sizes may actually see a sequential increase.
We believe the following three factors will continue to drive the favorable pricing environment for the upcoming quarters: first, we expect glass supply to continue to be tight; second, our competitors continue to face profitability challenges at current pricing levels; and third, display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Glass prices must support acceptable returns on these investments.
In optical communications, fourth-quarter sales were $976 million, up 8% year over year and 7% sequentially.
Our year-over-year growth can be attributed to broad improvements in demand for both carrier and enterprise customers.
Fourth-quarter core net income of $141 million was up 127% year over year, and 23% sequentially.
The improvement was driven by the incremental volume and favorable cost performance.
We have returned to growth in optical communications, and we expect that growth to continue.
Bandwidth demand is increasing and users are demanding higher performance connections.
We're seeing positive statements from customers on increasing investments in their optical networks.
Our sales and order rates are picking up, and we're ready to capture demand as it materializes.
We are confident we will grow sales in optical communications for the year.
We continue to monitor and evaluate market demand signals to determine the magnitude of growth, and we'll keep -- we'll continue to keep you updated as we go through the year.
In environmental technologies, fourth-quarter sales were $445 million, up 19% year over year and 17% sequentially, ahead of expectations as markets continue to improve and GPF adoptions continued in China.
Net income was $93 million, up 45% year over year and 35% sequentially, driven by strong operational performance globally and successful ramping of additional GPF capacity in China.
For the full year, sales were $1.4 billion and our performance was better than the underlying market.
Net income was $197 million.
While our full-year 2020 sales were certainly impacted by COVID-19, we are recovering faster than the market by increasing our content for both the automotive and diesel end markets.
Despite severely -- severely challenged markets we saw year overgrowth in GPF sales.
Strong GPF adoption continues in Europe and in China, where the China 6a regulation is being implemented nationwide this month.
We are ahead of our original timeframe to build a $500 million GPF business.
Specialty materials had an outstanding fourth quarter and a full year.
Q4 sales of $545 million were up 20% year over year, full-year sales were $1.9 billion, up 18% year over year, despite a 7% decline in the smartphone market, driven by strong demand for our premium cover materials and our other innovations.
Net income was $423 million, up 40% from 2019 on higher sales volume and strong cost performance.
The importance of computing and connectivity were amplified during the pandemic.
Our new product innovations, including Ceramic Shield and Gorilla Glass Victus, as well as our EUV products in the semiconductor market were important contributors to our strong performance.
Now before I get to our life sciences results, I'd like to note something of great importance to us.
Throughout the pandemic, our life sciences market access platform has applied its broad capabilities and full product portfolio to help the world combat the pandemic.
From our traditionally research-focused consumables to our bioproduction products to our transport media and, of course, our Valor Glass, we're playing a vital role in the development and supply of test kits and vaccines.
Now, let's look at our segment results.
Life sciences fourth-quarter sales were $274 million, up 7% year over year and 23% sequentially, driven by strong demand for COVID-related products, including bioproduction products used in clinical trials.
Net income was $42 million, up 11% year over year and 50% sequentially.
In summary, we successfully navigated a very challenging year.
We strengthened our balance sheet, established growth in the second half, and generated a free cash flow of $948 million for the year.
As we look ahead, we have strong momentum coming into 2021 and expect year-over-year growth to accelerate in the first quarter.
Specifically, we expect core sales of $3.0 billion to $3.2 billion, compared to $2.5 billion in the first quarter last year, and earnings per share of $0.40 to $0.44, which is double last year's first-quarter earnings per share at the low end of the range.
For the full year, we expect growth in sales and earnings and we anticipate generating more free cash flow in 2021 than in 2020.
And we will share more with you as the year progresses.
Let's turn to our commitment to financial stewardship and prudent capital allocation.
Our fundamental approach remains the same.
We will continue to focus our portfolio and utilize our financial strength.
We generate very strong operating cash flow, and we expect that to continue going forward.
We will continue to use our cash to grow, extend our leadership, and reward shareholders.
Our first priority for our use of cash is to invest in our growth and extend our leadership.
We do this through RD&E investments, capital spending, and strategic M&A.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
In 2021, we expect capex similar to 2020, as we have the capacity in place to meet higher sales.
Now, we'll invest more if we require capacity to support additional growth, any additional capital investment would be supported by a customer commitment.
We'll keep you updated as we go throughout the year.
Given our expected strong free cash flow generation in 2021, we expect to increase our distributions to shareholders.
That includes reinstating opportunistic share repurchases sometime this year.
In closing, we're very pleased with our strong close to 2020, highlighted by growing sales and profitability.
We continue to focus on a rich set of opportunities.
Our businesses are fundamental to the long-term growth drivers in the industries they serve, and our more Corning strategy continues to deliver sales outperformance relative to our end markets.
And I look forward to sharing our progress as the year goes on.
With that, let's move to Q&A.
Operator, we're ready for the first question.
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q4 core earnings per share $0.52.
qtrly core sales of $3.3 billion, up 11% sequentially and 17% year over year.
in display technologies, q4 sales were $841 million, up 2% sequentially and 6% year over year.
expect year-over-year growth to accelerate in q1 of 2021.
optical communications q4 sales were $976 million, up 7% sequentially and 8% year over year.
expect core sales of $3.0 billion to $3.2 billion for q1 of 2021.
sees q1 earnings per share of $0.40 to $0.44.
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These statements are based on our current beliefs, as well as certain assumptions and information currently available to us and are discussed in more detail in our quarterly report on Form 10-Q for the quarter ended September 30, 2021, which we expect to be filed tomorrow, November 4.
I'll also refer to adjusted EBITDA and distributable cash flow, or DCF, all of which are non-GAAP financial measures.
You'll find a reconciliation of our non-GAAP measures on our website.
I'd like to start today by looking at some of our third quarter highlights.
We generated adjusted EBITDA of $2.6 billion and DCF attributable to the partners of Energy Transfer, as adjusted, of $1.3 billion.
Our excess cash flow after distributions was approximately $900 million.
On an incurred basis, we had excess DCF of approximately $540 million after distributions of $414 million and growth capital of approximately $360 million.
Operationally, our NGL transportation and fractionation and NGL refined products terminals volumes reached new records during the quarter largely driven by growth in volumes, beating our Mont Belvieu fractionators and Nederland Terminal.
As the market continues to recover, we are well-positioned to benefit from increasing demand and higher margins.
Switching gears to an update on the acquisition of Enable Midstream Partners, which will provide increased scale in the Mid-Continent and Ark-La-Tex regions and improved connectivity for our natural gas and NGL transportation customers.
We expect the combination of energy transfers and enables complementary assets to allow us to provide flexible and competitive service to our customers as we pursue additional commercial opportunities utilizing our improved connectivity and increased footprint.
As a reminder, we expect the combined company to generate more than $100 million of annual run rate cost synergies, and this is before potential commercial synergies.
We continue to believe that the transaction will close before the end of the year.
I'll now walk you through recent developments on our growth projects, starting with our Cushing South pipeline.
In early June, we commenced service to provide transportation for approximately 65,000 barrels per day of crude oil from our Cushing terminal to our Nederland terminal, providing access for Powder River and DJ Basin barrels to our Nederland terminal being an upstream connection with our White Cliffs Pipeline.
This pipe is already being fully utilized.
And as we mentioned on our last call, we are moving forward with Phase 2, which will increase the capacity to 120,000 barrels per day.
Phase 2 is expected to be in service early in the second quarter of 2022 and is underpinned by third-party commitments.
As a reminder, minimal capital spend is required for this phase.
Next, construction on the Ted Collins link is progressing and is now expected to be in service late in the first quarter of 2022.
The Ted Collins link will give us the ability to fully load and export unblended low-gravity Bakken and WTI barrels out of the Houston market, showcasing Energy Transfer's unique ability to provide a net Bakken barrel to markets along the Gulf Coast.
Now turning to our Mariner East system.
We have commissioned the next significant phase of the Mariner East project, which brings our current capacity on the Mariner East pipeline system to approximately 260,000 barrels per day.
Year-to-date, NGL volumes through the Mariner East pipeline system and Marcus Hook terminal are up 12% over the same period in 2020.
We are awaiting the issuance of a permit modification for the conversion of the final directional drill to an open cut, which will allow us to place the final segment of Mariner East into service in the first quarter of 2022.
Our Pennsylvania Access project, which will allow refined products to flow from the Midwest supply regions into Pennsylvania, New York and other markets in the Northeast, will begin moving refined products this winter.
Now for a brief update on our Nederland terminal.
As a reminder, with the completion of the remaining expansions of our LPG facilities at Nederland, earlier this year, we are now capable of exporting more than 700,000 barrels per day of NGLs from our Nederland terminal.
And when combined with our export capabilities from our Marcus Hook terminal, as well as our Mariner West pipeline, which exports ethane to Canada, our total NGL export capacity is over 1.1 million barrels per day, which is among the largest in the world.
At our expanded Nederland terminal, NGL volumes continued to increase during the third quarter, including export volumes under our Orbit ethane export joint venture, which has remained strong.
Year-to-date through September, we have loaded more than 16 million barrels of ethane out of this facility.
And in total, our percentage of worldwide NGL exports has doubled over the last 18 months to nearly 20%, which was more than any other company or country for the third quarter of 2021.
Looking ahead, we expect our total NGL export volumes from Nederland to continue to increase throughout next year.
In addition, demand for supply to refineries remain strong, and our crude oil storage at Nederland is fully contracted.
At Mont Belvieu, we recently brought on a 3 million-barrel high-rate storage well, which takes our NGL storage capabilities at Mont Belvieu to 53 million barrels.
And our Permian Bridge project, which connects our gathering and processing assets in the Delaware Basin with our G&P assets in the Midland Basin was placed into service in October and is already being significantly utilized.
This project allows us to move approximately 115,000 Mcf per day of rich gas out of the Midland Basin and to operate existing capacity more efficiently while also providing access to additional takeaway options.
In addition, it can easily be expanded to 200,000 Mcf per day when needed.
Lastly, in July, we announced the signing of a memorandum of understanding with the Republic of Panama to study the feasibility of jointly developing a proposed Trans-Panama gateway pipeline.
We believe this project would create the most liquid and attractive LPG supply hub in the world and are excited about the opportunity it presents.
Now for an update on our alternative energy activities, where we have continued to make progress on a number of fronts.
In September, we entered into a 15-year power purchase agreement with SB Energy for 120 megawatts of solar power from its Eiffel Solar project in Northeast Texas.
This is the second solar project we are participating in and these agreements provide a good fixed price per megawatt hour on a generated basis.
So we only pay for power actually generated and delivered to us.
We're also continuing to explore several opportunities for solar, wind, and forestry carbon credit projects on our existing acreage in the Appalachian region.
In particular, we're continuing to jointly pursue solar and wind development on the Energy Transfer track in Kentucky with a large utility company, and we are in discussions with other large renewable energy developers.
On the carbon capture front, our Marcus Hook project looks financially attractive based upon preliminary cost estimates and design feasibility studies.
This project would involve capturing CO2 from the flue gas and delivering it to customers for industrial applications and is used in food and beverage industries.
We're also pursuing several carbon projects related to our assets, including projects involving the capture of CO2 from processing plants for use in enhanced oil recovery or sequestration.
We continue to believe that our franchise will allow us to participate in a variety of projects involving carbon capture or other innovative uses as we continue to reduce our carbon footprint.
Lastly, we expect to publish our annual corporate responsibility report for our website shortly.
Now let's take a closer look at our third quarter results.
Consolidated adjusted EBITDA was $2.6 billion, compared to $2.9 billion for the third quarter of 2020.
DCF attributable to the partners as adjusted was $1.31 billion for the third quarter, compared to $1.69 billion for the third quarter of 2020.
While we saw higher volumes across the majority of our segments, including record volumes in the NGL and refined products segment, these benefits do not offset the significant optimization gains in the third quarter of 2020 related to our various optimization groups, as well as the onetime $103 million gain in our midstream segment.
In addition, the third quarter of 2021 included higher utilities and other winter storm Uri-related expenses.
On October 26, we announced a quarterly cash distribution of $0.1525 per common unit or $0.61 on an annualized basis.
This distribution will be paid on November 19 to unitholders of record as of the close of business on November 5.
Turning to our results by segment, and we'll start with the NGL and refined products.
Adjusted EBITDA was $706 million, compared to $762 million for the same period last year.
Higher terminal services and transportation margins related to the increased throughput on our Nederland and Mariner East pipelines in the third quarter of 2021 were offset by a $55 million decrease in our optimization businesses at Mont Belvieu and in the Northeast, as well as increased opex and G&A.
NGL transportation volumes on our wholly owned and joint venture pipelines increased to a record 1.8 million barrels per day, compared to 1.5 million barrels per day for the same period last year.
This increase was primarily due to increased export volumes feeding into our Nederland terminal from the initiation of service on our propane and ethane export projects, higher volumes from the Eagle Ford region, as well as increased volumes on our Mariner East and Mariner West pipeline systems.
And our fractionators also reached a new record for the quarter with an average fractionated volumes of 884,000 barrels per day, compared to 877,000 barrels per day for the third quarter of 2020.
Throughout 2021, we have continued to add volumes to our system and are well-positioned to capture additional volumes and capitalize on new opportunities as demand improves.
For our crude oil segment, adjusted EBITDA was $496 million, compared to $631 million for the same period last year.
The improved performance on our Bakken and Bayou Bridge pipelines as a result of recovering volumes in the third quarter of 2021 did not offset approximately $100 million of onetime items in the third quarter of 2020.
In addition, we had approximately $20 million in other optimization reductions, as well as increased opex and G&A expense year-over-year.
For midstream, adjusted EBITDA was $556 million, compared to $530 million for the third quarter of 2020.
This was largely the result of a $156 million increase related to favorable NGL and natural gas prices, as well as volume growth in the Permian and the ramp-up of recently completed assets in the Northeast, which were partially offset by a decrease of $103 million due to the restructuring and assignment of certain contracts in the Ark-La-Tex region in the third quarter of 2020.
Gathered gas volumes were 13 million MMBtus per day, compared to 12.9 million MMBtus per day for the same period last year due to higher volumes in the Permian, Ark-La-Tex and South Texas regions.
Permian Basin volumes continue to be strong and Midland inlet volumes remained at/or near record highs.
As a result, we are already utilizing our Permian Bridge project to enhance the efficiency of our processing in the area by moving some volumes over to our Delaware Basin processing plants.
In our Interstate segment, adjusted EBITDA was $334 million, compared to $425 million for the third quarter of 2020 primarily due to contract expirations at the end of 2020 on Tiger and FEP, as well as a shipper bankruptcy on Tiger and lower demand on Panhandle and Trunkline partially offset by an increase in transported volumes on Rover due to more favorable market conditions.
And for our intrastate segment, adjusted EBITDA was $172 million, compared to $203 million in the third quarter of last year.
This was primarily due to lower optimization volumes as a result of third-party customers shifting to long-term contracts from the Permian to the Gulf Coast and lower spreads, as well as an increase in operating expenses, which were largely offset by increased transportation volumes out of the Permian and an increase in retained fuel revenues and storage margin.
While it impacted us over the comparison period, the additional long-term contracting of third-party customers from the Permian to the Gulf Coast is expected to benefit us going forward as the Waha to Katy basis differential has tightened significantly.
To reduce volatility within our earnings and protect us from falling basis differentials, like we saw from the third quarter of 2020 to the third quarter of 2021, we have strategically taken steps to lock in additional volumes under fee-based long-term contracts, which are exceeding current differentials.
Now turning to our 2021 adjusted EBITDA guidance.
Our full year 2021 adjusted EBITDA remains $12.9 billion to $13.3 billion.
As a reminder, this range excludes any contributions from the announced Enable acquisition.
And moving to a growth capital update, for the nine months ended September 30, 2021, Energy Transfer spent $1.08 billion on organic growth projects, primarily in the NGL refined products segment, excluding SUN and USA Compression capex.
For full year 2021, we continue to expect growth capital expenditures to be approximately $1.6 billion, primarily in the NGL refined products, midstream, and crude oil segment.
After 2022 and 2023, we continue to expect to spend approximately $500 million to $700 million per year.
Now looking briefly at our liquidity position.
As of September 30, 2021, total available liquidity under our revolving credit facilities was approximately $5.4 billion, and our leverage ratio was 3.15 times per the credit facility.
During the third quarter, we utilized cash from operations to reduce our outstanding debt by approximately $800 million.
And year-to-date, we have reduced our long-term debt by approximately $6 billion.
We have done a lot of heavy lifting over the last few years as we work to accelerate our debt reduction, improve our leverage, and best position ourselves to return value to our unitholders.
We expect to generate a significant amount of cash flow in 2022, and paying down debt continues to be our top priority.
Additionally, our strong performance in 2021 opens the door for the potential to begin returning value to our unitholders in the form of distribution increases and/or buybacks beginning next year.
During the third quarter, we continue to see volumes recover across several of our systems, as well as improve fundamentals.
In addition, our Nederland and Mariner East expansion projects drove record volumes in our NGL and refined products segment, and we expect total NGL exports to grow throughout 2022.
Overall, our assets continued to generate strong cash flow, which allowed us to internally fund our growth projects and further reduce debt in the third quarter.
We remain committed to maintaining and improving our investment-grade rating and continue to place a significant amount of emphasis on capital discipline, deleveraging, and maintaining financial flexibility.
We continue to be excited about the acquisition of Enable, and we believe we will be able to use our enhanced footprint to improve efficiencies and pursue new commercial opportunities.
How we participate in the evolving energy world is a key focus, and we continue to make progress on a number of our alternative energy projects, which we can enhance and effectively grow our energy franchise with preliminary cost estimates looking favorable.
Operator, please open the lineup for our first question.
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for full year of 2021, et expects its adjusted ebitda to be $12.9 billion to $13.3 billion.
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Let me talk a little bit about the environment before we talk about the results for the quarter.
We talked to you about 90 days ago.
So I'll try and draw comparisons to what I said 90 days back.
I had an optimistic tone 90 days ago, I'm more optimistic today.
What we're seeing, the data that is coming to us from every angle, whether it's around the vaccination and the pandemic or its economic data across the board, we're seeing more reasons to be optimistic for the remaining of this year and into next year than we were in January.
In January, we were fairly optimistic to begin with.
So the economy is opening up.
Florida is clearly much further along than other parts of the country.
New York is a little further behind than other parts of the country.
But overall, our franchise where we do business, we're seeing a lot of positive momentum.
And then that -- those assumptions then get reflected in our financials, which we will talk to you in some detail.
But generally feeling very good about economic activity and about the economy opening up and the vaccine rollout.
Within the company also, I will say that we are trying to gather data on how many employees have been vaccinated.
It's self-reported data, so it lags a little bit.
But we're kind of matching up with where the country is.
About 30% of our employees are either vaccinated or about to be fully vaccinated, and many more are in line.
Most of the senior management team is now fully vaccinated.
The quarterly performance, we reported net income of about $99 million, 98.8% to be exact, $1.06 per share.
This compares to $0.89 that we reported to you last quarter.
And obviously, last -- this time last year, the first quarter was a loss of $0.33.
So we've come a long way in a short few months.
The highlights of the quarter is, again, we'll go through a little bit about the P&L.
I'll jump to the balance sheet after that.
Net interest income continued to grow despite elevated levels of liquidity as is the problem across the industry.
We had NII of $196 million.
This compares to $193 million last quarter and $181 million compared to the first quarter of last year.
As we told you three months ago, we were positively biased where it came to NIM guidance, and NIM did expand from 2.33% last quarter to 2.39% this quarter.
And that expansion really is a result of us executing on our deposit strategy.
Deposits continue to grow and cost of deposits continue to come down.
We had another very, very solid quarter.
Noninterest DDA grew by $957 million, which I'm very happy about.
The average noninterest DDA grew by $338 million.
But the number that really makes me happy is that noninterest DDA now stands at about 29% of our total deposits.
Just in December, we were at 25%.
At the end of 2019, I think we were at 18%.
And when we started this deposit-centric strategy about three years ago, we were in the mid-teens.
I think we were 14% or 15%.
So we've come a long way, and I'm very, very proud of what the company has achieved.
Cost of deposits also declined by 10 basis points.
Last quarter, we were at 43, we're down to 33 basis points for this quarter.
And I'm very confident that second quarter, we will again show a fairly decent decline.
And the reason I can say that is because on March 31, on a spot basis, we were already down to 27 basis points.
So we're starting second quarter at 27, so the number is going to be somewhere in the mid-20s.
And the guidance that we gave that we will drop our cost of funds -- cost of deposits into the teens by the end of the year stands.
So overall, feeling very good about what we've been able to achieve on the deposit side.
And the deposit growth was fairly widespread, came from every part of the bank.
On credit, the -- let me talk a little bit about loans.
Loans were down about $500 million.
Most of that decline was the continued drop in utilization rates online.
So, I think $425 million of that $505 million was directly attributable to less utilization.
This has been a negative surprise for us.
We had made assumptions when we did the plan at the beginning of the year that the line utilization will start to normalize slowly month by month.
But instead, we saw further declines in January.
We saw another decline further in February.
It's only in March where we've seen a slight uptick.
One month doesn't make a trend, but it's a positive number, and we're happy to see that.
And hopefully, we'll see this stabilize from here on and we start to get back to normal.
So Tom will talk to you more about that, but that was what was the biggest driver.
In terms of credit, let me go over a few things, temporary deferrals and modified loans under CARES Act -- modification under CARES Act, that total number remains stable at about 3% of the portfolio.
It was 71 basis points last quarter, it's down to 67.
But if you actually exclude the guaranteed portion of SBA loans, it was 53 basis points.
Charge-offs declined compared to all of last year.
I think last year, we were running at about 26 basis point net charge-off rate.
We're down to 17 basis points this quarter.
And for the first time since this pandemic hit us, our criticized and classified assets also started to decline.
And as we see more good economic data come through, more importantly, as we start to see cash flow data come through, I expect this number to start declining a little more rapidly into the second and third quarter.
So overall, feeling pretty good capital.
By the way, needless to say, we're in a very strong capital position.
CET1 ratio is at 13.2% for holdco and 14.8% for the bank.
We did buy back some stock.
We bought back about $7.3 million of stock this quarter.
We still have a little less than $40 million left in the buyback, and we plan to execute it against a buyback opportunistically.
It's a pretty volatile time in the stock market.
So we want to use that volatility to our advantage and buy back when they see dips in the stock.
We did declare a $0.23 dividend, and currently, we anticipate maintaining that level.
Our book value per share is now at $32.83.
Tangible book values at $32 even.
Both are above the pre-pandemic levels.
So strategy stays the same, continuing to add one core relationship at a time, continuing to focus on noninterest DDA.
I'll give you an example, something that just crossed my screen late last night.
We've been looking for this -- we've been calling on this client for a long time, and we're finally able to pry it away from one of the biggest banks in the country.
It's a firm -- mid-market firm based in Broward.
The relationship is coming over.
I won't say from which bank, but it comes with $0.5 million loan and $26 million in deposits with a full suite of treasury management products.
And a long-standing company, very successful in the community, and very happy to have them be a client of BankUnited.
So I see a deal or two like this every other day, and that's -- that really is driven by what really adds to the franchise value, and we're focused on that.
We'll also keep identifying niche markets and segments where we can grow.
We're now shifting focus.
We haven't hired very many producers over the course of last year through the pandemic, but we're now focused on bringing on more producers and are in discussions with a number of producers in different geographies.
Very importantly, we'll continue to invest in technology and innovation.
This -- actually, I do want to say, this quarter marks the culmination of our two-year journey, the cloud journey, as we call it.
We are now officially out of the data center business.
We are a fully cloud-enabled bank.
Took two years to put everything in the cloud and to be partnered with Amazon.
They've been great partners.
And in terms of our capabilities, our infrastructure, and the capabilities that cloud provides us, we're in a very different place than we were two years ago when we started down this path.
Also, I want to announce that part of this was also the first cloud-native application that we developed, also a very big deal for BankUnited because we never really had any developers.
We've never developed anything in terms of products for delivering our deposit solutions.
But two years ago, we decided that mobile banking is such a core function that we cannot just outsource it to the same vendor which every other bank our size goes to.
That we needed to control this and needed to actually have this in-house.
We put a lot of effort into developing it.
It will develop, like I said, in the cloud, and we launched this just last weekend, and converted our entire customer base with no issues at all, and I'm very excited about this big investment that we made.
Also, let me talk a little bit about 2.0, and specifically 2.0 revenue initiatives.
As you know, they have been delayed given the pandemic.
But I'm happy to report that we are actually making progress and getting a lot of traction, all the various things that added up to that revenue target, whether it's a commercial card program, whether it's treasury management space.
And you'll start to see some of that -- you already are seeing some of that in our P&L.
Deposit service charges and fees this quarter were up 17% compared to the first quarter of last year.
This is -- a lot of that is coming from the 2.0 initiatives that we've put in place and more to come.
Also, the small business initiatives that were also part of 2.0 are now going to pick momentum.
Small business, as you can imagine, were distracted very much with PPP 1.0 and then PPP 2.0.
As the PPP and everything related to this gets behind us, we're going to start focusing on that and start delivering on those initiatives as well.
So overall, feeling pretty good.
I think it was a pretty solid quarter.
Tom and Leslie are going to walk you in a little more detail on the businesses and also the financials.
So let's talk a little bit about the deposit side first.
And obviously, another excellent, excellent quarter for us in NIDDA growth.
And as Raj said, I think what's -- when we look back at this quarter, what's most satisfying is we're kind of building this wall brick by brick.
And when we look at the results that you see in NIDDA, I think the thing that's most gratifying is how broadly it's based across our business lines and also just the number of new relationships that are contributing to this growth, which is where we're seeing the majority of the growth is just coming off of, what we would call, new logos for the quarter were across all business lines and kind of sweet spot type relationships for us that, none are particularly jumbo, the one that Raj mentioned is a little bit larger, but just a broad number of small business, middle market, commercial relationships is really adding to this NIDDA growth.
So average noninterest-bearing deposits grew by $338 million for the quarter and by $3.1 billion compared to the first quarter of 2020.
On a period-end basis, noninterest DDA grew by $957 million for the quarter, while total deposits grew by $236 million.
So we continue to allow more price-sensitive and broker deposits to run off as we've grown the NIDDA base.
So significantly, time deposits for the quarter declined by $1 billion.
So if you look at total cost of deposits, as Raj mentioned, declined to 33 basis points for the quarter, 27 basis points on a spot basis, down from 36 as of December 31, 2020.
And reductions in cost of deposits continue to be broad-based across all product types and all lines of business.
We continue to forecast good growth in NIDDA, a good continuation of the momentum that we've had.
Every quarter may not be as strong as this one, but we expect that each quarter to be very good.
And we also expect overall cost of deposits to continue to decline.
As Raj mentioned on the loan side, we were down $505 million.
Q1 is not typically a strong quarter for us.
We did have $234 million of growth in the residential portfolio with the EBO Ginnie Mae portion contributing $341 million.
As Raj noted, the majority of our decline for the quarter was really attributed to line utilization, which has got hitting historic lows, but we anticipate that will pick up as we start to see the year unfold, the economy improve, people start to use more inventory purchases and other things happening within the portfolio.
One interesting sidenote, we looked in -- at our numbers for the quarter and we had a more historic level of line utilization, our commercial loans, our C&I loans would have actually been up.
It would have contributed another $800 million of base into the C&I portfolio.
So it gives you some kind of a dynamic for what the line utilization numbers look for.
As we look forward in the year, we're seeing good growth in pipelines in Q2.
As Raj noted, obviously, increased economic activity among our clients.
So we're anticipating, as the year develops, that we'll see growth in our residential teams, our small business lending, our commercial banking teams, core middle market teams, mortgage warehouse lending.
So we expect the remainder of the year to develop more strongly than we saw in the first quarter.
Just an update on PPP loans.
We booked $265 million worth of PPP loans during the first quarter under the Second Draw Program.
And in numbers of units, it's about 1/3 of what we did in the First Draw Program.
At this point, we're not accepting any more second draw PPP loans.
On the forgiveness front, we were -- we forgave $138 million in loans during -- that were made during the First Draw Program.
We have about $650 million remaining outstanding under the First Draw Program as of March 31.
Switching gears a little bit, some additional details around deferrals and CARES Act, modifications, Slide 16 in the supplemental deck also provides more details around this.
The levels of loans on deferral or modified basis remained relatively consistent with prior quarter.
In commercial, only $35 million of commercial loans.
We're still on short-term deferral as of March 31, $621 million of commercial loans have been modified under the CARES Act.
Together, these are $656 million or approximately 4% of the total commercial portfolio, which is pretty consistent with the levels since the end of the last quarter.
Not unexpectedly, the portfolio segment most impacted has been the CRE, hotel book, where $343 million or 55% of the segment has been modified, also consistent with prior quarter end.
Residential, excluding the Ginnie Mae early buyout portfolio, $91 million of the loans were on short-term deferral, an additional $15 million had been modified under longer-term CARES Act repayment plans as of March 31.
This totaled about 2% of the residential portfolio.
Of $525 million in residential loans that were granted an initial payment deferral, $91 million or 17% are still on deferral, while $434 million or 83% have rolled off.
Of those that have rolled off, 94% have either paid off or are making their regular payments at this time.
As it relates to the CRE portfolio, I wanted to spend a little time as we normally do going into some of the occupancy collection rates and some key data on some of the more impacted segments of the portfolio.
So on average, rent collection rates for the quarter, we continue to see good strength in the office market.
We saw collection rates of 96%, which were even for both Florida and New York.
Multifamily loans were at 90% collection rate in New York and 92% collection rate in Florida.
And retail has continued to improve and performed pretty well at 85% in New York and 99% in Florida.
I think the big news on the hotel front is we're seeing a lot more strength in the hotel market.
All of our properties in Florida are open and have been for a considerable period of time.
Two of the three properties that we have in New York are open, with the third expected to reopen in June.
Occupancy for the two hotels that are open in New York ran about 80% for March.
And in Florida, occupancy rates for the entire portfolio, which is a little under 30 hotels in total, averaged 80% in March, with some reporting occupancy rates in the 90% range.
For those that have tried to find a hotel in Florida recently, it's not so easy to find any place that's now open in Florida.
So we've seen this improve from 46% last quarter, 56% in January, February was stronger, and March was up to the 80% level, and we're seeing forward forecast for most operators that continue to show strength as we get -- as we start to head toward the summer months.
From a franchise perspective in the QSR portfolio, we're seeing the majority of our concepts are open, reporting strong same-store sales, particularly those with good drive-through delivery, pickup models.
We still have a couple of concepts that are predominantly indoor dining that are challenged, but I'd say, on a broad basis, the QSR portfolio is performing much better.
Staffing is a challenge in this market.
A lot of our QSR operators are reporting difficulty in bringing in staffing right now with stimulus payments and whatnot flowing through the economy.
So the labor market is a bit of a challenge.
But overall, revenue is strengthening in this segment.
In the fitness segment, Planet Fitness.
We have two concepts, as you know.
Planet Fitness, 100% of the stores are now open with payment systems turned on, retention is averaging 90% in that concept.
And we now have all of our Orange Theory franchises open.
There's been some decline in membership, but operators are still expecting a full recovery.
Some of them are still operating at lower capacity levels due to social distancing, but we're seeing a sizable pickup in the Orange Theory franchises as well.
So we're feeling much better about the QSR and franchise portfolio than we felt last quarter or the quarter before, so seeing a lot of strength there.
So with that, Leslie, we'll get into a little bit more detail about the quarter now.
So as Raj mentioned, net interest income grew this quarter, up about 1.5% from the prior quarter and up 9% from the first quarter of the prior year.
The NIM increased to 2.39% this quarter from 2.33% last quarter in spite of elevated levels of liquidity on the balance sheet, so we were pleased to see that.
The yield on loans increased to 3.58% this quarter from 3.55% last quarter.
The recognition of fees on PPP loans that were forgiven added about six basis points to that yield this quarter compared to three last quarter.
So as we pull that out, pretty flat quarter-to-quarter for the yield on loans.
And $6.3 million of that relates to the First Draw Program.
The yield on securities declined by nine basis points to 1.73% for the quarter.
Spreads remain really tight in the bond market, as I'm sure all of you know, and we continue to experience an accelerated level of prepayments on some of the higher-yielding mortgage-backed securities.
So those yields do remain under pressure.
The total cost of deposits declined by 10 basis points quarter-over-quarter with the cost of interest-bearing deposits declining by 13 basis points.
We do expect that to continue to decline given that the spot rate was 27 basis points at quarter end.
It's going to be at least somewhat lower than that, so we will see an additional decline this quarter, although maybe not as much as we've seen in the last two quarters.
The cost of FHLB borrowings did increase to 2.32% as the borrowings that were paid down were short-term lower rate advances compared to the hedged advances that remain on the balance sheet.
In the aggregate, there's about $1.6 billion of hedged advances that are scheduled to mature over the remainder of 2021, with a weighted average rate in excess of 2%.
And we continue to evaluate the economics and whether it makes sense to terminate some of the longer-dated hedges that are out there.
We do expect the NIM to continue to increase, we expect it to grow next quarter.
It will be helped by PPP forgiveness, but even excluding that, we expect the NIM to continue to grow up -- to go up.
Shifting gears a little bit to talk about CECL and the reserve.
Overall, the provision for credit losses for the quarter was a recovery of $28 million, compared to a recovery of $1.6 million last quarter, and obviously, a provision of $125 million in the first quarter of 2020, which was the quarter where we really booked our big provision related to the onset of COVID.
The negative provision this quarter primarily resulted from an improving economic forecast.
And within the forecast, the improvement in outlook for unemployment was the biggest driver of the reserve release.
The reserve declined from 1.08% to 0.95% of loans, and Slides nine through 11 of our deck gives some further details on the allowance.
Major drivers of change, the reserve went down $36 million related to the economic forecast, again, primarily the change in unemployment.
A decrease of $10.1 million due to charge-offs, most of which related to one BFG franchise loan that was having trouble even prior to COVID.
A decrease of $12.8 million due to changes in the portfolio mix and the net decline in the balance of loans outstanding.
$6.1 million increase in qualitative reserves.
$9.6 million increase related to updates of certain assumptions, primarily updated prepayment speeds.
An increase of $6.8 million related to loans that were further downgraded to the substandard accruing category.
So those are the major components of the move in the reserve for the quarter.
I do want to point out that the reduction in the reserve for the quarter was primarily related to the pass rated portion of the portfolio.
The reserve for pass rated loans declined from $137 million to $93 million, while the reserve for non-pass loans increased from $120 million to $128 million.
So as we move forward, our expectation would be if economic trajectory plays out as we think it's going to, we would expect to see some upward risk rating migration, and that should -- that would, in turn, result in some further reductions in the reserve.
Some of the key economic forecast assumptions that drove the reserve, and I'll remind you that it's really a lot more complicated than this.
This is a very high-level look at some of the data points that are in the economic forecast.
National unemployment declining to 5% by the end of 2021 and trending down to just over 4% by the end of 2022.
Real GDP growth of just over 7% by the end of 2021 and 2.3% for '22.
The S&P 500 index remaining relatively stable at around 3,700 and Fed funds rates staying at or near zero into 2023.
Little bit of detail on risk rating migration, and you can see a breakdown of all of this on Slides 23 through 26 in the deck.
Total criticized and classified assets declined by about $75 million this quarter, but we did see some migration into the substandard accruing category from special mention.
We do, again, expect to see some positive tailwinds here if the economy continues to improve, as we expect it to, as we move through 2021.
In terms of the migration to substandard accrual, the largest categories where we saw that were CRE, hotel, multifamily, New York, and office.
Nonperforming loans did decline this quarter, from $244 million to $234 million.
Just to quickly wrap up, when I look forward to the rest of 2021, to reiterate Tom's comments, we do expect noninterest DDA growth to continue as well as total deposit growth.
But our focus remains on noninterest DDA, and we're more than willing, given our liquidity position, to allow more rate-sensitive and brokered deposits to run off.
FHLB advances will continue to decline, and securities will probably grow in the low to mid-single digits, depending on our liquidity position.
The provision, always the fun one to try to forecast.
Under CECL, the provision should, in theory, be related to new loan production, while charge-offs should reduce the reserve.
If we do see positive risk rating migration as we currently expect, we'll see some further reserve release related to that.
Net interest income should be up mid-single digits over 2020, as should noninterest income excluding securities gains which tend to be episodic, and we don't make any attempt to predict those.
And with respect to expenses, I'd say the guidance we gave in January has not changed.
Leslie, I'll just add to your little color.
This is a very hard time to try and predict what will happen.
We gave you guidance three months ago, and I look at various aspects of our guidance.
On the deposit side, we're way ahead of what we thought we would do, to be very honest.
This quarter was much better than what was in our plan.
On the loan side, we had also expected that we'll start bringing in -- increasing our line utilization, instead it actually declined.
Now with the exception of March where it went up 0.5 point, so it sort of went in the right direction a little bit.
But December to Jan, Jan to Feb, it was just -- it surprised us because we were seeing economic activity around us, but we were not seeing the line utilization.
So, I think the guidance overall -- we still feel pretty good about where the trajectory will be for earnings.
But in terms of deposit, I think we will outperform.
On the loan side, I think we said low to mid-single digits, we'll probably be in the low single digits based on what we see now.
And margin, we still feel pretty good.
We've already delivered a nice expansion in margin, and we'll continue to do that.
So overall, I feel fairly good.
I was in Miami for the first time after 12 months, two weeks ago.
I spent a few days there and -- just to see the hustle and bustle that is -- that I've been hearing about from everyone for the last several months now.
But to actually see it and feel it, I will tell you that if you are planning summer vacations, nobody can go to Europe and people are planning to go to either Hawaii or Florida or other places.
Now is the time to book your hotels.
You are not going to find any hotel rooms if you wait another month.
That's how active Miami Beach and Miami generally is.
So very, very positive trends that we're seeing.
Some silly things also happening in Miami Beach, but that just comes with the territory.
But let's turn this over and take some questions.
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q1 earnings per share $1.06.
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First, I need to cover a few details with you.
We will be advancing the slides as the speakers present today.
It will also be available by telephone through November 12, 2021.
These are indeed challenging times for us.
But right upfront, I want to make it clear that while we may be navigating some short-term challenges, as you'll see, the mid-term prospects post 2022 are positive, and we remain confident in our ability to create renewed growth and deliver strong shareholder returns.
I know the conclusion of the 2019 rate case is the most significant development and everyone is interested in hearing more about that.
But before we cover the rate case, you can see from the four main topics we will discuss today.
I'll cover our third quarter results and our expectations for the remainder of 2021.
Finally, I will wrap up with 2022 guidance and our long-term financial outlook.
Focusing on the third quarter, our performance remains strong, earning $3 per share compared to $3.07 per share in third quarter of 2020.
Mild weather was a significant factor, largely offset by strong sales.
We experienced a mild July and August driven by one of the wettest monsoon seasons in recent history.
Residential cooling degree days in the third quarter decreased 27.5% compared to the same time a year ago, and were 10.6% lower than historical 10-year averages.
As a reminder, third quarter last year was the hottest on record.
Robust sales and usage growth in addition increased transmission sales this quarter mitigated most of the weather impacts.
Looking at full year, I'll provide an update to the 2021 Key Drivers and earnings guidance.
Customer growth and weather normalized sales growth remain important drivers for the remainder of the year.
We are updating weather normalized sales guidance to 3% to 4%, up from 1% to 2%, based on continued robust customer growth and strong residential usage.
Lastly, with the conclusion of the 2019 rate case, we're now able to provide full year guidance.
We expect earnings per share to be within the range of $5.25 to $5.35 per share.
As all of you know, after a series of open meetings and public discussions, the Commission issued a final decision in our 2019 rate case.
This rate case was complex and the issues were numerous.
I'll highlight a few of the main issues that were decided, the revenue requirement SCRs and the ROE.
I'll also discuss our next step and strategy coming out of this case, and then lastly as Ted mentioned, he'll provide the 2022 guidance and our long-term financial outlook.
This outcome was not what we wanted and the process that transpired was not constructive.
Everything we have said on the record with our regulators about what's so damaging and concerning about this decision holds true.
It is a decision that makes everything we're committed to doing more challenging and more costly for a time.
What this decision has not done is change our mission as a company, nor our commitment to delivering value to our customers and you our investors.
It has not changed the commitment of our employees to operational excellence in all that we do.
In fact, we're using the expertise and the track record that we've built in the areas of long-term planning, cost management, innovation and serving as an active voice and advocate for the Arizona business community to emerge from this case with a robust strategy.
We're not apologetic about standing up for what's right for our customers and our communities and for our investors, the owners of this company.
It's your confidence in us and your investment in us that makes it possible to deliver the product and services that power Arizona's economy and way of life.
We don't take that for granted and we'll lay out for you today how we plan to continue to create values at competitive levels, amid the headwinds and the challenges that this case has created.
As a reminder, this case was unique for many reasons.
We are compelled by the Commission to file this case under a question of whether we are over earning.
We are also required to fully litigate this case instead of pursuing settlement opportunities.
This is our first fully litigated rate case in over 15 years.
We still believe that rate case settlements are the standard and this case was definitely an exception.
And finally this case was centered around cost recovery of coal asset.
In contrast, our future investment recovery will be premised on infrastructure supporting Clean Energy and our customer growth.
Let me walk through some of the major decisions of the case.
First, the Commission adopted a total base rate decrease of $119 million inclusive of fuel.
The Commission did reverse its initial vote to move the SCR issue to a separate proceeding and instead provided partial recovery of the SCRs with the disallowance of $216 million.
We disagree with the Commission's decision that the SCR investment was imprudent and don't believe that the record in this case supports that conclusion.
As I've stated before the Four Corners Power Plant is a critically important reliability asset for the entire Southwest region.
It's used in useful currently serving customers and the investment in the SCRs was required to keep the plant running under federal law.
In addition, the Commission voted to lower the ROE from the recommended opinion orders already low ROE of 9.16% to 8.7%.
With this part of the decision, the Commission has adopted an ROE that's meaningfully below the national average of 9.4% for electric utilities and the company disagrees with the Commission's rationale.
We have embraced a culture focused on customer service and don't believe that a penalty was warranted, and the ROE granted ignores the fact that we were one of the fastest growing states in the country and we need to attract capital in order to fund the growth and economic development that we're experiencing in Arizona.
In addition, the Commission moved away from the long-standing practice of providing a risk premium for serving as the operator of the largest clean nuclear generating station in the country.
We'll continue to navigate through these challenges by leveraging our strong growth and seeking judicial review of the decision through the courts.
Although we are disappointed by the Commission's decision, importantly, we now have clarity of the path forward.
And so, let me share our next steps and strategy as we look to the future.
We continue to remain optimistic about our future for many reasons and I'll discuss each of these reasons in more detail.
First, we have a solid track record for performance and have grown earnings and our dividends steadily throughout this time, although we're looking at a reset with this rate case outcome and despite the challenges of our regulatory environment, both for Arizona and our company, we believe that we have the ability to create long-term value and steady growth from here.
And Ted will later share our financial outlook and the actions that we're taking as a management team to get us there.
In addition to our earnings track record, we've delivered on our promise to provide affordable energy to our customers and I'll share I think a great example.
We've seen a 6% weather normalized increase in demand for residential electricity from 2018 to 2020.
During that same period we've lowered the average residential customer bill by more than 7%.
We remain focused on customer affordability and keeping it central to our plans to provide long-term sustainable growth.
That focus, coupled with continued cost management creates headroom for the future.
The second reason that I'm optimistic about our future is our best-in-class service territory.
Arizona remains among the fastest growing states in the country, where other states were experiencing little or negative customer growth, we're projecting 1.5% to 2.5% retail customer growth in 2021 and 3% to 4% weather normalized sales growth.
We expect 43,000 housing permits this year in Maricopa County alone, levels that have not been reached since before the great recession.
We believe the constructive business environment and the ample job growth that it creates a competitive cost of living and a desirable climate will continue to grow the Metro Phoenix housing market and benefit the local economy.
Focusing on our service territory specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever.
In particular, Phoenix is becoming a leader in attracting high tech and data center customers.
As you may remember, Taiwan Semiconductor broke ground on their $12 billion investment earlier this year, cementing Phoenix is one of the top semiconductor hubs in the country.
More recently, KORE Power announced their intention to build a 1 million square foot lithium-ion battery manufacturing facility.
We'll continue to focus our economic development approach on helping to attract and expand businesses and job creators.
The third reason that we're confident is the clear path for our transition to Clean Energy.
We came out with our Clean Energy commitment in early 2020, and I'm proud that we've made significant progress toward that commitment.
As you know, earlier this year, we announced that our Four Corners power plant would begin seasonal operations in 2023.
This will reduce annual carbon emissions from the plant by an estimated 20% to 25% compared to current conditions.
In addition, we remain committed to end the use of coal at our remaining Cholla units by 2025 and to completely exit coal by 2031.
Since our Clean Energy commitments announcement we've procured nearly 1,400 megawatts of additional Clean Energy and storage.
Obviously, Arizona enjoys some of the best solar conditions in the world and we are well positioned to capitalize on this resource as we continue that Clean Energy transition.
Turning to our regulatory environment.
Although, this last case was not constructive, I believe we'll be able to reasonably navigate through the regulatory environment in the future.
I'll underscore that this last case was unique in nearly every aspect.
We plan on filing a new rate case as soon as practicable and be looking to improve the ROE commensurate with rising interest rates and returns.
Historically, outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and a diverse range of vested interest in our state's energy future.
We would aim to achieve a settled outcome in our next case, because we believe that the nature of that process itself yields more informed constructive and mutually beneficial results.
We'll work to find alignment with stakeholders and the regulators, so that we can improve things for all interested parties.
Finally, I'm optimistic about the future because we have a well thought out long-term strategy that my entire management team and I are committed to executing.
We've refocused on the customer and have built a customer-centric strategy that will allow us to deliver exceptional customer service results.
We are the most improved large utility in J.D. Power's 2020 residential electric service study and we're focused on making continued improvements.
Near term, our focus and priorities remain on improving our customer experience, customer communications, providing safe and reliable service and continuing to engage with stakeholders to advance our shared priorities of clean, reliable and affordable energy for Arizona residents and businesses.
Now, I'll walk through our 2022 guidance and long-term financial outlook.
As Jeff discussed, this last case was not the outcome we were looking for and we recognize this rate case is a regulatory reset.
We're providing a 2022 earnings guidance range of $3.80 to $4 per share given the full effects of the rate case.
We recognize this is a significant reduction compared to 2021, so we've illustrated key factors contributing to the change in earnings.
As you can see on Slide 19, we're starting with the midpoint of our 2021 guidance and walking through the drivers to get us to the midpoint of our 2022 guidance.
No surprise, the most significant driver is the recent rate case decision, with a negative $0.90 impact.
This reflects an additional $13 million downward adjustment beyond the $90 million net income impact estimated for the recommended opinion on order last quarter.
In addition, growth in depreciable plant, higher interest expense related to new financing needs and lower pension OPEB non service credits make up the remaining negative drivers.
We are focused on cost management and expect O&M savings to provide some positive impact to get us to our 2022 guidance range of $3.80 to $4 per share.
Turning to the future, we are prepared to use all levers we have available to help us mitigate the impact of this case, and we remain optimistic of our ability to provide long-term value.
As you can see, investors can expect seven objectives from us and I'll touch upon each one.
Our plan is expected to provide strong long-term earnings growth after 2022 for the next five years.
I want to be transparent and reemphasize that this as projected 5% to 7% earnings growth, builds on our 2022 guidance.
We realize the 2021 base year is a lower growth rate at about 1% to 2%.
However, we believe 2022 is the appropriate place to anchor our long-term outlook given the valuation reset that has already occurred and we're focused on creating shareholder value from this point going forward.
There are a number of factors that could provide upside potential to our growth guidance.
For example, we have the ability to meet -- we have the ability to invest in more Clean Energy if we achieve more constructive cost recovery.
In addition, robust economic development opportunities may drive increased sales and customer growth.
Those along with other factors could provide upside to our guidance.
The second objective shareholders can expect from us, is an optimized capital management plan.
As Jeff discussed, we continued to experience solid growth in our service territory, which is the primary driver behind our capital plan.
Steady population growth is expected to drive average annual customer growth in the range of 1.5% to 2.5% through 2024.
In addition, we expect average annual sales growth to be in the range of 3.5% to 4.5% through 2024 on a weather-normalized basis.
We have updated our capital plan to $4.7 billion from 2022 to 2024.
While this represents a modest increase from prior levels, we believe this is prudent until we're in a better place to secure timely and constructive cost recovery.
We are committed to taking a balanced approach in managing our capital plan to support customer growth, reliability and our clean transition, while limiting our equity needs to minimize dilution as we recover from the outcome of this case.
Third, as you can see from 2019 to 2024, we project that our rate base growth will remain steady at an average annual growth rate of 5% to 6%.
I want to highlight that our FERC jurisdictional transmission investments continue to represent a meaningful portion of that growth, that almost a quarter of the total rate base.
These investments benefit from superior authorized returns in a more favorable cost recovery construct than our ACC jurisdictional investments.
We believe the steady growth will allow us the opportunity to provide solid earnings growth from transmission in the future.
Next, I'd like to provide clarity on our financing plans going forward.
We've previously stated that we would issue equity prior to the next rate case.
We understand this case was not constructive and we're committed to doing everything we can to protect shareholders from further dilution.
Therefore, we're deferring our equity issuance and have no plans to issue equity until the conclusion of the next rate case.
In the meantime, we'll leverage our sales growth and the strength of our balance sheet to support our investment needs.
While we show equity or equity alternatives in the plan, we have no plans for this to be sourced earlier than 2024, protecting investors from dilution during this period.
We have a solid track record of disciplined cost management and previously announced that we have initiated additional cost savings programs.
We understand the importance of efficiency and instituting lean initiatives.
With that in mind, we're updating our O&M guidance to show one, a reduction of O&M expense from 2021 to 2022.
Two, a goal of keeping total O&M flat during this period.
And three, a goal of declining O&M per kilowatt hour.
Cost management and lean processes will continue to be a strong focus of our management team to mitigate both inflationary pressures and regulatory lag.
We anticipate another important expectation that investors can look forward to as our attractive dividend yield.
Yesterday, our Board of Directors announced an increase in our quarterly shareholder dividend from $0.83 to $0.85 per share.
We have consistently grown our dividend for 10 years straight and we are committed to dividend growth going forward.
Our longer term objective is to grow the dividend, commensurate with earnings growth and target a long-term dividend payout ratio of 65% to 75%.
We understand that we're not there now, but we are confident in our plan and that we will eventually grow back into this payout range.
Turning to the final item, our balance sheet.
We continue to maintain a strong balance sheet, providing us flexibility in our sources of capital over the next few years.
We have an attractive long-term debt maturity profile and no debt maturing at APS until 2024.
Additionally, we maintain robust and durable sources of liquidity with our $1.2 billion of credit facilities recently extended to 2026 and a well-funded and largely derisked pension.
Taking a closer look at our ratings.
We continue to have solid investment grade credit ratings.
Even with the recent downgrade by Fitch and the credit reviews announced by Moody's and S&P, our balance sheet targets include three key components, maintaining credit rating strength, maintaining an APS equity layer greater than 50% and an FFO to debt range of 16% to 18%.
In summary, we're taking action during this reset and have a plan for attractive growth going forward.
Importantly, we plan to defer all equity until 2024, further reduce O&M and optimize the balance sheet and capital program during this reset period.
In return, we have the highest dividend yield among peers, which stands today above 5%.
While certainly a factor of the current valuation, even at a stock price 20% higher than current levels, we offer a dividend yield more competitive than peers.
In addition, we announced long-term earnings per share growth guidance of 5% to 7% from 2022 for the next five years.
With the attractive dividend yield and solid earnings per share CAGR, we anticipate a competitive 10% to 12% total shareholder return going forward.
In the short-term, we are laser focused on doing everything we can to protect investors during this reset period and then transitioning to a renewed era of growth, so that we can provide a competitive return going forward.
We remain optimistic about the future.
Although the final outcome of this rate case was worse than we had expected, we have a path forward that is centered around our long-term track record of constructive rate case outcomes, our robust service territory growth, continued balance sheet strength and a focused management team that is taking action.
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compname reports qtrly earnings per share of $1.91.
qtrly earnings per share $1.91.
qtrly operating revenues $1 billion versus $ 929.6 million.
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The slides that accompany today's call are also available on our website.
We'll refer to those slides by number throughout the call.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission.
We also have other company representatives available to help answer any questions you may have after Steve, Lisa and Darrel provide updates.
On Slide 4, we present our quarterly and annual financial results.
IDACORP's 2019 fourth-quarter earnings per diluted share were $0.93, an increase of $0.41 per share over last year's fourth quarter.
IDACORP's earnings per diluted share for the full-year 2019 were $4.61, an increase of $0.12 per share over 2018.
These full-year results represent the 12th straight year of earnings growth for IDACORP and are the highest achieved in its history.
IDACORP's cumulative average growth rate in diluted earnings per share is 7.9% since 2007.
Today, we also initiated our full-year 2020 IDACORP earnings guidance estimate to be in the range of $4.45 to $4.65 per diluted share with our expectation that Idaho Power will not need to utilize any of the tax credits in 2020 that are available to support earnings in Idaho under its settlement stipulation with the Idaho Public Utilities Commission.
Last week, we announced that after 24 years with the company that I would retire effective June 1 of this year.
In connection with this decision, our board of directors selected Lisa Grow to succeed me as president and CEO of IDACORP and Idaho Power effective June 1 and also appointed her to the boards of directors of both companies effective last week.
She's an electrical engineer by training and she's got over 32 years of experience at Idaho Power.
Not only does she have a long tenure at the company, she also has a long history with Idaho Power as her grandfather was a lineman with the company for 30 years prior to Lisa joining the company.
She has contributed significantly to the operational and financial success of Idaho Power since becoming an officer in 2005.
She has earned the opportunity to take over the reins as we move forward into 2020 and beyond.
I look forward to continuing to serve as a member of the board of directors once I step away from my executive roles.
With that short introduction, I will now turn the time over to Lisa for some updates on the company, as well as ongoing economic activities.
I am honored by the opportunity to succeed you, and I look forward to the exciting times ahead.
In addition to the financial success noted by Justin, Idaho Power set records across several of our important metrics: safety, customer satisfaction and reliability.
On Slide 5, we see details of the company's record employee safety results in 2019.
We are very excited and proud to see injuries at an all-time low as we continue to spend significant time on our safety culture and to emphasize the importance of safety at work and at home.
Our record-setting results in residential and business customer satisfaction are shown on Slide 6.
As the population within our service area continues to grow, Idaho Power is working hard to meet our customers' evolving needs.
Most Idaho Power customers experienced -- most Idaho customers experienced an overall price decrease for the second consecutive year in 2019 with business customers' rates going down by at least 5%.
Idaho Power's efforts to keep prices affordable, provide personal service and improve the customer experience are paying off as overall customer satisfaction metrics continue to rank near the top of the list among our peer utilities.
Reliability is a key piece of the customer satisfaction puzzle and is also included on Slide 6, which shows another outstanding year.
Idaho Power kept customers' lights on 99.975% of the time in 2019, and overall system reliability was among the best in company history, finishing very close to 2018's record results.
As noted on Slide 7, Idaho Power service area continues to experience substantial customer growth.
For the third year in a row, Idaho remains the fastest-growing state in the nation, and Idaho Power's customer base grew 2.5% in 2019, including a 2.7% growth rate for our residential customer segment.
Idaho Power now has more than 570,000 customers, and we view the reliable, affordable, clean energy that our company provides as a key driver for continuing to attract new customers.
The economy is thriving within Idaho Power's service area, and Moody's GDP forecast calls for sustained economic growth.
In 2019, Idaho Power experienced sales growth in its commercial and industrial sectors through a balanced mix of new business and expansion projects across the food processing, manufacturing, distribution and technology sectors.
Moody's current forecast of GDP in Idaho Power's service area predicts growth of 4.4% in 2020 and another 4.4% in 2021.
Meanwhile, employment increased 3.2%, and the unemployment rate was 2.8% at the end of 2019, compared with 3.5% nationally.
Turning to Slide 8.
Idaho Power's most recent integrated resource plan calls for continued work toward a unit-by-unit early exit from the Jim Bridger plant located in Wyoming by 2030.
In 2019, the company ended its participation in Unit 1 of the North Valmy plant in Nevada, which was a significant milestone in our path away from coal.
We also have an agreement to exit Unit 2 by 2025.
The Boardman plant in Oregon is also scheduled to cease operations this year.
In both cases, Idaho Power has State Public Utility Commission's support for a cost recovery framework to be applied through the end of their useful life, which we believe could provide a blueprint for a similar approach for Bridger.
We are continuing to explore options with PacifiCorp, the co-owner of Bridger, as we plan the end-of-life for the entire Jim Bridger plant.
PacifiCorp's IRP, as published last fall, showed early shutdown dates for two Bridger units as well.
Idaho Power's overall coal-fired generation has decreased for six consecutive years.
As recently as 2013, coal was our largest energy source at 47% of our total energy mix.
Today, that number is around 16%.
Our path away from coal, which is driven by the economics of the plant, aligns with our Clean Today, Cleaner Tomorrow plan to provide 100% clean energy by 2045.
Another key project in our Cleaner Tomorrow plan is the Boardman to Hemingway transmission project or B2H, which made solid progress in 2019.
The Oregon Department of Energy recommended approval of the 300-mile line.
The department is expected to release a proposed order, which is the next step in the permitting process, authorizing the transmission line this year.
If the permitting process remains on track, we expect the Oregon Energy Facility Siting Council to issue a final order and site certificate in 2021.
Following preconstruction activities, construction is expected to begin as early as 2023, with the line expected to be in service in 2026 or sometime thereafter.
The IRP we amended and filed at the end of last month also plans for us to include 120 megawatts of solar from the Jackpot Solar power purchase agreement.
Idaho Power evaluated purchasing the project and elected not to pursue it.
We do not expect Idaho Power to file a general rate case in Idaho or Oregon in the next 12 months.
The influx of new customers, constructive regulatory outcomes and effective cost management all play significant roles in this decision.
With that, I will turn the time to Steve, who will go through the 2019 financial results.
We had excellent 2019 results.
Weather challenges through the year were more than offset by a very good final quarter.
I'll walk you through the drivers year over year on Slide 9.
Strong net customer growth of 2.5% added $18.8 million to operating income in 2019.
A decline in usage per customer, mostly related to lower irrigation sales, decreased operating income by $21.4 million.
Greater precipitation and more moderate spring and summer temperatures led to 11% less use per customer for those in the agricultural irrigation class this year.
Further down the table, net retail revenues per megawatt hour decreased operating income by $2.8 million.
As anticipated, the settlement stipulations associated with income tax reform reduced revenues more significantly in 2019.
Idaho Power's open access transmission tariff rates declined by 10% in October of 2018 and again by 13% in October 2019, lowering transmission wheeling-related revenues by $5.3 million.
These rates reset each year to align revenues with the cost of the transmission system.
To a lesser extent, lower transmission volumes also contributed to an overall reduced wheeling revenue this year.
Next on the table, other operating and maintenance expenses decreased $8.7 million as our team's continued focus on cost management resulted in lower expenses across several areas.
Contributing to this decrease was lower bad debt expense of $1.1 million due to a strong economy and the nonrecurrence of a 2018 O&M expense of $4 million for a noncash amortization of regulatory deferrals related to tax reform.
Idaho Power's 2019 return on year-end equity in Idaho landed between the 9.5% tax credit support level and the 10% customer sharing line under the Idaho regulatory settlement stipulation.
So we did not record any additional tax credit amortization or provision against revenues for sharing with Idaho customers this year.
Last year, we recorded a $5 million provision against revenues for sharing, which did not recur.
Idaho Power has the full $45 million of approved credits available to support earnings in future years.
As a reminder, the tax credit support line will be at 9.4% for 2020.
These items collectively resulted in a year-over-year increase to Idaho Power's operating income of $2.3 million.
Nonoperating income and expenses netted to a $9.9 million improvement to pre-tax earnings due to several items.
A $4.2 million charge in 2018 related to Idaho Power's post-retirement plan did not recur.
This was anticipated and reflected in our prior earnings guidance ranges.
Next, our allowance for equity funds used during construction increased $2.7 million as the average construction work in progress balance was higher throughout 2019.
Finally, stronger asset returns this year led to $2.1 million of higher investment income from the Rabbi Trust associated with Idaho Power's nonqualified defined benefit pension plans.
On the next line, you will see income taxes were higher by $10.1 million.
Remember that 2018 included $5.7 million of benefits from remeasurement of deferred taxes at Idaho Power due to income tax reform, as well as $1.3 million of tax-deductible bond redemption costs incurred last year.
There was no such remeasurement or bond redemption in 2019.
Amortization of newly funded vintage investment tax credits helped lower tax expense in the current year, while higher pre-tax income primarily contributed to the remainder of the increases.
Finally, at IDACORP Financial Services, distributions from the sale of low-income housing properties led to approximately $3 million higher net income at that subsidiary.
While the nature, timing and amount of the underlying property sales at IFS are difficult to predict and are controlled by third parties, we do not expect them to be as significant in 2020.
Overall, Idaho Power's and IDACORP's net income were $2.1 million and $6.1 million higher than last year, respectively.
IDACORP and Idaho Power continue to maintain strong balance sheets, including investment-grade credit ratings and sound liquidity, which enable us to fund ongoing capital expenditures and dividend payments.
Regarding dividends, you'll note that in addition to the latest dividend increase of 6.3% announced by the board of directors last September, the board also increased IDACORP's target dividend payout ratio to 60% to 70% of sustainable earnings.
This reflects several years of our steady upward trajectory of dividend increases.
We expect to recommend an annual dividend increase of 5% or more to the board of directors in the coming year.
On Slide 10, we show IDACORP's operating cash flows along with our liquidity positions as of the end of 2019.
Cash flows from operations were $125 million lower than 2018.
These were mostly related to changes in regulatory assets and liabilities like those resulting from the power cost adjustment mechanism and the timing of working capital receipts and payments.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the bottom of Slide 10.
At this time, we do not anticipate issuing additional equity in 2020 other than relatively nominal amounts under the compensation plans.
Slide 11 shows our first look at full-year 2020 earnings guidance and our key financial and operating metrics estimates.
We are initiating IDACORP's 2020 earnings guidance in the range of $4.45 to $4.65 per diluted share, which is up roughly 4% over prior-year guidance range and assumes no use of additional tax credits under normal weather conditions.
Our record 12 years of earnings growth is something that sets us apart from our peers.
We expect O&M expenses to be in the range of $350 million to $360 million, which would keep O&M relatively flat for the ninth straight year.
We expect capital expenditures will lift somewhat to the range of $300 million to $310 million.
You'll note that our updated five-year forecast of capital expenditures is also higher than our previous plan, now forecasted to range from $1.6 billion to $1.7 billion over that time.
This forecast still does not include the majority of costs to build the major infrastructure projects, such as Boardman to Hemingway or increased compliance costs associated with the new Hells Canyon license due to the uncertainty and the exact timing of that spend.
Finally, our current reservoir storage and stream flow forecast suggests that hydropower generation should be in the range of 6.5 million to 8.5 million megawatt hours.
With that, I'll turn the time back to Darrel.
There is much to be proud of as we look back on the outstanding results of 2019.
While the energy industry is rapidly evolving, IDACORP continues to meet challenges and opportunities while delivering unparalleled results for customers and investors alike.
From meeting financial targets to striving for a cleaner energy future, we believe that our employees and our ongoing business strategy will help sustain our success into the future.
I will close with a look at weather on Slide 12.
The latest projections from the National Oceanic and Atmospheric Administration suggests an equal chance of above or below normal precipitation levels and a 40% to 50% chance of above normal temperatures from March to May.
We have seen a lot of snow and rain in recent weeks.
As a reminder, our power cost adjustment mechanisms in Idaho and Oregon significantly reduced earnings volatility related to changes in our resource mix and associated power supply costs that can fluctuate greatly due to weather.
With that, Steve, Lisa and I and others here today will be happy to answer questions you may have.
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compname reports q3 earnings per share $1.93.
sees fy earnings per share $4.80 to $4.90.
q3 earnings per share $1.93.
sees 2021 earnings per share $4.80 - $4.90.
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Reconciliations for any reference to any non-GAAP financial measure is included in today's material and are also posted on our website at phstock.com.
If you move to Slide 3, you'll see our agenda, we'll begin with Chairman and Chief Executive Officer, Tom Williams, providing some strategic comments and highlights from our second quarter, following Tom's comments, I'll provide a more detailed review of our second quarter performance and review the components of our increased to guidance for the remainder of our fiscal year FY '21.
Tom will then provide a few summary comments and will open the call to questions from Tom, we, or myself.
And with that, Tom, I'll hand it off to you.
Now, before I move to Slide 4, I want to make a few opening comments.
Calendar 2020 was an extremely difficult year, to say the least for all of us, both professionally and personally and I hope all of you are staying safe.
Our global team has come together like no other time in our history and has responded to this combination of a health and economic crisis.
We've rallied around our purpose, and the one strategy, we've showed that Parker is an exceptional performer, even in the most difficult of environments.
So if you go to Slide 4, one of our key competitive advantages are breadth in motion control technologies.
We're now up to two-thirds of our revenue this -- you heard me talk about this is probably 160% but now the two-thirds of our revenue comes from customers who buy from four more of these technologies.
As these interconnected technologies that enable us to create even more value for our customers and create a distinct competitive advantage versus our competitors.
If you move to Slide 5, we just had outstanding performance in the quarter.
I will run you through some of the highlights.
Top quartile safety performance, we had a 23% reduction in recordable incidents this now makes 75% reduction for the last five years, which has been phenomenal.
Sales decline was 2.5% year-over-year, you can see it was a little over 6% from an organic standpoint this was significantly better than our guidance and about a 50% plus improvement from where we were on Q1.
Q2 was a record net income at $447 million, the EBITDA margin was a little over 23%, as reported or 20.8% adjusted.
You can see the significant improvement versus prior 230 basis points.
Year-to-date cash flow from operations was a record at 20.4% of sales.
And then the table to bottom there has got segment operating margin, both as reported and adjusted basis so I'd call your attention to the adjusted row, 20.4% segment our operating margin adjusted and again a giant increase versus prior plus 230 basis points.
So there's a lot of numbers on this page, we have a lot of companies to track.
So the easy way to remember this is, is the quarter we put up 320's and we happen to highlight them in gold, so greater than 20% EBITDA margin, CFOA margin and segment operating margin, so we're pretty proud of that.
And those are all who create results during the pandemic, so just fantastic job by the whole team.
If you go to Slide 6, we're going to talk about cash flow the cash flow quarter paid down $767 million of debt in a quarter.
If you look at our last 14 months it's $2.8 billion of debt this was a little over half of the acquisition debt, so we took almost organic size, just great progress there.
You see the ratios in the middle of the page there, of significance, if we go back a year ago, we were 4.0 and now we're at 2.7 on a gross debt to EBITDA basis.
And we've now reinstated effective in this quarter Q3 our 10b5-1 share repurchase program.
So I'll move to the next slide, which is our transformation of the company, and hopefully, just the last two slides are indicative of how the company has transformed, but I'd like to give a little more color and context, as to what we're doing.
So if you move to Slide eight, this is our strategy, summary on a page and it's flanked on the left side with why we win, which you've heard me talk about this in the past.
This is a list of our competitive advantages, and I've highlighted those.
So I'm not going to talk about on this really today, but their historical success factors that will continue on into the future.
I want to focus most of the time for my next couple of slides on where we're going and I've got a slide in each one of these bullets, and the output of really this historical success factors on where we're going, is that we want to be a top quartile company, and we want to stand out in the crowd and we think we're doing that.
So we go to Slide 9, the Win Strategy and this is 3.0, this is our business system a pound for pound this has been the most impactful change we've made to-date to the Win Strategy, and it's going to be Win 3.0 and our purpose statement.
There are going to be a powerhouse behind our future performance.
If you go to 10, you've seen our purpose statement enabling engineering breakthroughs that lead to a better tomorrow this is a statement that everybody has really rallied around the foundry inspiration within the company.
It's enabled everyone to connect their efforts to this higher calling, this higher purpose of life and really it helps to answer the question, how can we help through our customers create a better tomorrow.
And I've given what's going on with the coronavirus and the vaccine, Slide 11, is probably a great highlight of our purpose and action and just how essential we are to the vaccine value chain.
The way to read this slide to go left to right, and go in a clockwise fashion, we will start in the upper left hand corner.
So we're in a development and production phase of these vaccines mixing purification filtration and dispensing then you got to get the product moved around, so we are in sterile transfer containers especially designed and then where all of our motion and control technologies are in both air and ground transportation to move the product around the world.
You need to be able to start locally and that requires low temperature refrigeration.
So our refrigeration technologies are at play there.
And then when we administer to the patient, again you need on-premise refrigeration and then stoppers and syringe sales as part of engineered materials offering.
If you move to Slide 12, my last slide from my opening comments, I want to focus on our strategy to grow faster in the market and our proxy for the market is global industrial production growth, which is GIPI, that acronym.
So on the left hand side, it's a series of portfolio things that you've seen us make transforming the portfolio company buying three great companies, $3 billion of acquired revenue we're all accretive on growth, cash margins.
And a matter of fact, as an example, LORD grew mid-single digits last quarter, while the rest of the company, total company grew minus 6%.
On the right hand side, there is a list of organic growth strategies.
And what's interesting about this list with the exception of international distribution, these are all new with Win Strategy 3.0.
So I'm going to make a quick comment on each one.
So strategic positioning is really our effort to focus on stronger divisional strategies, and we have with every division we do three, three a month, and these are extremely productive conversations with our general managers to how they're going to position your division to win versus the competition.
Second, both are an Innovation we made two big changes one is the metric PVI which is product vitality index to measure of new products as a percent of sales looking at a five-year period for new products, and the new product blueprinting, which is that NPB acronym there, is really a change to our ideation process to create better ideas coming into the renovation funnel.
The output of what we're trying to do here is that we want our PBI context the percent of sales to grow by 600 basis points over the next five years and more innovative portfolio, better chances to grow, better margins etc.
And then Simple by Design, I've talked a lot about that.
It's a speed initiative, it's a cost initiative, it's a customer experience initiative, it's a recognition that 70% of your costs are tied up on how you design a product and Simply by Design is all about focusing on design excellence.
So when you put together design excellence with operational excellence, it's a dynamite pairing.
International Distribution is going to continue from the success we've had with 2.0.
Digital Leadership is really a four-pronged attack, digital customer experience, digital products, digital operations and digital productivity and digital productivity is where we have a concerted effort on our official intelligence and debt analytics.
And then lastly, a new incentive plan, our Annual Cash Incentive Plan are acronym ACIP and that's going to focus our divisions and or company on driving growth cash and earnings.
So it's this combination, and it's this combination that's helped us perform better on the top line organically, particular in the current downturn and it will be our catapult to growing fast in the market as we go forward.
So with that, I'm going to hand it back to Todd for more details for the quarter.
I'd like to direct everyone to Slide 14, and I'll just begin summarizing our strong second quarter results.
This slide displays, as reported and adjusted earnings per share for the second quarter, and I'll focus on adjusted earnings per share.
We generated $3.44 this quarter and that compares to $2.98 last year.
If you look at the breakdown of adjustments for the FY '22 or excuse me FY '21, as reported numbers it netted to $0.03 this quarter, and that is made up in the following buckets, business realignment expenses of $0.14, integration cost to achieve of $0.02, acquisition-related amortization expense of $0.62, and as we communicated last quarter, we are adjusting out the gain on the sale of land that amounted to $0.77.
And all-in the net tax impact of all of those adjustments, is $0.02.
Last year, our second quarter earnings per share were adjusted by $1.41, the details of which are included in the reconciliation tables for non-GAAP financial measures.
If you move to Slide 15, this is just a walk from the $2.98 to the $3.44 for the quarter and despite organic sales declining 6% and total sales declining 2.5%, adjusted segment operating income increased by $70 million or $0.11, that equated to $0.42 per share,so very strong operating beat for the quarter.
Detrimental margins on a year-over-basis are favorable, demonstrating the excellent operational execution, robust cost containment by our team members really in every segment and every region.
If you continue on the slide, we had a slight headwind from higher corporate G&A just $0.02, that was a result of market-based adjustments to investment tied to deferred comp.
And as Tom mentioned, our strong cash flow allowed us to pay off a significant portion of debt on a year-over-year basis that reduced our interest expense, that equated to $0.12 for the quarter.
And then if you look at the remaining items, other expense was just $0.01, slightly higher, we had a higher effective tax rate that impacted us by $0.03 and finally slightly higher diluted shares resulted in a $0.02 impact, that's how we get to the $3.44.
If you move to Slide 16.
This is savings from our Cost Out Actions and I know there's been a lot of questions on this, just on, from some of the early reports.
Just a reminder, these represent savings recognized in the year, as a result of our discretionary actions in response to the pandemic and volume declines, plus the savings we realized from our permanent realignment actions taken in FY '20 and also in FY '21.
So if you look at this, our second quarter discretionary savings exceeded our forecast and now amount to $190 million on a year-to-date basis.
We are now forecasting for the full year that discretionary total will increase to $225 million or an increase of $50 million.
The majority of that increase was recognized in the second quarter and roughly amounted to $35 million above our forecast.
Just a reminder, as demand continues to increase and our teams pivot to support growth, we expect these discretionary savings to be lower in the second half.
Permanent actions remain on track.
There is no changes to what we have communicated previously, our full-year forecast will generate savings of $250 million and that will be $210 million incremental.
And we believe, that this will help us generate a strong incremental margins that we have in our guidance for the second half.
If we move to Slide 17, this is just a walk of the total results for the company's our sales and segment operating margin, and as Tom mentioned, organic sales did decline by 6.1% this year.
The decline was partially offset by the contributions from acquisitions, that was 2.6% and currency impact of 1%.
And again, despite these lower sales, total adjusted segment operating margins improved to 20.4% versus 17.9% last year.
This 250 basis point improvement reflects all the positive impacts from our Win Strategy initiatives, the hard work and dedication to cost containment and productivity improvements, as well as savings from those realignment activities, I just spoke off and really performance of the recent acquisition.
So strong execution really across the entire company to get these results.
If we jump into the segments, if you go to Slide 18, looking at Diversified Industrial North America, sales there declined by 5.9%, acquisitions were a plus of 3.1% and currency-only slightly negatively impacted sales.
But again, even with these lower sales our operating margin for the second quarter on an adjusted basis increased sizably to 21.3%, last year it was 18.2%.
So again another impressive 310 basis point improvement, focused on our long-term initiatives around Win Strategy along with the productivity improvements, diligent cost containment actions and really some increased synergies we're seeing out of the LORD acquisitions.
So if we go to the next slide, Slide 19, for Diversified Industrial International, organic sales for the quarter increased by 3.1%, acquisitions added 3.2% and currency accounted for 3.5%, again strong operating performance here, for the quarter, we reached 20.3% of sales versus 16% in the prior year.
And again, same story, Win Strategy initiatives, strong synergy growth and really our teams around the world are rallying together in light of the pandemic.
If we go to Slide 20, and talk about Aerospace Systems' Segment.
And again, what we'll see here is a decline of 20.9% for the quarter, acquisitions helped us by 0.4%, and again, a small currency impact of 0.1% really declines in the commercial business is both in the OEM and aftermarkets and markets were the main impact, these were partially offset by higher sales in both military OEM and military aftermarket sales.
Operating margins for the second quarter was 18% versus last year's 20.2%, this resulted in a detrimental margin of 28.8%, which is in line with our expectations, and really the result of all the previous actions we've taken to realign the Aerospace business to current market conditions, along with strong cost controls and really helping to offset the pandemic imposed to the mix that we're seeing from the commercial and military businesses.
Slide 21, is just some highlights on cash flow.
Tom already mentioned this, but our operating cash flow activities increased 64% year-over-year to a record of $1.35 billion of cash, this is an impressive 20.4% of sales.
Our global teams are really focused on this, very disciplined in managing our working capital across the world, and we're really focused on delivering strong cash flow generation.
If you look at free cash flow, year-to-date, we now move to 19%, that's an increase of 78% versus prior year and our cash flow conversion is now 164% versus 130% last year.
So just strong cash flow performance from the team, very impressive results.
If we want to just focus on orders, real quick moving to Slide 22, our orders came in at flat this year or this quarter I should say and that was really driven by plus 1% and our Industrial North American businesses plus 10% in our Diversified Industrial businesses and minus 18% on a 12 month basis in Aerospace.
So, all-in, we came in flat and that's the first time in seven quarters, I believe that the numbers have been not negative.
If we move to Slide 23, in the guidance, obviously, we have a pretty large guidance increase.
We are now providing this on an as reported and adjusted basis.
And based on the strong performance we just spoke off in the first half, all the current indicators that we see right now we have increased our total outlook for sales to a year-over-year increase of 1.7% at the midpoint,this includes the forecasted organic decline of 3.4%, offset by increases from acquisitions of 2.9% and currency of 2.2%.
And again, just a reminder we've calculated the impact of currency to spot rates based on the quarter ending December 30th and we've held those rates steady as we look through the second half of our fiscal year.
In respect to margins, for adjusted operating margins by segment, at the midpoint we are now forecasting to increase margins 150 basis points year-over-year and that range is expected to be 20.2% to 20.4% for the full year.
And if you note for items below segment operating income, there is a fairly significant difference between the as reported estimate of $388 million and the adjusted forecast of $487 million.
The difference is that land sale that we spoke about that's $101 million pre-tax, $76 million after-tax that was recognized as other income in Q2.
Full-year effective tax rate, no change, we still expect that to be 23%, and for the full year, the guidance range for earnings per share on an as reported basis is now $11.90 to $12.40 or $12.15 at the midpoint and on an adjusted per share basis, the guidance range is now $13.65 to $14.15 or $13.90, at the midpoint.
Adjustments to the as reported forecast made in this guidance at a pre-tax level include business realignment expenses of approximately $60 million for the year associated with savings projected from those actions to be $50 million in the current year, and acquisition and integration cost to achieve $50 million of expense.
Synergy savings for the lower acquisition are now projected to reach $100 million, that is an increase of $20 million from our prior stated numbers of $80 million and that is included in our guidance.
Exotic synergies remain are expected to be $2 million for the full year.
Just a reminder, acquisition-related intangible asset amortization expense is forecasted to be $322 million for the year, and some assumptions that we have baked into the guidance here, at the midpoint, our sales are divided 48% first half 52% second half, and both, adjusted segment operating income and adjusted earnings per share is split 47% first half, 53% second half.
For the third quarter of FY '21, we are forecasting adjusted earnings per share to be $3.54 at the midpoint and that excludes $0.57 or $97 million of acquisition-related amortization expense, the business realignment expense and integration cost, we achieved in the quarter.
So if you look at -- move to Slide 24, this is really just the walk from our previous guide to our revised guide.
We had guided at $12 per share last quarter based on the strong second quarter performance, we exceeded our estimates by a $1.6 and we've mentioned this, but the improving demand environment along with the strong operational performance, some additional extended discretionary savings, the permanent restructuring savings, and increased LORD synergies, we feel confident in raising our forecasted margins, which at $0.85 of segment operating income over the next two quarters for the remainder of the fiscal year.
So the majority of this increase is based on operational performance.
This calculated to an estimated incremental margin of 41% for the second half and then some other minor adjustments to the below segment operating income lines are a negative impact of $0.01 and that's a net of interest expense and income tax.
So that's how we get to the $13.90.
That is approximately a 60% increase from our prior guidance.
And just want to wrap things up with these great results don't happen by accident, they're driven by a highly engaged global team.
Our focus on safety, high performance team is lean in Kaizen is driving an ownership culture within the company, hence resulting a top quartile engagement as well as top quartile results.
We talked about the portfolio, it's a big competitive advantage of us at connectivity, the transformation on those three acquisitions is a fact that they're outgrowing and generating more cash and margins on legacy Parker, our performance over the cycle, but we're just reflecting the last 5 years and just use round numbers, our margins are up 500 basis points.
In a five-year period of time that was not just the easiest five-year period of time for industrial companies.
And then our Win Strategy 3.0 in particular in the Purpose Statement are going to be the powerhouse behind accelerating our performance intoo the future.
And Gigi, I'm going to hand it back to you for start the Q&A.
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q2 adjusted earnings per share $3.44.
increases fiscal 2021 earnings per share guidance midpoint to $12.15 as reported, or $13.90 adjusted.
qtrly orders were flat for total parker.
during quarter, company made debt repayments of $767 million.
outlook for key end markets continues to be uncertain in current environment.
increased guidance for earnings per share to range of $11.90 to $12.40, or $13.65 to $14.15 on an adjusted basis for fy 2021.
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I'm Mark Kowlzan, Chairman and CEO of PCA and with me on the call today is Tom Hassfurther, Executive Vice President, who runs the Packaging business and Bob Mundy, our Chief Financial Officer.
I'll then wrap things up and then would be glad to take questions.
Yesterday, we reported second quarter net income of $207 million or $2.17 per share.
Excluding special items, second quarter 2021 net income was also $207 million or $2.17 per share compared to the second quarter of 2020 net income of $132 million or $1.38 per share.
Second quarter net sales were $1.9 billion in 2021 and $1.5 billion in 2020.
Total company EBITDA for the second quarter excluding special items was $397 million in 2021 and $299 million in 2020.
Reported earnings in the second quarter of 2021 included special items expense and income rounding to a negligible impact while last year's second quarter net income included special items expenses of $0.79 per share related primarily to the impairment of goodwill associated with our Paper segment.
Excluding special items, the $0.79 per share increase in second quarter 2021 earnings compared to the second quarter of 2020 was driven primarily by higher prices and mix of $1.01 and volume $0.74 in our Packaging segment, higher volume in our Paper segment of $0.03, and lower non-operating pension expense of $0.03.
These items were partially offset by higher operating costs of $0.57 primarily due to inflation related increases in the areas of labor and fringes, repairs, materials and supplies, recycled fiber cost as well as other indirect and fixed cost areas.
We also had inflation related increases in our converting costs, which were higher by $0.05 per share while annual outage expenses were up $0.19 per share compared to last year.
Freight and logistics expenses were higher by $0.19 per share driven by historically high load to truck ratios, driver shortages, increases in fuel costs, and a higher mix of spot pricing to keep pace with the box demand.
Lastly, depreciation expense was higher by $0.01 per share and Paper segment prices and mix were lower by $0.01 per share.
Looking at our Packaging business, EBITDA excluding special items in the second quarter of 2021 of $409 million with sales of $1.7 billion resulted in a margin of 24% versus last year's EBITDA of $313 million and sales of $1.4 billion or a 22% margin.
Our mills and plants continued to do an outstanding job of meeting our customer needs while managing through certain material and chemical availability issues, a tight labor market, various freight and logistics challenges as well as the planned maintenance outages at four of our mills during the second quarter.
The mills executed the planned outages extremely well and with the help of the No.
3 machine at our Jackson, Alabama mill provided our plants the necessary containerboard to achieve an all-time record for total box shipments.
Although we were able to build some much-needed inventory, due to very high demand, we ended the second quarter below our targeted levels and at a new low for weeks of inventory supply for this time of year and ahead of expected very busy third and fourth quarters.
In the second half of the year, we still anticipate a planned outage at our Jackson, Alabama mill later in the third quarter as well as a significant planned outage at our DeRidder mill in the fourth quarter.
Implementation of the previously announced price increases continues to be executed extremely well by our sales organization while our engineering and technology organization and the employees at all of our mills and corrugated products plants continues to successfully implement numerous initiatives and projects to reduce cost through efficiency, productivity, and optimization improvements.
With inflation driven cost increases across most all areas of our company coupled with truck, rail, and barge challenges for both incoming and outgoing products and materials at our facilities, these efforts are absolutely critical to our success.
In addition, being a primarily virgin fiber based producer of containerboard minimizes the impact of significant increases in recycled fiber costs over the last several quarters.
As Mark indicated, containerboard and corrugated products demand remains very strong across most of all of our end markets.
Our plants achieved a new all-time quarterly record for total box shipments as well as a second quarter record for shipments per day, both of which were up 9.6% compared to last year's second quarter.
Through the first half of 2021, our box shipment volume is up 9% on a per day basis versus the industry being up 6.8%.
Driven by higher domestic demand, outside sales volume of containerboard was about 43,000 tons above the second quarter of 2020, but was down slightly versus the first quarter of this year due to lower export shipments, supplying the record requirements of our box plants and the need to position inventory levels ahead of what appears to be a strong second half of the year.
We are getting good realization from the implementation of our previously announced price increases across all product lines.
Domestic containerboard and corrugated products prices and mix together were $0.92 per share above the second quarter of 2020 and up $0.51 per share compared to the first quarter of 2021.
Export containerboard prices were up $0.09 per share versus last year's second quarter and up $0.04 compared to the first quarter of 2021.
Finally, I'd like to reemphasize some of what Mark was pointing out regarding the many things we do to help offset inflation and improve our margins beyond just price increases.
The benefits from our capital spending strategy in the box plants that we've spoken about over the last few years have been extremely successful and put us in position to serve our customers better than ever before.
Our strategy of improving the technology and equipment in our plants and optimizing our footprint through the construction of new facilities as well as closing certain plants to consolidate business with other locations is based upon our customer's needs and demands and improving our capabilities to grow with them.
We're seeing this in our volume growth with new and existing customers, operating efficiencies and savings, and cost reductions in several conversion areas throughout our plants.
Looking at the Paper segment, EBITDA excluding special items in the second quarter was $12 million with sales of $142 million or an 8% margin compared to second quarter 2020 EBITDA of $5 million and sales of $3 million or a 4% margin.
Although about 1% below second quarter 2020 levels, prices and mix moved higher for the first and into the second quarter of 2021 as we continued to implement our announced price increases.
Volume was 17% above last year when pandemic issues caused us to take both machines at the Jackson, Alabama mill down for two months during the second quarter while this year, we ran the No.
1 machine at Jackson on paper and the No.
3 machine ran linerboard.
Now that we have our finished goods inventory at a new optimal level, sales volume in the second quarter is fairly reflective of what our production capability is as a three machine paper system.
We'll continue to assess our outlook for paper demand and will run our paper system accordingly.
Cash provided by operations for the second quarter was $228 million with free cash flow of $97 million.
The primary uses of cash during the quarter included capital expenditures of $131 million, common stock dividends of $95 million, cash taxes of $87 million, and net interest payments of $40 [Phonetic] million.
We ended the quarter with $972 million of cash on hand or $1.1 billion including marketable securities.
Our liquidity at June 30th was just under $1.5 billion.
As we move from the second to the third quarter in our Packaging segment, we expect continued strong demand for containerboard and corrugated products with one additional day for box shipments.
Paper segment volume should be relatively flat primarily due to the scheduled maintenance outage at the Jackson mill.
We will also continue to implement our previously announced price increases in both our Packaging and Paper segments.
Our annual outage costs will be lower with one outage in the third quarter versus four mill outages in the second quarter.
Inflation associated with most of the operating costs as well as freight and logistics expenses is expected to continue.
Energy costs will also be impacted due to higher seasonal usage and wood costs in our southern mills will be higher due to wet weather, low inventory, and high demand.
Considering these items, we expect third quarter earnings of $2.37 per share.
The statements were based on current estimates, expectations, and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors in our Annual Report on Form 10-K on file with the SEC.
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packaging corp of america q2 earnings per share $1.38 excluding items.
q2 earnings per share $1.38 excluding items.
q2 earnings per share $0.59.
q2 sales $1.54 billion versus refinitiv ibes estimate of $1.63 billion.
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These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual performance and events may differ materially.
Factors that could cause results to differ include the factors described in our third quarter 2021 report on Form 10-Q and our 2020 annual report on Form 10-K and other recent filings made with the SEC.
Additionally, some remarks may refer to non-GAAP financial measures.
Shane Fitzsimons, who became AIG's CFO on January 1st, will be available for Q&A, along with David McElroy and Kevin Hogan.
Today, I will cover four topics: First, an overview of General Insurance fourth quarter and full year performance, where we continue to drive meaningful underwriting profitability improvement.
I will also briefly touch on the 1/1 reinsurance renewal season.
Second, I will review results from our life and retirement business, which continues to be a meaningful contributor to our overall results.
Third, I will provide an update on our progress toward an IPO of life and retirement and operational separation of the business from AIG.
And fourth, I will review our current plans regarding capital management.
Before turning to those topics, I want to take a few minutes to highlight some noteworthy achievements in 2021, which were significant for AIG.
2021 was a pivotal year and one in which our team executed on several strategic priorities.
We produced strong liquidity throughout 2021, which provided flexibility and allowed us to return $3.7 billion to shareholders through share repurchases and dividends.
We also repurchased $4 billion of debt, which reduced our debt leverage by 380 basis points to 24.6%.
Notwithstanding these actions, we ended 2021 with $10.7 billion in parent liquidity.
As I said on prior calls, the path we've taken to improve AIG and our portfolio in general insurance, in particular, with a significant undertaking.
In general insurance, given the portfolio we started within 2018, we needed to make fundamental changes.
We quickly overhauled our underwriting standards and developed a culture of underwriting excellence, including significantly reducing gross limits.
To give you a sense for the magnitude of what we needed to do, we reduced gross limits by over $1 trillion in our property, specialty, and casualty businesses.
In addition, we took a conservative approach to volatility by reducing net limits and exposure through strategic implementation of reinsurance.
As a result of this strategy, since 2018 and through 2021, we've been able to grow net premiums written in commercial by over $3 billion, while ceding an additional $2 billion of reinsurance premium to further reduce volatility and protect the balance sheet.
At the same time, we improved the combined ratio, excluding CATs by 1,000 basis points.
Simply put, today, we have a different portfolio with a markedly different risk profile, which we believe is significantly stronger by all measures.
Turning to life retirement, we again had solid and consistent results throughout 2021, benefiting from product diversity within the business.
Return on adjusted segment common equity was 14.2% for the full year.
Throughout 2021, we also made tremendous progress on the separation of life retirement from AIG.
We're executing on multiple workstreams to operationally separate the business, and we closed on the sale of 9.9% equity stake and transferred $50 billion of assets under management to Blackstone.
Additionally, we achieved significant milestones at AIG 200 and remain on track to deliver $1 billion in run-rate savings by the end of 2022 against the spend of $1.3 billion.
I could not be prouder of what the team has accomplished.
While we still have plenty of work ahead of us, it would be remiss of me not to recognize these accomplishments and the significant momentum we have heading into 2022.
Now let me turn to our business results in general insurance for the fourth quarter of 2021.
Mark is going to go into more detail, but we had a terrific quarter to close out the year.
In the fourth quarter, general insurance net premiums written increased 8% overall on an FX-adjusted basis, with another strong quarter of 13% growth in commercial, which was tempered somewhat by a slight contraction in Personal, with a 1% reduction in net premiums written.
The growth in commercial lines was balanced with 11% in North America and 16% in international.
Personal lines net premium growth contracted by 1% in the quarter due to a 5% reduction in international, driven by our repositioning of the Personal Property portfolio in Japan, offset by 17% growth in North America, which largely reflects less year-over-year ceded reinsurance.
Looking at fourth quarter profitability, I'm very pleased with the accident year combined ratio ex CATs, which improved 310 basis points year over year to 89.8%, the first sub-90% quarterly result since the financial crisis.
This improvement was driven by commercial, which achieved an accident year combined ratio ex CATs of 87.9%, a 380 basis point improvement year over year and the third consecutive quarter below 90%.
Personal report 130 basis points of improvement in the accident year combined ratio ex CATs to 94.3%.
Pivoting to the full year 2021, we made enormous progress in improving the quality of the underwriting portfolio and driving growth throughout the year.
Net premiums written grew 11% on an FX-adjusted basis, driven by global commercial growth of 16%.
Growth in commercial was particularly strong in both North America at 18% and international at 13%.
We had very strong retention in our in-force portfolio with North America improving by 300 basis points and international improving by 500 basis points for the full year.
Gross new business in Global Commercial grew 27% year over year to over $4 billion, with 24% growth in international and 30% in North America.
Overall, global commercial saw increases of 13%, and strong momentum continued in many lines.
In global personal, we had some growth challenges in this segment, but accident and health performed very well, and overall, we had a solid year with net premiums written up 1% on an FX-adjusted basis.
These results also reflect less reinsurance cessions in our high net worth business and some growth in warranty.
Turning to underwriting profitability for full year 2021.
general insurance's accident year combined ratio ex CATs was 91%, an improvement of 310 basis points year over year.
The full year saw 140 basis point improvement in the accident year loss ratio ex CATs and 170 basis point improvement in the expense ratio, split evenly between the GOE ratio and the acquisition ratio.
These positive results were driven by our improved portfolio mix, net earned premium growth, achieving rate in excess of loss cost trends, continued expense discipline, and the benefits we are receiving from AIG 200.
Global commercial achieved an impressive accident year combined ratio ex CATs of 89.1%, an improvement of 410 basis points year over year.
The accident year combined ratio ex CAT for North America commercial and international commercial were 91% and 86.7%, which reflected improvements of 450 basis points and 340 basis points, respectively.
In global personal, the accident year combined ratio ex CATs was 94.9%, an improvement of 120 basis points year over year, driven by improvement in the expense ratio.
These notable combined ratio improvements across general insurance reflected improved higher-quality global portfolio driven by the strategic underwriting actions and strong execution, which have enabled us to shift our focus toward accelerating profitable growth in areas of the market where we see attractive opportunities.
We are very pleased with these materially improved results, which provide tangible evidence of our successful underwriting strategy and the significant progress we have made.
Turning to January 1 renewals with respect to our ceded reinsurance, we were very pleased with the outcome of our reinsurance placements.
While the markets presented significant challenges across the industry, with retrocessional limited along with other capacity issues, our reinsurance partners recognize the strength of our improved underwriting portfolio and reduced aggregation exposure, which translated to many improvements in our reinsurance structures, along with better terms and conditions.
It's important to keep in mind that we placed over 35 treaties at 1/1, with over 65 discrete layers and over $12 billion of limit placed and we cede over $3 billion of premium in the market.
As you can imagine, we're not an index of market pricing because of the significant improvement in the portfolio, along with the size and complexity of our placements.
We continue to maintain very strong relationships with our reinsurance partners.
And the support we receive in the marketplace is evident in the quality of the overall reinsurance program.
We continue to make meaningful improvements to our core placements in every major treaty on January 1, and as a result, continue to reduce volatility in our portfolio.
For our Property CAT treaty, we improved the per occurrence structure and improved our aggregate structure for our global commercial businesses.
For the North America per occurrence property CAT treaty, we lowered our attachment point to $250 million for all perils, which is a reduction from our core 2021 program that had staggered attachment points, depending on apparel, that range from $200 million to $500 million.
And we maintained our per occurrence attachment points in international, which are $200 million for Japan and $100 million for the rest of the world.
For our global shared limit aggregate cover, we were able to reduce our attachment point in every region across the world, most notably, $100 million reductions in the attachment point in North America.
Our global shared limit, each and every deductible remain the same or reduced in every global region, most notably $25 million reductions in North America-named storms.
Our attachment point return periods are the same or lower in every region across the world when compared to our 2021 core reinsurance program, and our exhaustion period returns are higher in every instance across the world on an OEP and AEP basis.
And we achieved these significant improvements while modestly reducing the total aggregate reinsurance CAT spend.
On our core casualty treaty, we reduced our net limits on our excess to loss treaty in both North America and international.
On our proportional core North America placement, we maintained the same session amount while improving our ceding commission by 400 basis points, which represents an 800 basis point improvement over the last 24 months, reflecting our significantly improved underwriting and recognition from the reinsurance market.
Lastly, we renewed our cyber structure at 1/1, with additional quota share seed increasing from 60% to 70% and the aggregate placement attaching at 85% versus a 90% loss ratio.
Given the tight terms and conditions and discipline in our portfolio, along with significant rate increase we achieved during the year, we were able to secure more quota share authorization, which is a great example of the reinsurance market's flight to quality.
As we discussed on last earnings call, we've spent considerable time through AIG research and our chief underwriting office analyzing the impact of climate change and the increased frequency and severity of natural catastrophes.
A few observations about 2021.
It was the sixth warmest year on record since NOAH began tracking global temperatures in 1880.
Hurricane Ida estimated at $36 billion of insured loss was the third largest hurricane on record.
In North America, $17 billion of winter weather losses was the largest on record for this peril.
And $13 billion of insured loss for European flooding was the costliest disaster on record for the continent.
While we've been working over the past few years to reposition our portfolio to limit exposure and dampen volatility, changing weather patterns and increased density of risk in peak zones have caused stress on aggregation and anchored the ability of property underwriters to make appropriate risk-adjusted returns on capital deployed.
These changes have caused us to look deeper into the exposures we are underwriting in several lines of business.
An example of a business that needs further attention and strategic repositioning is our high net worth property portfolio within our personal insurance segment.
By the nature of the business, it's exposed to peak zones and is susceptible to increased frequency and severity.
This reality, together with secondary perils that have become primary perils in the underwriting and modeling process, as well as secondary perils and modeling, have all driven up loss costs, creating a significant issue that needs to be addressed.
When analyzing the portfolio over the last five years, we've seen catastrophe levels that are 10 times the level the portfolio dealt with in the prior 10 years for losses in excess of $50 million.
The inability to reflect emerging risk factors, the effects of changes to modeling, increased loss costs from cats has put the profitability of the business under pressure.
In addition, when you consider the increased exposure in most peak zones in the United States over the last few years, with significantly increased total insured values, in some cases, greater than 100%, more density, supply chain issues, reinsurance availability, and increased reinsurance costs, and all this with heightened complexity the pandemic has caused, along with the impact of demand surge post-CATs, not being tested, the business model simply needs to change.
Recognizing these realities, after careful review, we decided to take meaningful steps to address this risk issue in our high net worth business, which will allow us to continue to offer comprehensive solutions to our clients that are more consistent and sustainable.
Aggregation and profitability challenges led us to the conclusion that we have to offer the property homeowners product as an example, through excess and surplus lines on a non-admitted basis in multiple states.
For example, in December, we announced that we would no longer be offering admitted personal property homeowners policies in the state of California.
We cannot maintain our current level of aggregation in the state nor have we been able to achieve any profitability from this line of business.
Being a prudent steward of capital, these actions will enable us to segment the portfolio, achieve an acceptable return, reduce volatility, and offer clients more comprehensive policy wordings and services.
Now turning to life retirement.
Full year results were driven by improved equity markets, strong alternative investment income, higher interest rates, higher call, and tender income, and higher fee income, partially offset by elevated mortality and base spread compression across products.
Adjusted pre-tax income in the fourth quarter and full year was $969 million and $3.9 billion, respectively.
The full year growth of 11% was driven by strong alternative investment and fee income.
Full year sales were strong with premiums and deposits increasing 15% year over year to $31.3 billion.
Sales within our individual retirement segment grew 34% across our three product lines for the year.
Assets under management were $323 billion, and assets under administration increased to $86 billion, benefiting both from strong sales activities and favorable economic conditions.
We also made excellent progress with Blackstone in the fourth quarter, completing the initial $50 billion asset transfer, incorporating them into our asset-liability management process, finalizing the investment guidelines, and developing initial product offerings based on Blackstone's origination platform.
Lastly, having analyzed our exposure to long-duration target improvements, or LDTI accounting, based on the current interest rate and macro environment, we expect the transition impact of LDTI is well within Life Retirement's current balance of AOCI.
Mark will provide more detail on this topic in his remarks.
Turning to the separation and IPO of life retirement.
In addition to closing Blackstone transactions, we also continue to make significant progress on operationally separating life retirement from AIG, both with respect to what can be done by the IPO and longer-term to transition service agreements.
We are applying the same rigor and discipline to our separation workstreams as we have with our AIG 200 transformation program, but with a clear focus on speed to execution.
We continue to work toward an IPO in the second quarter of this year, subject to regulatory approvals and market conditions.
As I mentioned on our last call, due to the sale of our affordable housing portfolio in the fourth quarter, and the execution of certain tax strategies, we are not constrained in terms of how much of life retirement we can sell in an IPO.
Having said that, the size of the IPO will be dependent on market conditions.
We continue to expect to retain a greater-than-50% interest immediately following the IPO and to continue to consolidate life retirement's financial statements at least until such time as we fall below the 50% ownership threshold.
Finally, turning to capital management.
We've been giving significant thought to both life retirement as a stand-alone business and AIG as we continue the path to separation.
With respect to life and retirement, our goal remains to achieve a successful IPO of a business with a capital structure that is consistent with its industry peers.
Life and retirement has a strong balance sheet and limited exposure to legacy liabilities, and its insurance operations have a history of strong cash flow generation.
We expect that over time, this business will sustain a payout ratio to shareholders of 60% to 65% between dividends and share repurchases on a full calendar year basis.
We also expect that post IPO, life and retirement will pay an annual dividend in the range of $400 million to $600 million, which equates to roughly a 2% to 3% yield on book value.
Additionally, as part of the separation process, in the fourth quarter of 2021, life and retirement declared a dividend payable to AIG in the amount of $8.3 billion, which will be funded by life and retirement debt issuances and paid prior to the IPO.
Our expectation is that a vast majority of this dividend payment will be used to reduce debt at AIG, and therefore, the overall amount of debt across our consolidated company will remain relatively constant at the time of the life retirement IPO.
Post deconsolidation, we expect life retirement to maintain a leverage ratio in the high 20s, with AIG maintaining a leverage ratio in the low 20s.
Regarding our current capital management plan for AIG, ending 2021 with $10.7 billion in parent liquidity provides us with a significant amount of flexibility.
Our capital management philosophy will continue to be balanced to maintain appropriate levels of debt and to return capital to shareholders through share buybacks and dividends, while also allowing for investment in growth opportunities across our global portfolio.
This will also be true post-IPO and over time as we continue to sell down our stake in life retirement.
With respect to share buybacks, we have $3.9 billion remaining under our current authorization and expect to complete this amount in 2022, weighted more toward the first half of this year.
We do not expect the life retirement IPO to impact AIG's dividend and expect to maintain our current annual dividend level at $1.28 per share.
With respect to growth opportunities, our priorities will be to allocate capital in general insurance, where we see opportunities to grow and further improve our risk-adjusted returns.
We believe there are excellent opportunities for continued growth in global commercial Lines, which Mark will cover in more detail in his remarks.
As we move through 2022 and are further along with the IPO and separation of life retirement, we will continue to provide updates regarding capital management.
As you can see, we made significant progress in 2021 and had a terrific year.
2022 will be another busy and transformational year for AIG.
We started 2022 with a significant amount of momentum, and our colleagues continue to demonstrate an ability to execute on multiple fronts as we continue our journey to be a top-performing company.
Given Peter's comments, I will head directly into the fourth quarter results.
Diluted adjusted earnings per share were $1.58, representing 68% growth over the prior year.
This material improvement in adjusted earnings per share was driven by an over 1,000 basis point reduction in the general insurance calendar quarter combined ratio; 9% growth in net earned premiums, led by global commercial with 13% net earned premium growth; and an improvement in the underlying accident year combined ratio ex CATs to 89.8%, as Peter mentioned, our first sub-90% quarterly results since before the financial crisis, which also represented a 310 basis point improvement from the prior-year quarter.
Life and retirement delivered another quarter of solid returns and remained well-positioned, with a 13.7% return on adjusted segment common equity for the fourth quarter and 14.2% for the full year 2021.
The strength of our operating earnings and capital actions in the quarter helped drive a near 10% adjusted annualized ROE and growth in adjusted tangible book value per share of nearly $7, which represents a sequential increase of 12% and a full year increase of 23%.
We fulfilled our capital management commitments and finished the year with a GAAP leverage ratio of 24.6%, a reduction of 150 basis points in the quarter and 380 basis points over the course of the year, which is another milestone, as we stated, our goal was to be at or under 25% on this important metric.
This improvement was driven by approximately $4 billion of debt and hybrid retirement, along with $2.6 billion of share repurchases, nearly $2.1 billion of which occurred in the second half of 2021, which was slightly above our guidance.
Moving to general insurance.
Catastrophe losses of $189 million were significantly lower this quarter, compared to $545 million in the prior-year quarter.
This quarter's main drivers were the Midwest tornadoes and the Colorado wildfire.
Prior year development was $44 million favorable in the fourth quarter compared to unfavorable development of $45 million in the prior-year quarter.
As usual, there was net favorable amortization from the ADC, which was $45 million this quarter.
So PYD was essentially flat without this amortization.
On a full year basis, net favorable development amounted to $201 million relative to $43 billion in net loss and loss adjustment expense reserves.
In 2020, we released $76 million of net favorable development.
Shifting to premium growth.
Overall global commercial Insurance net premiums grew 13% on a reported and constant dollar basis for the quarter, and growth in North America commercial was 11%, driven by casualty, which increased 50%; Lexington, which increased 14%; and financial lines, which increased over 10%.
In international commercial, growth was 16% on an FX-adjusted basis.
And by line of business, global specialty, which is booked in international, grew over 25%.
Talbot had 20% growth, and property grew by 13%.
Overall growth in the fourth quarter was driven by strong incremental rate improvement, higher renewal retentions, and strong new business volumes.
Commercial retention improved by 300 basis points year-over-year in North America to 80% and by 400 basis points in international to 86% in the period.
This increase in wholesale business in North America commercial brings with it lower channel retention ratios in addition to purposefully lower retentions in cyber and private D&O.
Excluding these items, the retention ratios between North America and international commercial are comparable.
Commercial new business grew by 33% in the fourth quarter with 41% growth in North America and 25% growth in international.
Turning to rate, where overall global commercial Lines saw increases of 10% in the quarter, we achieved the third straight year of double-digit increases.
Strong momentum continued across most lines, and we continue to achieve rate above loss cost trends.
North America commercial's overall 11% rate increases were balanced across the portfolio and led by financial Lines, which increased by 15%; excess casualty, which increased by 14%; retail property, which was up 13%; and Lexington, which increased by 11%.
International commercial rate increases in the aggregate were 9%, driven by EMEA, which increased by 18%; the U.K., which increased by 12%; financial lines, which increased 18%; and energy, which was up 11%, which is also its 11th consecutive quarter of double-digit rate increases.
Shifting now to a calendar year combined ratio comparison.
General insurance produced a 95.8% combined ratio for 2021, an improvement of 850 basis points over 2020 and nearly 1,600 basis points better from 2018's 111.4% calendar year combined ratio.
Peeling back a bit more, the combined CAT and prior period development improvement has been 720 basis points since 2018, indicating both a material CAT exposure reduction, in line with the movement we have shown in our PMLs, and a much stronger loss reserve position than three years ago.
Turning to additional pricing.
Rate increases continue to be favorable and outpaced loss cost trends in most areas of the portfolio.
With the level of rate that we have achieved in just the last 12 months, we expect that margin expansion will continue at least through 2022 and likely into accident year 2023.
Getting more specific for illustrative purposes, we have communicated written rate changes during prior earnings calls and will continue to do so.
However, since earned rate changes more directly impact reported results, and given recent discussions around the inflation component of loss cost trend, I thought I'd go over a few areas on an earned rate basis for full year 2021.
In North America commercial, for example, excess casualty business that focuses on our national and corporate accounts has achieved an approximate earned rate increase approaching 40% in 2021 over 2020's earned rate level, as has cyber.
D&O and non-admitted casualty achieved earned rate increases in the mid-20s.
And importantly, retail and wholesale property achieved earned rate increases during 2021 in the low 20s.
This is noteworthy because property is getting most of the inflation attention, and yet the level of earned rate that was achieved is, in my view, still materially ahead of property and loss cost trend.
And the same could be said for both excess casualty and D&O.
Recent property written rate increases are still in the low teens, and looking into policy year 2022 should keep them above loss trend even with an inflationary spike.
Property pricing needs to remain firm to cover these increased costs of labor, materials, and transportation.
Turning to international commercial.
Similar to North America, there are large areas of material earned rate increases for full year 2021.
International financial Lines achieved a 23% earned rate increase over 2020's earned rate level.
The international property book achieved an 18% earned rate increase, and the energy book achieved earned rate increases in the mid-20s.
Let's now step back and look at the last three years of cumulative written rate increases achieved at a high level during 2019 through 2021.
North America commercial across all lines of business had a 47% cumulative written rate increase, and international commercial's cumulative written rate increase during that same time period was 40%.
These measures, although they don't take into account improved terms and conditions and other difficult-to-track impacts, indicate, on their own, a significant ingredient of margin improvement as evidenced by the material reduction in our reported accident year results.
As we think about moving forward into calendar year 2022 and 2023, we need to be cognizant about the absolute, significantly favorable impact on combined ratios over the last three years and realize that most lines of business are well into the green.
Although there are several opposite forces that work, such as economic and social inflation, my sense is that the 2022 market will continue to produce tight terms and conditions and strong pricing to sustain additional margin expansion into calendar 2023.
As we think about 2022, major areas of growth for North America would be accident and health as the economy is expected to begin rebounding, and Lexington on a non-admitted basis.
And on the international side, we see growth in our global specialty operations, A&H as well and select casualty and financial Lines areas around the globe, whereas AIG Re sees growth mostly in casualty business.
The AIG Re portfolio strategically took the opportunity to further derisk and rebalance the portfolio away from property CAT due to our view of less-than-adequate returns in that space and expanded further into casualty and specialty Lines and expects to continue that trend.
zone PML down meaningfully across most points in the return period curve.
Moving to life and retirement.
Premiums and deposits grew 19% in the fourth quarter, excluding retail mutual funds, relative to the comparable quarter last year.
Growth was driven by individual retirement and $2.1 billion of pension risk transfer activity.
APTI for the quarter was $969 million, down 6%, driven primarily by lower net investment income and unfavorable COVID-19 base mortality, although non-COVID-19 mortality returned to being better than pricing expectations.
On a full year basis, APTI increased to $3.9 billion, reflecting higher net investment income and fee income, partially offset by adverse mortality.
Our investment portfolio and hedging program continued to perform extremely well for both the quarter and the year.
Composite base spreads across individual and group retirement, along with institutional markets, compressed 12 basis points during 2021 within the sensitivity guidance we've previously provided.
Within individual retirement, Index Annuities continued to be the net flows growth engine with $880 million of positive net flows for the quarter and $4.1 billion of the full year.
APTI was essentially flat for full year 2021 over full year 2020, but premiums and deposits were up 34% and AUM was up 2% year over year to $159 billion.
Group retirement had APTI of $314 million for the fourth quarter, virtually flat with last year's comparable quarter, but was up 27% on a full year basis, with premium and deposits up roughly 4% and assets under administration up over 7.5% on a full year basis to $140 billion.
Life insurance APTI was a negative $8 million in the fourth quarter, but had a gain of $106 million for the full year.
Premiums and deposits grew 4% from fourth quarter of 2020 and over 5% for the full year to $4.7 billion.
Additionally, total insurance in-force grew to $1.2 trillion, representing over 3% growth.
Institutional markets grew premiums and deposits by 74% relative to last year's comparable quarter, primarily due to the significant pension risk transfer sales.
Moving to other operations.
The adjusted pre-tax loss before consolidation and eliminations was $178 million, a $250 million improvement versus the prior-year quarter, with the primary drivers being higher net investment income of $237 million; a lower corporate interest expense on financial debt of $51 million, resulting from our debt redemption activities; partially offset by higher corporate GOE of $12 million, which include increases in performance-based compensation.
Heading to Peter's comment about AIG 200, $810 million of run-rate savings are already executed or contracted toward the $1 billion run rate savings objective, with approximately $540 million recognized to date in our income statement and $645 million of the $1.3 billion cost to achieve having been spent to date.
Total cash and investments were $361 billion, and fourth quarter net investment income on an APTI basis was $3.3 billion, which was essentially the same both sequentially and year over year and was aided by higher alternative investment income, particularly within private equity.
NII for the full year of $12.9 billion was up over $600 million from 2020.
Private equity returns were nearly 32% for the full year, up from approximately 10% last year.
Hedge funds returned approximately 14% each year, and mortgage loan returns were stable at 4.2%.
We ended the year with our primary operating subsidiaries being profitable and well capitalized, with general insurance's U.S. pool fleet risk-based capital ratio for the fourth quarter estimated to be between 460% and 470%.
And the life and retirement [Inaudible] is estimated to be between 440% and 450%, both well above the upper bound of our target operating ranges.
With respect to share count, our average total diluted shares outstanding in the fourth quarter were 847 million, a reduction of 2%, as we repurchased approximately 17 million shares in the quarter.
The end-of-period outstanding shares for book value per share purposes was approximately 819 million at year-end 2021.
Now I'd like to address the forthcoming LDTI accounting changes affecting our life and retirement business.
First, this is a GAAP-only accounting standard, and there should not be impacts to cash flow or statutory results.
As this continues to be a work in progress for us and the industry at large, I'd like to provide a range toward the transitional balance impact at January 1, 2021, as being between $1 billion and $3 billion decrease to shareholders' equity, with our current point estimate being toward the lower end of this range.
This decrease represents a netting between an increase to retained earnings and a decrease to AOCI.
Once again, life and retirement's breadth of product offerings provides value as the LDTI impact of old traditional products covered by FAS 60 involving mortality are roughly offset by the elimination of historical AOCI adjustment associated with certain longevity products.
Also, current GAAP accounting for living benefits is at fair value, and changes go through the income statement, whereas under LDTI, a portion of that charge will be recorded in AOCI, pertaining to the company's own credit spreads, which, for that piece, will help to dampen some volatility.
But mortality benefits will now also be at fair value and will act as an offset to take volatility in the other direction within the GAAP income statement.
Turning now to the recent S&P capital model changes.
The deadline to respond has been extended to March of 2022, and S&P will presumably conclude shortly thereafter.
Both the property, casualty, and the life retirement insurance industries will likely see higher capital charges for in insurance exposures as well as for asset credit and asset market risks.
Additionally, reduced benefits of holding company cash liquidity and lower levels of accessible debt leverage is an indicated outcome, but all with material offsets due to increased diversification benefits.
We have spent considerable time on the analysis of this proposal so far, but it is probably premature to make any predictions at this point before S&P in the industry have had more time to land upon the exact details of the final framework.
Now in conclusion, by virtually all measures, growth, profitability, returns, margin expansion, adjusted book, adjusted tangible book value, debt leverage reduction, EPS, adjusted pre- and after-tax income, and net income all point to an outstanding year for AIG.
When you also factor in our global platform, our marketplace actions and impact, the strength of our loss reserves, a robust reinsurance program, and massive portfolio reconstruction AIG is exceedingly well-positioned as we look to the separation of L&R, completing AIG 200, maintaining our path toward increasing profitable growth and for whatever else the future holds.
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qtrly earnings per share $4.38; qtrly adjusted earnings per share $1.58.
qtrly general insurance net premiums written increased 7% from prior year quarter to $5.96 billion.
as of december 31, 2021, book value per common share was $79.97, up 5% from december 31, 2020.
qtrly general insurance underwriting income of $499 million included $189 million of catastrophe losses, net of reinsurance mainly from tornadoes in southern u.s., wildfires.
return on common equity and adjusted roce were 23.0% and 9.9%, respectively, on an annualized basis for q4 2021.
co sees ipo of life and retirement unit in q2 of 2022.
completed initial asset transfer of $50 billion to blackstone.
co continues to make significant progress towards separating life and retirement unit.
co sees ipo of life and retirement unit in second quarter of this year.
size of life and retirement unit's ipo will depend on market conditions but aig will retain over 50% stake immediately after ipo.
co expects that over time, life and retirement unit will sustain an annual payout ratio to shareholders of 60% to 65% between dividends and share repurchases.
co believes life and retirement unit will pay an annual dividend in the range of $400 million to $600 million post ipo.
$8.3 billion dividend paid by life and retirement business to aig will be used to reduce debt.
post deconsolidation, co expects life and retirement unit to maintain a leverage ratio in the high 20s.
co does not expect life and retirement ipo to impact aig's dividend.
co expects to complete in 2022 the $3.9 billion remaining under current share buyback authorization.
will prioritize allocating capital in general insurance segment.
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Undoubtedly these are unprecedented times.
With safety and well-being of our employees as the highest priority I am extremely proud of our entire team supporting our customers with the central water heating and water treatment products to combat this virus.
As a result of the COVID-19 pandemic and in support of continuing our manufacturing efforts during this time we have undertaken numerous meaningful in some cases extraordinary steps at our manufacturing plants to protect our employees.
These steps include plant accommodations and reconfigurations to maintain social distancing mask availability to all employees deep cleaning quarantining individuals with positive tests or potential exposure to the virus for 14 days and restricting access to facilities among others.
While these steps result in lower manufacturing efficiencies in some cases our focus is on safety first.
The majority of our office personnel have been working from home and have done a great job in maintaining productivity and support of the business.
As offices have reopened in China and will soon in other countries and in the U.S. we have implemented return to office protocols which include bringing back office staff in waves over a two month period making maks available more frequent cleaning of common areas sanitizing stations throughout the office areas and limiting use of conference rooms for small group meetings to maintain social distancing.
Our long-term relationships in many cases decades-long and strength of our partners within various channels including wholesale distributors DIY retail hardware stores plumbing supply and independent reps are particularly important as we provide the essential water heating and water treatment products critical to uninterrupted operations of hospitals clinics grocery stores food service companies and many more including the households that many are now using to conduct business and education.
Our global supply chain management team proactively monitors and manages the ability to operate effectively and identify bottlenecks.
To date we have not seen any meaningful disruption in our supply chain.
We engaged in ongoing communication with our supply chain partners to identify and mitigate risk including multi-sourcing and managing inventory at higher levels.
Our recent implementation of SAP has provided improved management tools and visibility into our supply chain.
Additionally we have improved our manufacturing flexibility as a result of water heater tank standardization projects over the last five years.
Standardization greatly improves our ability to shift manufacturing from one plant to another should the need arise.
The stability afforded by the replacement component in residential and commercial water heater and boiler demand which we estimate at 85% of the U.S. unit volume puts us in a position of strength as we navigate through this pandemic.
We estimate replacement demand is 40% to 50% in China.
While we are in a position of strength similar to 2008 and 2009 time frame we expect to see lower demand for the majority of our products and have been proactive in managing costs.
We have increased our cost-reduction programs in China and we continue to monitor the North American environment and customer demand to potentially take further actions such as furlough programs and other restructuring.
A. O. Smith is in a solid financial position with positive cash flow and a strong balance sheet.
While A. O. Smith has a strong balance sheet and capital position we are proactively managing our discretionary spend and cash position.
To that end we suspended our share repurchase program in mid-March in addition while we continue to focus on strategic investments including new products and production efficiency.
We have reprioritized and reduced our capital spend plans for 2020 by approximately 20%.
Through April we have completed $200 million of dividends out of China and we have repatriated $125 million to the U.S. As of April 30 2020 we had approximately $850 million in liquidity consisting of cash cash equivalents marketable securities and borrowing capacity on our credit facility which remains in place throughout 2020 and 2021 expiring in December 2021.
We continue to focus on rightsizing the cost structure of our China business.
We have achieved a 20% headcount reduction compared with December 2018 and we will continue to assess the need for additional workforce reduction.
We are targeting 1000 net store closures this year in China along with further cuts in advertising and other costs.
Total savings are expected to total $55 million an increase of $10 million from our estimate in January of which $30 million was achieved in 2019.
Our debt maturity schedule is shown on slide five.
The next major maturity date is at the end of next year in December 2021 when our revolving credit facility expires.
We are in compliance with all covenants in our credit facility.
Our leverage ratio is 17.5% gross debt to total capital at the end of March was significantly below the 60% maximum dictated by our credit and various long-term facilities.
I will begin comments about the first quarter on slide six.
First quarter 2020 sales of $637 million declined 15% compared with the first quarter of 2019.
The decline in sales was largely due to a 56% decline in China local currency sales driven by the COVID-19 pandemic.
As a result of lower sales in China first quarter 2020 net earnings of $52 million and earnings per share of $0.32 declined significantly compared to the same period in 2019.
Sales in our North America segment of $533 million increased 2% compared with the first quarter of 2019.
Incremental sales of $16 million from the Water-Right acquisition purchased in April 2019 organic growth of 17% in North America water treatment products and higher water heater volumes drove sales higher.
These factors were partially offset by water heater sales mix composed of more electric models which have a lower selling price and lower contractual formula pricing associated with a portion of water heater sales based on lower steel costs.
Rest of the World segment sales of $110 million declined 53% with the same quarter in 2019.
China sales declined 56% in local currency related to weak consumer demand driven by the pandemic.
China channel inventories declined slightly from the levels at the end of 2019 and remained in the normal range of two to three months.
On slide eight North America segment earnings of $127 million were 10% higher than segment earnings in the same quarter in 2019.
The improvement in earnings were driven by lower steel costs incremental profit from Water-Right and improvement in the profitability of the organic water treatment sales which were partially offset by the mix skew to electric water heaters and lower contractual pricing.
As a result first quarter 2020 segment margin of 23.9% improved from 22.2% achieved in the same period last year.
Rest of the World loss of $42 million declined significantly compared with 2019 first quarter segment earnings of $12 million.
The unfavorable impact to profits from lower China sales and a higher mix of mid-price products which have lower margins more than offset the benefit to profits from lower SG&A expense.
As a result of these factors the segment margin was negative with compared with 5.3% in the same quarter in 2019.
Our corporate expenses of $15 million and interest expense of $2 million were essentially flat as last year.
Our effective tax rate of 23.6% in the first quarter of 2020 was higher than the 20% tax rate in the first quarter of 2019 primarily due to geographical differences in pre-tax income.
Cash provided by operations of $54 million during the first quarter of 2020 was higher than $22 million in the same period of 2019 as a result of lower investment in working capital including timing of certain volume incentive payments which was partially offset by lower earnings compared with the year ago period.
Our liquidity and balance sheet remained strong.
We had cash balances totaling $552 million and our net cash position was $209 million at the end of March.
During the first quarter of 2020 we repurchased approximately 1.4 million shares of common stock for a total of $57 million.
During April we saw differing levels of impact from the pandemic across our major product lines and geographies.
In North America our average daily orders for residential water heaters declined low single digits compared with the first quarter pace.
Commercial average order rates in April were down 30% to 35%.
It is difficult to interpret order rates in April as customers are likely adjusting inventory levels as they manage their inventory investment dollars.
In China the pandemic had a significant impact on our volume in the first quarter.
50% of our sales volume occurred before the Chinese New Year shutdown on January 24.
With manufacturing government offices restaurants and schools now largely reopened and the majority of installers able to access apartments in China we have seen sequential improvement in sellout and orders in April compared with February and March.
Consumers remain cautious and it's too early to determine when consumers will return to normal levels in retail environments.
A portion of the improvement could be pent-up demand.
In North America demand for residential boilers has remained soft following a warm winter.
And we have delayed our early buy incentive program in this environment.
Our commercial condensing boiler backlog has doubled from levels at this time last year but some orders have extended delivery dates.
With construction sites closed in some states timing of delivery is difficult to project.
Safety and security of drinking water is a high priority for consumers during this time.
The North America water treatment end market strength we saw in the first quarter continued in our direct-to-consumer product portfolio which skews to lower price easier-to-install products.
In April we experienced some challenges in parts of the country with installed in-home products.
In India our water treatment products are considered essential.
But our manufacturing plant is closed as worker transportation is difficult in this environment.
We believe the current environment does not allow for the forecast of performance with reasonable precision.
And as a result we continue to suspend our 2020 full year guidance.
As the depth of the disruption and pace of recovery in our end markets become clearer we look to return to our practice of providing a current year outlook.
In Mexico similar to other companies we temporarily suspended operations as governmental agencies continue to sort through the industries designated as essential and allow to continue operate as well as the conditions and safety measures under which businesses deem essential are allowed to operate.
We temporarily shifted manufacturing from Mexico to the U.S. to minimize disruption of our customers.
Each day we move closer to an understanding of when we'll resume production and believe that we will be in a week or two and at a reduced manning and capacity.
These lower rates coupled with the U.S. output are expected to support demand for customers over the coming months.
Our global supply chain team has been proactive from early in the first quarter and continues to monitor and manage availability of components.
Again to date we have experienced minimal disruptions in our global supply chain.
Our largest suppliers in Mexico which are in different states than our boilers plant are now reopened but at reduced capacity.
While the disruption has been minimal we have experienced reduced safety stock levels on certain items and our supply team is in ongoing communication with our suppliers to mitigate operational risk and manage inventory levels.
We believe replacement demand for water heaters and boilers in the U.S. is approximately 85%.
In 2006 through 2009 which captured the Great Recession peak to trough industry shipments of residential water heater volumes declined 18%.
The decline was primarily driven by a $1.5 million decline in new homes constructed.
During that period we were able to flex our operations to maintain margins.
At 1.3 million new homes in 2019 we do not anticipate the new home construction impact will be as great as the Great Recession.
The replacement base of our core U.S. products provides a stabilizing buffer to the economic downturn expected in the remaining three quarters of 2020.
After being closed for several weeks in February in compliance with local orders our three plants in China are open and operating.
Foot traffic in our retail network in China remains low and we are building to order at lower-than-normal operating capacities.
Our suppliers are open and we are now and we are not experiencing disruptions.
Customers continue to prefer products with fewer features continuing the trend we saw last year as you would expect in this environment.
Our mid-price products are positioned for this trend.
Despite reduced headcount retail footprint and advertising costs we continue to invest in R&D in the region.
Product development continues with a focus on taking costs out of our most popular new products to improve contribution margins.
Product development has been one of the pillars to our success in China and we are committed to our investment in engineering resources in China and around the world.
After a hard closure of the economy in the first quarter China is slowly returning to business.
While we have seen April orders and -- incrementally improve from February and March it's too early to predict if the recent improvement is the result of pent-up demand or by consumers slowly returning to the market.
In North America we have previously experienced in weathering through difficult economic conditions most recently in the 2008 recession.
However with the massive and abrupt impact to jobs and end markets like restaurants hotels and hospitals it is difficult to predict this current state of shelter-at-home and state-by-state closures will play out similarly to the 2008 recession.
While we would expect that our replacement business in both water heating and boilers will provide a buffer in the same manner as we have seen before the impact to construction and discretionary spend and closure of certain job site activity is difficult to predict for the remainder of 2020.
In India it is clear that our targets breakeven in 2020 will be pushed out as the country battles COVID-19.
We believe that particularly in these uncertain times A. O. Smith is a compelling investment for a number of reasons.
We have leading market share in our major product categories.
We estimate replacement demand represents approximately 85% of U.S. water heater and boiler volumes.
We have a strong premium brand in China a broad product offering in our key product categories broad distribution and a reputation for quality and innovation in that region.
Over time we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We have strong cash flow and balance sheet supporting the ability to continue to invest for the long term with investments in automation innovation and new products as well as acquisition and return to cash and returning cash to shareholders.
We will continue to proactively manage our business in this uncertain environment as we've seen consumer demand trends emerge in China where we were first impacted by the pandemic and now in North America as the current economy begins to reemerge after the economic shutdown.
We have a strong team which has navigated successfully through prior downturns.
I'm confident in our ability to execute through COVID-19.
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q4 revenue rose 4 percent to $3.1 billion.
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Certain risk factors inherent in our business are set forth in filings with the SEC, including our most recent 10-K and subsequent filings.
We caution you not to place undue reliance on these statements.
Some of the comments may refer to non-GAAP financial measures, such as adjusted net revenue, adjusted operating margin and adjusted earnings per share, which we believe are more reflective of our ongoing performance.
Joining me on the call are Jeff Sloan, CEO; Cameron Bready, president and COO; and Paul Todd, senior executive vice president and CFO.
We entered 2020 with our business as healthy as it has ever been during my tenure at Global Payments.
And our performance in the first quarter prior to the impact of COVID-19 reflected that strength, the soundness of our strategy and the consistency of our execution.
We believe that these underlying trends will position Global Payments to resume its track record of market-leading growth when the worldwide economy inevitably returns.
The company's results in January, February and through the first two weeks of March exceeded our internal expectations, excluding the impact from COVID-19 in our Asia Pacific region.
However, starting in mid-March, the virus began to impact the company's results significantly in North America and Europe as governments took actions to encourage social distancing and implement shelter-in-place directives.
The deterioration accelerated toward the end of March as the number of countries and localities adopting restrictive measures meaningfully increased.
Notwithstanding the impact of the virus, we were successful in winning meaningful new business in the first quarter.
These competitive takeaways highlight that the underlying strength of our pure-play payments model is being recognized by some of the most complex and sophisticated customers.
They also provide us with continued confidence in further sustained share gains as the partner of choice at scale for cutting-edge companies.
First, we are delighted to announce that Truist Financial Corporation has selected Global Payments to be its provider of issuer processing services for its combined businesses.
Truist is the sixth largest commercial bank in the United States serving approximately 12 million consumer households and a full range of business clients with leading market share in many of the most attractive high-growth markets in the country.
Importantly, Truist has a bold vision to meaningfully increase investment in innovative technology and to create distinctive client experiences.
Truist's strategy to transform its payments businesses via technology aligns perfectly with our TSYS issuer business and provides further validation of our market-leading technologies, product services and the quality and competitiveness of our team members.
Our issuer business has a strong track record of innovation to the benefit of our customers.
Contactless is a great example, and we have seen near 30% year-on-year growth in recent periods.
We also are partnering with the card brands and digital wallet providers to further accelerate contactless growth in light of the virus.
In addition, TSYS will be the first issuer technology partner to offer Visa's new installment solution at the point of sale as an enhancement to our existing capabilities.
Second, we are very pleased to announce that Synovus Financial Corp.
has selected Global Payments to be its new exclusive merchant acquiring partner.
Synovus is a leading regional commercial bank with 299 branches in the southeast region of the United States.
Our new partnership with Synovus confirms the wisdom of the Global Payments and TSYS merger.
We do not believe that either company individually would have been positioned to win this business.
We already launched our partnership with Synovus on April 1.
Third, we continue to notch significant sales wins in our technology-enabled businesses during the quarter.
Our partner software business, which we recently rebranded as Global Payments Integrated, launched 30 new partners in the first few months of 2020.
We are tracking well ahead of where we were at this time in 2019, which was a year that marked a record for new partner production.
Cameron will provide more detail shortly.
We also saw significant new business successes across our own software portfolio.
For example, we are delighted to announce new wins with Inspire Brands and Focus Brands, including Auntie Anne's, CKE Restaurants and Arby's.
In addition, we continue to make meaningful progress with the rollout of our Xenial QSR cloud-based SaaS point-of-sale solution to new and existing customers, such as Long John Silver's and Dutch Bros.
We have also begun testing this solution for a potential placement throughout the restaurant brands international family of more than 26,000 global restaurants.
These wins contribute to Xenial achieving record new bookings for its QSR business this quarter.
It is worth highlighting that Xenial provides enterprise QSR customers with cutting-edge software, digital wallets, drive-through technologies, mobile-ordering capabilities and integrations with leading delivery partners through our omni product.
In fact, for the first quarter, the number of omni mobile and online orders processed for Xenial customers increased over 50% sequentially as QSRs shifted toward online fulfillment.
Fourth and finally, we continue to make progress with our e-commerce and omnichannel businesses, which generated impressive new sales wins, including a large multinational telecommunications carrier for markets outside the United States, one of the largest multinational package delivery companies in Asia and a leading worldwide food services delivery business.
These businesses produced the best financial result for us in the quarter, highlighting our leading position in worldwide e-commerce and omnichannel acceptance.
And that trend has continued into April with absolute growth year over year in a number of virtual markets.
During this challenging time, our top priority remains the health and safety of our team members, customers, partners and the communities in which we live and work.
It has allowed our business and operations to continue to perform normally.
While these are difficult times, we are well-positioned given the strength of our business model and the dedication and focus of our employees.
I am especially proud of our Netspend business, which is facilitating the rapid distribution of much needed funds under the CARES Act.
We believe that Netspend was one of the first companies to provide stimulus funds to customers ahead of both financial technology peers and financial institutions.
Those critical funds were made available on average four days before most of the other providers in the market and ahead of its normal two days faster operating model for typical paychecks because Netspend has the end-to-end infrastructure already in place to process government ACH files upon receipt.
During April, we processed over 0.5 million deposits accounting for over $1.2 billion in stimulus payments to American consumers dispersed by the IRS.
In the coming weeks, we expect additional governmental programs to fund, and a number of our partners will assist consumers who receive paper checks by enabling deposits into existing or new Netspend accounts to our mobile app or directly onto their phones virtually via our Samsung partnership.
As just one example, together with Mastercard, we have helped facilitate 7-Eleven's new Transact prepaid product to enable under and unbanked individuals and families to receive much needed funds faster than a paper check through 7-Eleven stores.
Our powerful combination with TSYS provides us with multiple levers to mitigate headwinds that we may face from the pandemic.
We made significant strides on our integration this quarter, and we continue to anticipate delivering at least $125 million in annual run rate revenue synergies and at least $350 million in annual run rate expense synergies within three years of the merger close.
In addition to the merger synergies, we have now implemented additional cost initiatives to help address the anticipated impact of COVID-19 on our business.
We expect these actions to deliver at least an incremental $400 million in annualized savings over the next 12 months.
These amounts represent a more than doubling of the three-year annualized merger expense synergy benefit in just one year.
We have already initiated these expense actions in a series of ways beginning early in the second quarter.
As you will hear from Paul, our liquidity, free cash flow and balance sheet are healthy.
These efforts are intended to best position Global Payments to weather near-term disruptions and emerge from the crisis in the same strong position with which we entered it.
And we continue to invest in our businesses despite the impact of the virus on the worldwide economy.
Our long-term plans to grow our technology-enabled businesses, expand our omnichannel efforts and target the most attractive markets have not changed.
The uniqueness of our business mix, which is dramatically different today than it was during the last recession, has been a source of strength during the current crisis.
I would also like to express my sincere appreciation to all of our team members who have provided exemplary support to our customers during this challenging time.
As Jeff mentioned, even with the vast majority of our nearly 24,000 team members worldwide working from home since mid-March, our business has continued to operate seamlessly.
For the relatively few team members whose job function requires them to be in one of our offices, we have implemented appropriate social distancing practices, made antibacterial hand sanitizers, masks widely available and increased the frequency of cleaning of key areas.
Throughout this crisis, we have continued to put the health and well-being of our team members first while also supporting our customers and safeguarding our business.
Over the past several years, we have made significant investments in modernizing the operating environments and technology that support day-to-day execution in our business.
The largely cloud-based systems and collaboration tools we use globally facilitated a smooth transition of our operations to business continuity mode with significant utilization of work-from-home arrangements.
This has allowed us to sustain outstanding service to our customers while also enabling continued strong execution of our pure-play payment strategy as evidenced by the significant new wins in the quarter.
In our merchant solutions business, Global Payments Integrated is off to a record start to the year in terms of new partner wins and is already seeing benefits of our merger with TSYS.
We recently signed a new partnership agreement with a large multinational software provider based on our ability to deliver the Genius POS solution together with our best-in-class ecosystem while also enabling its customers to support electronic tips by the Netspend card -- PayCard product.
Global Payments was uniquely positioned to provide this comprehensive solution, which reflects the powerful combination of highly complementary capabilities brought together by our merger with TSYS.
Our strategy of delivering the full value stack in key vertical markets continues to produce deeper, richer and more value-added relationships with our customers.
In addition to the Xenial highlights that Jeff already provided, our higher education business had its strongest ever bookings performance in March, and AdvancedMD saw bookings increased 35% year on year for the first quarter largely due to our ability to deliver cloud-based technology solutions, including telemedicine capabilities to physician practices throughout the U.S. In our Heartland business, we delivered outstanding growth of over 30% in online payments during the first quarter as we continued to see strong customer demand for our omnichannel solutions.
Notably, this growth accelerated in March as we installed three times as many new e-commerce merchants as anticipated largely due to significant demand for online ordering capabilities.
We also began deploying vital POS through our Heartland distribution channel in early March, exactly as we said we would, and we remain confident in our ability to execute on our sales plan for this distinctive solution.
Further, we now plan to deliver vital POS to Canada later this quarter, an acceleration from our original target of a third-quarter launch.
In Canada, our new partnership with Desjardins is off to a terrific start.
Merchant migration and lead referrals from all branches commenced at the beginning of March, and we received nearly 1,500 referrals before the current disruption.
Our early successes reinforce our confidence in this new partnership that combines Global Payments' differentiated technologies and payments capabilities with Desjardins' market-leading position in Québec.
In Europe, we successfully launched our social commerce solution in key markets, enabling our customers to accept payments through social networks.
In the last few weeks, we launched this product with a new leading national veterinary chain and a high-end restaurant group in the U.K. and also signed Hyundai, which is currently deploying the solution to all of its dealerships in the region.
by enabling a leading building society with call center payment solutions for work-from-home environments.
We successfully executed a new acquiring contract with this customer and distributed software to its call center staff and mortgage brokers from start to finish in less than three days.
And in Asia, we saw strong new sales performance, particularly in our e-commerce business despite COVID-19 gripping that region for the majority of the quarter.
We have enabled several of our large retail customers to accelerate their shift to e-commerce and signed new e-commerce partnerships with two large multinational health and wellness companies.
Turning to our issuer business, in addition to the Truist win, we finalized an agreement with Scotiabank to convert its Canadian consumer credit card and loan accounts.
And we have executed a multiyear renewal agreement for its North American consumer and commercial credit card business.
Additionally, we successfully signed a new multiyear processing and managed services agreement with U.K.-based Yaya, encompassing their recently acquired credit card portfolios and extended several other existing client agreements, including with Barclaycard and Bank of Montreal.
We also converted over 300,000 accounts during the period and have a robust pipeline with implementation stage throughout the year and into 2021.
Delivering superior support to our customers is a key pillar of our business model, and we have continued to do so in this unprecedented environment without exception.
Throughout this pandemic, we remain focused on supporting customers across all of our businesses, including our small to medium-sized merchant customers in the markets most impacted by the virus.
We have worked tirelessly to assist these customers by enabling new capabilities to support their business operations, including rapidly equipping merchants who did not previously sell online with a full omni solution, particularly in the restaurant vertical market.
In fact, in North America alone, we have added over 1,800 new restaurants to our online ordering platform since mid-March.
Likewise, we have been facilitating social distancing and no-contact commerce by enabling mobile pay and contactless and mobile wallet acceptance at merchants who had not previously accepted these form factors.
As a worldwide leader in NFC deployment, we rapidly enabled contactless acceptance for our merchant customers, which also positions us well for the future as we expect the secular shift from cash to electronic forms of payments to accelerate post the pandemic.
We have also provided customers and markets worldwide with virtual terminals to allow them to accept orders over the phone.
For healthcare customers at AdvancedMD, we've enabled nearly 1,500 practices with telemedicine capabilities, delivering the technology for more than 80,000 virtual visits in the last two weeks of March alone.
In addition to these efforts, we are providing economic relief in a variety of forms to our customers, including waiving certain fees such as SaaS and POS payments, as well as online ordering fees.
We have also granted free trial or reduced fees for newly enabled services and established a charitable program targeted at our most vulnerable merchant customers that provides preloaded pay cards that can be used to support their staff at no cost.
Further, we are waiving setup fees in the first 90 days of subscription fees for our virtual card add-on solution to brick-and-mortar gift card customers and have extended free trial period of our analytics and customer engagement platform that we are deploying in our Heartland business.
to facilitate payroll protection program loans for customers across our distribution platforms.
To date, our lending partner has placed thousands of PPP loans for our customers.
Our issuer business has also maintained strong operational stability in its call centers as we work to support our issuer clients during a period of very high call volumes.
Additionally, we are working with issuers to enable cardholder and small business relief programs, including supporting the delivery of a range of payment options as consumers and businesses seek predictable ways to manage budgets and expenses during this challenging time.
While we continue to manage through this situation with a difficult relentless focus on execution you have come to expect from Global Payments, we also have an eye on the future and are working to ensure the business is well-positioned for the inevitable recovery.
We are revamping sales and marketing strategies to align with our expectations for market reopenings around the globe and to emphasize those solutions most in demand.
In the U.S., we are also aggressively recruiting and onboarding new sales professionals into our Heartland channel, which we can do in a cost-effective manner given our model.
And while we are reducing expenses where appropriate, we continue to invest in products and capabilities that will further differentiate Global Payments in the future.
There is no question the competitive environment will look different on the other side of this crisis, and we are poised to benefit in the long term due to the distinctiveness of our technology-enabled pure-play payment strategy.
I want to reiterate how pleased we are with the way in which our team members have responded during this crucial time to ensure business continuity, deliver the highest standard of support and execution for our customers and allow for us to achieve strong financial performance.
For the first quarter, total company adjusted net revenue was $1.73 billion, reflecting growth of 108% over 2019 and ahead of our preliminary expectations on April 6.
On a combined basis, our revenue increased slightly from the prior year, including a roughly 50-basis-point headwind from the impact of negative foreign currency exchange rates.
Adjusted operating margins expanded an impressive 300 basis points to 39% for the quarter and well above the 250 basis point annual expansion target we mentioned on our last call.
As a result, we were able to deliver strong adjusted earnings-per-share growth of 18% to $1.58, which also includes a roughly 100-basis-point impact from adverse foreign currency exchange rate movements.
This first-quarter bottom-line performance was better than anticipated when we previewed our first quarter on April 6.
Notably, from the start of the quarter through the first two weeks of March, our performance was exceeding our growth expectations compared to last year, excluding the impact of the virus we were already experiencing in the Asia Pacific region.
Our merchant solutions business drove the outperformance while results for our issuer and business consumer segments were tracking relatively in line with our expectations through that period.
However, in the second half of March, the spread of COVID-19 began to impact our results meaningfully in North America and Europe in addition to Asia Pacific.
As Jeff and Cameron both mentioned, it was a dynamic quarter for all of our businesses, and I want to provide some color on each segment.
First, adjusted net revenue in merchant solutions increased 2% on a combined basis to $1.1 billion for the first quarter, which includes nearly a 100-basis-point headwind from currency while adjusted operating margin improved 180 basis points to 45.4%.
Before the spread of COVID-19, we were experiencing low double-digit adjusted net revenue growth in this segment, excluding the impact of COVID-19 in Asia Pacific, which negatively impacted results consistent with the $15 million drag we had previously disclosed.
This strength was largely attributable to our technology-enabled businesses, including Global Payments Integrated, which was tracking toward mid-teens growth for the lion's share of the quarter.
This business continues to benefit from record new wins, strong same-store sales and low attrition rates driven by our ability to provide a truly integrated ecosystem across more vertical markets and more geographies than our peers.
We also maintained our consistent track record of strong growth in our vertical market software portfolio ahead of the COVID-19 impact.
As Jeff and Cameron indicated, booking trends across the portfolio remained strong with record achievements at several of our businesses during the period.
Our relationship-led businesses were also seeing good momentum outside of Asia Pacific before the spread of COVID-19.
Notably, in North America, adjusted net revenue was tracking up low double digits ahead of our expectations, and our European businesses were delivering high single-digit growth.
For the full quarter, as in-store volumes came under pressure, our e-commerce and omnichannel businesses served as a partial hedge.
As Cameron noted, we delivered strong growth in online sales at Heartland during the quarter while in Europe, we saw high single-digit growth in the U.K. and roughly 20% growth in Spain as more spending moved online.
E-comm omni revenue was also up double digits in APAC during the first quarter.
Moving to issuer solutions, we delivered a record $442 million in adjusted net revenue for the first quarter, representing growth of 150 basis points on a constant-currency basis.
As I mentioned previously, this business was tracking in line with our expectations through early March for roughly 3% growth with underlying trends to that point remaining consistent with our long-term outlook for mid-single-digit growth.
Adjusted segment operating margin expanded a very strong 430 basis points to 39.5% as we continue to drive efficiencies and make the pivot toward the cloud in this business.
We also added over 13 million accounts on file this quarter, producing yet another record.
Transaction growth was in the mid-single digits.
We experienced strong volumes in managed services as cardholders ramped up the frequency of their interactions with trusted financial institutions in the quarter.
Finally, our business and consumer solutions segment delivered adjusted net revenue of $204 million, down nearly 7% from the prior year, primarily due to headwinds from the CFPB prepaid rule and seasonal tax impacts.
Absent that, adjusted net revenue was roughly flat for the quarter, marking a continuation of the underlying trends from the fourth quarter of 2019.
Adjusted operating margin for the quarter for this segment was 25.7% and was again better than our expectation.
We continue to be pleased by the performance of our DDA products with account growth of over 30% from the prior-year period.
As Jeff mentioned, we saw a substantial benefit in early April from the processing of stimulus payments in this segment.
In sum, we delivered solid operating performance across all our segments through outstanding execution, and we also benefited from the early and rapid cost actions we took to position our company given the current environment and for the eventual recovery.
As it relates to cost actions, as Jeff highlighted, we have already implemented expense initiatives that will translate to roughly $100 million per quarter in incremental cost benefits for the balance of 2020.
Our focus has been to streamline discretionary spend that includes cuts to G&E and marketing budgets, reductions in executive pay and other salary initiatives and additional targeted actions across the organization.
We have also been intentional about these measures to allow our strong growth momentum to continue when a more normalized operating environment resumes.
From a cash flow standpoint for the quarter, we generated adjusted free cash flow of approximately $400 million, which was in line with our expectation.
We also exited Q1 with roughly $1.3 billion of available cash, including $640 million in excess of our operating cash needs.
This excess cash increased approximately $300 million from year-end.
We have adjusted our capital spending outlook for the year from the high $500 million to low $600 million range we talked about on our last call and now expect to be in the $400 million to $500 million range or roughly $100 million less for the year.
We invested $105 million of cash in the first quarter that was focused on new products and technologies to ensure we continue to build upon our leading portfolio of pure-play payment solutions, which is consistent with our newly revised estimate.
Earlier in the quarter, we finished the buyback activity started in the fourth quarter, purchasing 2.1 million of our shares for approximately $400 million.
We did, however, suspend repurchases in early March.
We ended the quarter with a leverage position of roughly 2.45 times on a net-debt basis or roughly 2.75 times on a gross basis consistent with year-end.
Our strong investment-grade balance sheet, in combination with our stable free cash flow generation, provides us with ample capital and financial flexibility to navigate through this challenging time.
With $2.9 billion of liquidity, including our available cash and undrawn revolver and no significant required debt repayments until our maturity in April 2021, we are truly in a position of financial strength.
We will continue to monitor and leverage market opportunities to maintain that strong position over the long term.
Although trends are dynamic, we have seen some stabilization and improvement in late April from the lower levels we have seen several weeks ago.
Specifically, volume trends in our merchant business have held fairly steady and begun to recover modestly, led by our technology-enabled businesses.
In addition, markets that have recently reopened, such as China and in Central Europe, have seen similar stabilization and improvement trends in domestic volumes.
Our issuer solutions business remains resilient as bundled pricing and managed services volumes are helping to mitigate the impact of transaction level declines.
Our international issuing business also remains a bright spot with absolute growth in the low single digits despite the macroeconomic environment.
These trends have been offset in part by what we are seeing in our commercial card area due to limited travel spending by corporations and governments.
Similar to our experience in merchants, issuing trends have stabilized and recovered somewhat in selected verticals over the last several weeks.
Finally, business and consumer solutions has benefited from processing substantial stimulus funds, and we do expect to recapture some of the lost revenue from last quarter related to the extended tax deadline over the next several months.
Additionally, April is the first month where we do not have CFPB headwinds for comparison.
And while we are not providing guidance at this time, I think it's worth parsing our business in light of the current environment.
First, we have several businesses that have been relatively more resilient through this period.
This includes both our issuer and business consumer segments, which combined account for roughly 35% of our adjusted net revenue.
Additionally, roughly half of merchant solutions adjusted net revenue has been generally less economically sensitive.
This includes our omnichannel business, Global Payments Integrated and certain vertical market solutions like Xenial, AMD and our university business.
So two-thirds of our businesses have been somewhat insulated from fluctuating consumer spending trends.
With that said, it is difficult to predict when and how the current environment will change.
However, we are confident we will emerge stronger due to the significant cost initiatives being implemented to protect our earnings, cash flows and investment-grade balance sheet.
All in all, we are pleased with how we are positioned given the unprecedented times we are operating in as a company.
Our recent significant wins highlight the wisdom of our partnership with TSYS and the strength of our combined business.
We have already taken and will continue to take actions to best position our company for success as the worldwide economy returns to growth.
In the interim, we are fortunate to be confronting this crisis from a position of strength.
The competitive landscape will no doubt change as a result of this crisis, and we believe that we will capitalize on those changes and continue to gain share organically and through further consolidation.
We believe that the virus will continue to accelerate the ongoing shift toward further digitization of payments and the movement toward online commerce globally.
We are also grateful for our market-leading position in software across multiple vertical markets, highlighting the diversity of our business banks.
We believe that we will continue to be the beneficiary of trends that will be further catalyzed by COVID-19.
While we are not immune to the current economic climate, we are as well-positioned as we have ever been with a balanced portfolio in payments and vertical market software at scale.
We expect our strategy of leading with software owned and partner with an emphasis on premier omnichannel solutions in the most attractive markets will serve us well into the future.
[Operator instructions] Operator, we will now go to questions.
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compname reports q1 adj. earnings per share of $1.58.
q1 adjusted earnings per share $1.58.
implemented cost initiatives that co expects to deliver at least an incremental $400 million of savings over next 12 months.
truist financial has selected global payments to be its provider of issuer processing services for its combined business.
remain on track to achieve at least $125 million in annual run-rate revenue synergies from tsys merger.
remain on track to achieve at least $350 million in annual run-rate expense synergies from tsys merger.
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pseg.com, and our 10-K will be filed shortly.
We will also discuss non-GAAP operating earnings and non-GAAP adjusted EBITDA, which differ from net income as reported in accordance with Generally Accepted Accounting Principles in the United States.
At the conclusion of their remarks, there will be time for your question.
PSE&G reported non-GAAP operating earnings for the fourth quarter of $0.65 per share.
Non-GAAP operating earnings for the full year rose by 4.6% to $3.43 per share, and mark the 16th year in a row that PSE&G delivered results within our original earnings guidance.
PSE&G GAAP results were $0.85 per share for the fourth quarter of 2020 compared with $0.86 per share for the fourth quarter of 2019.
In addition for the full year PSE&G reported 2020 net income of $3.76 per share compared with $3.33 per share in 2019.
Details on the results for the quarter and the full year can be found on slides 12 and 14.
I am pleased to report that the PSE&G's fourth quarter and full year results reflected solid contributions from both PSE&G and PSEG Power.
And I'm particularly proud of the achievements of our employees during this past year as it was one of the most challenging in recent memory.
Their efforts have kept our customers connected to essential energy services to power their homes, businesses, and vitally important institutions.
We have also made steady progress in several key business priorities, the most important of which is our transition to becoming primarily a regulated utility, with contract and generation comprise about zero carbon nuclear fleet and future investments in regional offshore wind.
In the past six months, we've announced the exploration of strategic alternatives for PSEG Power's 7,200 plus megawatts of non Nuclear Generating assets, and received initial indications of interest for both the fossil and solar source assets.
PSE&G successfully initiated its landmark clean energy future program, securing approval to spend nearly $2 billion in energy efficiency, smart meter installations and electric vehicle charging infrastructure, all of which will enhance New Jersey's environmental profile for years to come.
In addition, the New Jersey Board of Public Utilities, I'll refer to them as the BPU recently concluded public hearings regarding PSE&G nuclear application to extend the zero-emission certificate.
I think I'll shorten that to ZEC from now on through May 2025.
Our service area experience milder than the normal weather during the fourth quarter, book ending the week heating season of the first quarter in 2020.
Regarding whether normalized sales for the year, while total electric sales volume declined by 2%.
Gas sales rose by 1%.
In both the electric and gas businesses higher residential usage of approximately 5% largely offset declines in commercial and industrial sales resulting in stable margins overall.
Working with COVID-19 health and safety protocols since last March, PSE&G was able to execute on its plan $2.7 billion capital spending program in 2020.
These capital programs provide a critical investment to support the New Jersey economy, particularly in the early months of the pandemic, and preserve essential jobs while replacing vitally important energy infrastructure, and generating customer benefits of improved reliability and resiliency, as well as methane reduction.
In January of 2021, the BPU approved two settlements with PSE&G and other parties in the clean energy future energy, cloud and electric vehicle proceedings.
The energy cloud investment program is estimated to be approximately $707 million over the next four years, and will result in the replacement of over 2 million electric meters with smart meters.
The electric vehicle program will direct $166 million into EV charging infrastructure over the next six years.
With these recent settlements, the BPU has constructively addressed the vast majority of the clean energy future filings and has approved nearly $2 billion of investment to help realize New Jersey's energy goals.
The Energy Efficiency Program will also be established clean energy job training for over 3,200 direct jobs, while enabling the avoidance of 8 million metric tons of carbon emissions through the year 2015.
Investing in energy efficiency programs is the most cost-effective solution to reducing carbon emissions.
Importantly, the conservation incentive of the settlement encourages the broad adoption of energy efficiency, with certain programs focusing on low- and moderate-income customers that will lower bills for participating customers.
We expect the balance of the clean energy future filing, which includes our request to spend under $200 million on energy storage, and a few remaining EV programs will be addressed following future stakeholder proceeding.
PSE&G continues to engage with the BPU staff and re counsel to advance confidential discussions toward a settlement of the return on equity related to PSE&G formula rate for transmission overseen by the Federal Energy Regulatory Commission.
The annual update under PSE&G existing formula rate filed last October was implemented this past January and together with cost reallocations of our revenue requirements for certain transmission projects, candidly to customers outside of our zone.
This resulted in a net reduction in PSE&G customer costs.
For 2020, PSE&G, once again achieved top quartile OSHA scores.
We also achieve the top quarter of JD Power ranking in the eastern large company category for both residential electric and gas companies.
And PSE&G posted its best ever JD Power scores for electric and gas customer satisfaction outpacing the average industry results on metrics that consider total monthly cost, bill clarity, fairness of pricing and options and ability to manage monthly usage among residential customers.
Also for the 19th year in a row PA consulting recognized PSE&G with its reliability one award as the most reliable electric utility in the Mid-Atlantic region and for the first time with our 2020 outstanding customer engagement award.
New Jersey has recently made solid progress in lowering its COVID-19 positivity rates, and continues to face the reopening of businesses, schools and other activities.
We have a long history of partnering with the state to support the economy.
And we continue to work with them on investment programs that can spur economic development and employment recovery, all while being quite thoughtful about managing customer rate impacts.
Regarding collection activities, the moratorium on shut offs residential electric and gas services currently scheduled to conclude in March, recognizing the economic hardship that many of our customers continue to face PSE&G in partnership with the BPU and community groups is working hard to enroll customers and customer payments support programs, such as light heap and deferred payment rate.
When the moratorium is lifted, we will work closely with the BPU other stakeholders and our customers to ensure a collections process that supports our customer's individual situations.
Turning now PSEG Power, we're continuing all activities related to the exploration of strategic alternatives we announced last July.
In the fourth quarter of last year, we launched the formal sales processes of the 1,467 megawatt solar source, and over 6,750 megawatt thoughtful portfolios.
We are currently evaluating indications of interest, and believe we are on track to announce an outcome in the second half of 2021.
As we launched the strategic alternatives initiative last year, and throughout the process thus far, PSEG Power has continued to deliver on expectations for non-GAAP operating earnings and adjusted EBITDA.
Last year PSEG fossil posted one of its best operational performance records ever, and completed its entire maintenance outage schedule without any OSHA safety violations.
In addition, PSE&G nuclear completed to complex refueling outages in 2020, with new COVID-19 safety protocols, and continue its overall outstanding operating performance.
These achievements speak volumes about the professionalism of our dedicated workforce that exemplifies our focus on safety and operational excellence.
PSE&G nuclear Zero Mission certificate application and the extension of the current ZEC is currently under consideration at the BPU.
Last month, the BPU staff consultant released their preliminary findings.
The consultants found that all three of our New Jersey units were eligible, recognizing that each unit had a financial need for next.
There were other aspects of the preliminary findings that we view as inconsistent with the ZEC law.
And we look forward to upcoming hearings where we will have the opportunity to address those items.
It is clear that New Jersey recognizes the need for nuclear power in order to achieve its short and long-term clean energy goals, as laid out in states on an energy master plan and DEP'S 80 by 60 report.
The recent weather-related power and market values in Texas and California further underscore the importance of maintaining New Jersey's reliable resource mix.
Over the next few weeks, you will hear as mentioned that our confidential filings show that these units are actually in need of more than $10 per megawatt hour, partly due to the fact that PGM forward market prices are lower versus 2018, which was the year that first ZEC application.
As stated in the 2018 ZEC law, nuclear operating risk and market risk must be recognized as a cost in any economic determination and ZEC eligibility.
We have responded to all information requests and share confidential financial information with rate council and PJM independent market monitor.
In order to support transparency around this important proceeding.
And the actions and expansion of the current ZEC, we would not continue to operate the plant.
While the direction of public policy both in New Jersey, Jersey and in the nation is the increased recognition of carbon free energy to mitigate climate change.
That realization in the form of a future price on carbon is highly uncertain at best.
With the final decision on the ZEC application expected on April 27, we are hopeful that the BPU will act to extend the $10 per megawatt hour attribute payment to preserve nuclear units and their 3,400 megawatts of zero carbon base load generation through May of 2025.
The BPU is also moving forward with its investigation of resource adequacy, and the potential for the creation of fixed resource requirements service area within New Jersey, I'm just going to call that FRR in future.
We've maintained a neutral stance on the potential of an alternative capacity procurement paradigm, but remain supportive of accommodations that enable state supported resources to qualify as capacity that can satisfy both the state's capacity obligations, and its clean energy goals.
As we've previously stated, the current minimum offer floor prices are not expected to prevent either our nuclear or gas part of units from clearing in the upcoming PJM capacity auction scheduled for this May.
Now let me turn my attention to 2021 guidance.
We are introducing non-GAAP operating earnings guidance of $3.35 to $3.55 per share with the utility expected to contribute between one $1,410 million and $1,470 million.
PSEG Power between $280 million and $370 million and parent others expected to post a loss of $15 million.
This year we expect PSE&G to contribute just over 80% of consolidated non-GAAP operating earnings at the midpoint of guidance.
Going forward, we expect that the utility earnings will represent 80% to 90% of PSE&G non-GAAP results, with the remaining balance expected to be comprised of long-term agreements for zero carbon offshore wind generation, and as ZEC supported New Jersey nuclear units.
For PSEG Power, over 70% of its 2021 gross margin has been secured by the way of energy hedges, capacity revenues established prior auctions, zero emission certificates, and ancillary service payments.
However, for 2021, recontracting at lower market prices, higher costs tied to a hope Creek refueling outage, and the absence of tax benefits realized in 2020 results in the lower non-GAAP operating earnings guidance for 2021.
Our PSE&G five-year capital spending forecast has been updated to $14 billion to $16 billion for 2021 through 2025 and includes approximately $2 billion of clean energy future investments, as well as the expected extension of the gas system modernization program and Energy Efficiency Program at their average annual run rates for the last two years of the period that being 2024 and 2025.
Consistent with test years approximately 90% or $13 billion to $15 billion this capital program will be directed to grow regulated operations at PSE&G.
This ongoing investment in essential energy infrastructure and clean energy programs is expected to produce 6.5% to 8% compound annual growth and rate base over the five-year period starting from $22 billion at year-end 2020.
On slide 10, we've provided you with an alternate view of our updated capital program for 2021 through 2025.
We've classified it by investments in decarbonization, energy transition, climate adaptation for resilience and reliability and methane reduction.
As a sidebar, any spend for offshore wind will be incremental to these totals and is not included in the $14 billion to $16 billion capital plan.
We also expect that our strong cash flow will enable us to fund our entire five-year capital spending program, as well as our planned offshore wind investments during the 2021 and 2025 period, without the need to issue new equity.
As we continue to plan for the responsible reentry to our offices and facilities currently targeted for this July.
Whether responding to a myriad of COVID-19 challenges, or their excellent injury free response to the nor'easter that we just experienced this past month, employees across our organization has embodied operational excellence, as they provide our New Jersey, New York, Connecticut and Mid-Atlantic customers with reliable essential energy services.
Before moving to Dan's financial review, I will summarize the new initiatives in place of future growth and areas of our continued strategic focus.
These range from the new clean energy future investments behind the meter to infrastructure opportunities supporting electrification of transportation, and a growing mix of renewables in the distribution system to expanding the existing aging infrastructure replacement programs to assist the New Jersey economic recovery.
In addition, we are advancing the strategic alternatives of exploration through a robust bidding process, pursuing near term opportunities to expand offshore wind investments in the Mid-Atlantic and are engaged in ongoing efforts to preserve the New Jersey nuclear fleet, the most cost effective and most reliable source of base load supply to reduce emissions.
Each of these actions serves to further PSE&G's already strong ESG leadership position, which we continuously strive to improve.
In 2020, we move to decarbonize our generating fleet, announced an investment in New Jersey offshore wind, and initiated a landmark energy efficiency investment to bring universal access to a broad range of clean energy opportunities.
In 2021, we joined the company network of the series organization at CERS to advance our climate advocacy.
We will achieve a coal free generating fleet in June.
And we recently published our first ESG Performance Report.
PSEG is getting recognized for our ESG initiatives by Standard and Poor's was included us in their 2021 sustainability yearbook.
And by the Dow Jones Sustainability Index was named PSE&G to the North American index for 13 years in a row.
We're also gratified to be named to the 2021 listing of America's most responsible companies by Newsweek magazine, and the Forbes list of best employees for diversity in 2020.
And best employers and veterans in 2020.
The Board of Directors recent decision to increase the company's common dividend to the indicative annual level of $2.04 per share is the 17th increase in the last 18 years, and reflects our ongoing commitment to returning capital to our shareholders to enhance our total return profile as we also pursue growth.
There is no lack of opportunity for PSE&G.
As we continue the transformation to a primarily regulated electric and gas utility, focused on clean energy infrastructure, complemented with contracted zero carbon generation, we are working toward a sustainable future where customers universally use less energy, the energy they use is cleaner, and its delivery is more reliable and more resilient.
We are confident that pursuing this strategy will enhance our ability to provide our customers with essential energy services, which has been our core mission for the last 118 years.
As Ralph said, PSE&G reported non-GAAP operating earnings for the fourth quarter of 2020 of $0.65 per share.
And we provided you with information on slides 12 and 14 regarding the contribution of non-GAAP operating earnings by business for the fourth quarter, and for the full year of 2020.
Slide 13 and 15 contained waterfall charts that take you through the net changes quarter-over-quarter and year-over-year, and non-GAAP operating earnings by major business.
I'll now review each company in more detail starting with PSE&G.
PSE&G's net income for the fourth quarter of 2020 increased by $0.04 to $0.58 per share, compared with net income of $0.54 per share for the fourth quarter of 2019 as shown on slide 17.
For the full year PSE&G's net income increased by $0.16 per share, or 6.5% compared to 2019 results.
This improvement reflects an 8% increase in rate base at year end 2020 to just over $22 billion, which as we note on slide 22 does not include approximately $1.8 billion of construction work in progress or see what that's mostly a transmission.
The continued growth in utility earnings resulting from investments in transmission added $0.2 per share versus the fourth quarter of 2019.
Gas margin was $0.02 favorable, reflecting GS&NT roll in and higher weather normalized volume.
Electric margin was flat compared to the fourth quarter of 2019.
As higher were the normalized volumes will offset by lower demand?
Mild temperatures during the quarter had a negative $0.03 per share impact, mostly reflecting recovery limitations under the earnings test of the gas weather normalization clause.
O&M expense was flat versus the fourth quarter 2019.
Higher distribution depreciation expense of a $0.01 per share offset lower pension expense of a $0.01 per share in the quarter.
Taxes and other were $0.03 per share favorable, partly reversing the negative $0.07 per share impact that the timing of taxes had on third quarter of 2020.
Recall in the third quarter flow through taxes and other items lower net income by $0.07 per share compared to the third quarter of 2019.
And we indicated at that time that about half of the $0.07 would reverse in the fourth quarter.
The balance is related to bad debts which we anticipate reversing in the future based upon the timing of actual write-offs.
Early winter weather in the fourth quarter as measured by the heating degree days was 9% milder than normal and 14% milder than in the fourth quarter of 2019.
The full year PSE&G weather-normalized residential electric sales increased by 5.6% due to the COVID-19 work from home impact, but a larger decline in commercial sales resulted in total electric sales declining by 2%.
Total weather-normalized gas sales were up 1.2% for 2020 by a 4.9% increase in residential use partially offset by a smaller decline in the commercial and industrial segment.
For both electric and gas sales, higher residential uses largely offset declines in commercial and industrial sales, resulting in stable margins overall.
PSE&G invested $700 million in the fourth quarter as part of its 2020 Capital Investment Program of approximately $2.7 billion directed to infrastructure upgrades of transmission and distribution facilities to maintain reliability, increase resiliency, make lifecycle replacements and clean energy investments.
PSE&G updated five-year capital spending plan includes investing $2.7 billion in 2021.
And as detailed on slide 21, approximately $960 million is allocated to transmission; $700 million to electric distribution, which includes approximately $200 million for Energy Strong Two, $875 million to gas distribution, which includes over $400 million for GSMP2 and $200 million for new clean energy future EV programs and the beginning of the AMI rollout.
The clean energy future EV investment will ramp up to approximately $125 million in 2021 before reaching a full annual run rate of about $350 million in 2023.
As Ralph mentioned the BPU approved two CF settlements in January, totaling approximately $875 million covering energy cloud and electric vehicle investments.
The capital and operating costs of these programs will begin to be recovered in PSE&G next rate proceeding, expected to be filed in the second half of 2023.
From the start of the programs until the commencement of new base rates estimated in late 2024, the return on other non-capital will be included for recovery in these rates as well as operating costs and stranded costs associated with retirement of the existing leaders.
Of these amounts, the vast majority about 90% received contemporaneous or near contemporaneous regulatory treatment either through the first formula rate, or clause recovery mechanisms or recovered and rates as replacement spend or new business.
As Ralph also mentioned, we continue settlement discussions with the BPU staff and recounsel regarding our FERC transmission return on equity.
Although our forecast for 2021 as soon as the resolution effective in the near term, those discussions remain confidential and ongoing.
PSE&G net income for 2021 is forecasted at $1,410 million to $1,470 million which reflects an assumed reduction of our transmission formula rate, as well as incremental investment in EV infrastructure and energy efficiency.
So moving to power, PSEG Power reported non-GAAP operating earnings of $0.10 per share in the fourth quarter unchanged from the non-GAAP results in the fourth quarter of 2019.
Results for the quarter brought Power's full year non-GAAP operating earnings to $430 million or $0.84 per share.
Compared with 2019 non-GAAP results of $09 million or $0.81per share.
Non-GAAP adjusted EBITDA total to $182 million for the quarter and $990 million for the full year of 2020.
And this compares to non-GAAP adjusted EBITDA of $198 million, and $1,035 million for the fourth quarter and full year 2019 respectively.
Non-GAAP adjusted EBITDA excludes the same items as our non-GAAP operating earnings measure, as well as income tax expense, interest expense, depreciation and amortization expense.
We've also provided you with added detail on generation for the fourth quarter and full year on slide 26.
PSEG Power's fourth quarter non-GAAP operating earnings were aided by the scheduled increase in PSEG Power's average capacity prices in PJM, covering the second half of 2020 and higher gas operations, which resulted in improved non-GAAP operating earnings comparisons of $0.04 and $0.01 per share respectively, compared to the fourth quarter of 2019.
However, lower generation output and recontracting at lower market prices reduced non-GAAP operating earnings by a total of $0.08 per share versus the year ago quarter.
The decline in O&M expenses in the quarter improve results by a $0.01 per share and reflects the absence of the Hope Creek refueling outage that occurred in the fourth quarter of 2019.
The extension of the Peach Bottom Nuclear operating licenses contributed to lower depreciation expense of a $0.01 per share and lower taxes improve non-GAAP operating earnings by a $0.01 over the year ago quarter.
Gross margin for the quarter was $32 a megawatt hour, a $1 per megawatt hour improvement over the fourth quarter of 2019, mainly reflecting the scheduled increase in capacity prices that began June 1, 2020 and remain in place through May of 2021.
For the full year 2020 gross margin was flat at $32 per megawatt hour compared to full year 2019.
Mild fall temperatures and holiday related spikes and COVID-19 positivity rates dampen market demand in New Jersey and kept our prices and natural gas prices lower than the quarter and year ago comparisons.
So let's turn to Power's operations.
Total output from Power's generating facilities declined 9% in the fourth quarter of 2020, compared to the fourth quarter of 2019.
Unplanned outages at fossil and an extended outage at the sale of one nuclear unit reduced fourth quarter generation levels compared to the fourth quarter in 2019.
However, full year 2020 output of 53 terawatt hours came in above our 50 to 52 terawatt hour forecast.
The nuclear fleet operated at an average capacity factor of 78.9% in the quarter, and 90.3% for the full year, producing nearly 31 terawatt hours of zero carbon base load power.
The combined cycle fleet operated an average capacity factor of 46.2% in the quarter, and 48.3% for the full year, generating approximately 22 terawatt hours in 2020.
The three new combined cycle generating units, Keys, Sewaren and Bridgeport Harbor five posted an average capacity factor of over 75% for the full year 2020.
And this coming June PSEG Power will complete the planned early retirement of the 383 megawatt coal fired Bridgeport Harbor three generating station, eliminating the last coal unit in power's fleet.
For 2021, Power has hedged approximately 90% to 95% of its expected output of 48 to 50 terawatt hours, at an average price of $32 per megawatt hour, which represents an approximately $2 per megawatt hour decline from 2012.
In addition 2021 average hedge prices no longer include cost-based transmission charges for New Jersey's basic generation service contracts due to a change in how they are billed and collected.
This change further reduces revenues by approximately $3 per megawatt hour starting on February 1 of 2021.
And is often on the cost side so there's no P&L impact as a result.
We're forecasting 2021 non-GAAP operating earnings and non-GAAP adjusted EBITDA PSEG Power to be $280 million to $370 million and $850 million to $950 million, respectively.
Power segment guidance reflects a full year of fossil and solar operations, lower expected generation volume and lower market prices, as well as the absence of a one-time tax benefit realized in 2020.
Now, let me briefly address operating results from enterprise and other which reported a net loss that increased by $0.03 per share, compared to the fourth quarter of 2019.
And reflects lower tax benefits compared with the fourth quarter of 2019 and lower results from KCG Long Island.
Regarding PSEG Long Island, following several challenges related to our response to tropical storm Isaias.
We've made significant improvements in our outage management to lessening business continuity and other systems and processes.
The Long Island Power Authority filed a complaint against PSE&G Long Island in New York State court last December, alleging multiple breaches of the operating services agreement or OSA in connection with PSE&G Long Island's preparation and response to tropical storm Isaias.
We are in discussions with LIPA to address their concerns, which could include potential amendments to our OSA with LIPA and to resolve all claims.
As a reminder, our 12-year contract is scheduled to run through 2025.
We are committed to addressing the identified performance issues and to continue our strong track record of performance for Long Island customers since taking over operations.
For 2021, PSEG Enterprise and other are forecasted to have a net loss of $15 million as parent financing and other costs exceed earnings from PSEG volume.
PSEG ended 2020 with approximately $3.8 billion of available liquidity, including cash on hand of $543 million, and debt representing 52% of our consolidated capital.
In December PSEG issued $96 million of 8.63% senior notes due April 2031, in exchange for like amount of 8.63% senior notes due April 2031, originally issued at Power, which were cancelled following the completion of the exchange.
PSEG also retired a $700 million term loan at maturity.
Power's debt as a percentage of capital declined to 27% on December 31 from 28%, at September 30.
To summarize non-GAAP results for the quarter was $0.65 per share; full year non-GAAP operating earnings were $3.43 per share.
And as we move into 2021, our guidance for the year is $3.35 to $3.55 per share, with regulated operations expected to contribute over 80% of consolidated results, arranged for 2021 reflects incremental investment in our T&D infrastructure, and a ramp up of a new clean energy future programs, as well as an assumed reduction return on equity of our transmission formula rate during the year at PSE&G.
And a full year of fossil and solar operations at PSEG family.
PSE&G also raised its common dividend by $0.08 per share for the indicative annual level of $2.04, a 4% increase over 2020.
The 2021 indicative rate continues to represent a conservative 59% payout of consolidated earnings at the midpoint of 2021 guidance and utility earnings alone are expected to cover 140% of the dividend at the midpoint of 2021 guidance.
We still expect our strong cash flow will enable us to fully fund PSE&G's five year $14 million to $16 billion capital investment program, as well as our plan to offer when investment during the 2021 to 2025 period without the need to issue new equity.
That concludes my comments.
And Shelby we're now ready to take questions.
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compname reports qtrly earnings per share $0.85.
public service enterprise group - qtrly earnings per share $0.85.
non-gaap 2021 operating earnings guidance $3.35 - $3.55 per share.
strategic alternatives review of non-nuclear generation assets on track.
has updated its 5-year capital spending forecast to $14 billion - $16 billion for 2021-2025 period.
public service enterprise group - expect that strong cash flow will enable us to fund entire $14 - $16 billion, 5-year capital spending program.
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Before we get into Armstrong's fourth quarter and full year 2020 financials, I want to take a moment to recognize what we've all been through, on a personal level, these last 12 months.
Our 2,700 Armstrong employees, our communities, our partners, suppliers, our customers and our shareholders have, no doubt, been impacted by the multiple crisis we've all faced.
And I want to share my admiration for the creativity and the teamwork and many acts of selflessness that I have witnessed within our own organization and in our communities.
It's been an extraordinary year.
And I wish us all a healthy and prosperous 2021.
I have a lot to cover today.
I'll begin by reviewing our financial results with some commentary on fourth quarter market conditions.
And then I'll recap our 2020 accomplishments, and there are many, including launching new products in response to the threats posed by COVID-19, AirAssure and VidaShield.
And then I will discuss the increasing importance of Healthy Spaces before turning the call over to Brian to provide a detailed review of our financial performance for both the quarter and the year.
With regard to the marketplace, in the fourth quarter, we saw sequential improvement, pretty much as we expected.
The various end markets and channel activity continued to be mixed by territory and vertical.
New Orleans, for example, exhibited quarter-over-quarter strength related to hurricane damage and the Pacific Northwest continued to improve.
Meanwhile, the Upper Midwest and Southern California moderated.
The number of healthcare projects bid during the quarter picked up nicely but was offset by slower activity in education.
So although we saw overall sequential improvement, underlying conditions remain choppy and drive near-term uncertainty as building owners seek to determine the best path forward to adapt their facilities to enable the safe return of occupants.
For the full year, 2020 sales of $937 million were down 10% from 2019.
Adjusted EBITDA of $330 million was down 18% from 2019, coming in at the high end of our guidance range.
Adjusted free cash flow for the year was a strong $212 million or 23% of sales, once again demonstrating the strength of Armstrong's best-in-class value creation model even in the face of a pandemic-driven sales declines.
Full year 2020 results were characterized by a significant drop in sales in the second quarter as the pandemic struck and certain markets were effectively shut down by government mandates.
Since the second quarter, we have experienced sequential improvements on both a month-to-month and a quarter-to-quarter basis.
In the Mineral Fiber business, in addition to significant volume declines, we were faced with two unusual mix headwinds that impacted AUV or average unit value.
Beginning in the second quarter, we experienced significant negative territory mix as our key seven territories, including the New York metro area, were disproportionately affected by the construction shutdowns.
This trend moderated and continued to improve in the fourth quarter.
A compounding AUV headwind was channel mix, driven by stronger sales to big-box customers as work from home became a reality for many.
This was a good result from a volume perspective and reflects the hard work of our teams with these channel partners.
However, price points in this channel are lower than our overall average and drove a headwind on mix fall through, particularly in the most recent quarter.
We expect these timing-related trends to normalize beginning in the second quarter of 2021.
Core product mix, the underlying driver of AUV improvement for the past 10 years has continued to be positive in 2020 as our higher-end solutions, including the Total Acoustics and Sustain families, outperformed the lower price range of our portfolio, reflecting the continued desire of architects and building owners to improve the performance and aesthetics of their spaces.
The other component and underlying driver of AUV is like-for-like pricing.
Once again in 2020, we delivered positive like-for-like pricing and price greater than input cost inflation.
Operationally, our plants ran well, adopting new safety protocols.
And we were able to maintain high levels of quality, service and productivity.
I'm extremely proud of the way our manufacturing teams innovated to find ways to keep our plants operating and servicing customers throughout this year and do it safely.
Architectural Specialties experienced similar disruptions as large renovation and new construction projects were delayed at the outset of the pandemic.
But as with Mineral Fiber, sales recovered sequentially as markets reopened and contractors adapted to the new safety protocols.
The Architectural Specialties business exited 2020 with a record backlog and is well positioned for 2021.
Now more than any year in my memory, 2020 was about more than just financial results.
In a year of a health crisis and a resulting economic crisis and a social crisis on top of that, 2020 was about responding to short-term priorities while preserving the foundation for longer-term opportunity.
When the pandemic first hit, our priorities were protecting the health and safety of our people, adapting our business practices to maintain connectivity and collaboration with our customers and continuing to supply essential products with a special emphasis on serving healthcare projects.
Once the immediacy of the crisis passed, we made several strategic decisions based on the belief that the pandemic will end and the innate human desire for connection and community will once again return us all to offices, schools and shops.
We made decisions to conserve cash and manage expenses, to retain our talent and preserve organizational capability and capacity that we have worked really hard to build over the past several years.
We remain committed to our digital and M&A initiatives.
And we pivoted our new product development efforts to meet the need for Healthy Spaces with an emphasis on improving indoor air quality.
Now sitting here today, I believe those decisions were the right ones and are delivering on our objective of emerging from this crisis a stronger, more capable and competitive company.
As you recall, when the pandemic hit, we suspended our share repurchase program and trimmed capital expenditures prudently to conserve cash.
We identified and acted on $40 million of temporary cost savings that would not impact our growth and value creation opportunities.
With the return of some stability in the marketplace, we have resumed our share repurchase program, we are returning our capital expenditures to pre-pandemic levels and we are enhancing our investments in our digital and Healthy Space initiatives.
As we have reported, we did not furlough our salespeople.
We did not lay off resources or slow work on key initiatives.
In fact, we launched new digital tools, like Projectworks, to keep our sales teams better connected to customers.
And we added resources to our organization in order to accelerate the work around these and other key strategic initiatives.
Specifically, we launched a new digital platform in the fourth quarter that will enable Armstrong to drive Mineral Fiber volume growth.
I'm going to provide more details on this in a moment.
But I believe these actions collectively will further extend Armstrong's leadership position and allow us to accelerate growth as the economy recovers.
Now looking back on 2020, acquisitions were also a bright spot.
Despite the challenges presented by COVID, we were opportunistic and pursued and completed three transactions with Turf, Moz and Arktura.
These companies each bring unique and exciting capabilities as well as talent that cement Armstrong's leadership in felt products, custom metal capabilities and maybe most importantly bring design and technology capabilities that can be integrated and scaled across our entire company.
Our M&A pipeline remains active.
And we continue to have the capability to execute additional acquisitions and partnerships.
In new product introductions, we also had a strong year.
We launched 35 new products in 2020.
That's a 50% increase from our normal pace of activity.
I could not be more proud of our NPD team.
And I know that they are working very hard to develop important, groundbreaking new products and solutions to further contribute to the healthy space demand that we'll all have in 2021 and beyond.
Several of these new products came about from a pivot that we made when it became apparent that the COVID-19 pathogen was largely transmitted through the air as an aerosol.
Even with enhanced access protocols for our labs and test chambers, our team brought to market at record speed the 24/7 Defend portfolio to address the need for healthier, safer spaces and to specifically improve indoor air quality.
In November, we launched the AirAssure family of ceiling tiles.
AirAssure is a gasketed ceiling solution that forms a tight seal to the grid system.
It's designed to reduce air leaks through the ceiling plane by up to four times over standard ceilings.
Reducing air leaks can significantly increase the effectiveness of HVAC systems by forcing more air to flow through return air vents, where it can be filtered and purified, therefore, enabling better air quality.
In addition to allowing more filtering and cleaning of air, AirAssure can also reduce the risk of pathogens traveling from space-to-space in a building.
And by doing so, again AirAssure can protect a greater number of people.
Also in November, we paired the patented VidaShield ultraviolet air purification system with Armstrong Ceiling panels to provide cleaner, safer air in pretty much any commercial space.
This system, concealed in the ceiling plane, draws air into a chamber integrated into the ceiling tile, exposes the air to UV light to neutralize the harmful pathogens and then returns the cleaner air to the room.
VidaShield can be used with our ceilings as a stand-alone solution.
Or even better, it can be integrated with AirAssure panels.
These two new products are just the beginning of a robust pipeline of Healthy Space solutions, which represents a multiyear renovation opportunity for Armstrong.
The big picture of Healthy Spaces is critically important.
As you likely know, we spend 90% of our time indoors.
So it stands to reason that these spaces where we live our lives ought to be a safe, healthy and sustainable as possible.
They should be deliberately and holistically planned, designed and built to be protective, reassuring and comfortable.
In my view, this has always been true, but the pandemic has redefined what we mean and what we want in our healthy and well spaces.
And the need for solutions in this area is more pressing than ever.
The way we think about the performance of spaces we inhabit has changed and expanded forever.
As a CEO, I think a lot about my employees and how they're doing and how this is impacting their lives in a myriad of ways.
When we return to the office, I want them to feel safe and secure so that we can focus on doing our best work.
I know that we are at our best and most creative when we are together.
We're excited that Armstrong can play a crucial part of bringing Healthy Spaces to people.
To help us learn more and bring healthier spaces to life faster, we are installing our 24/7 Defend solutions in our own facilities, and we are retrofitting one of the existing buildings on our corporate campus to be a Healthy Spaces living lab.
This Healthy Space pilot will showcase what we've learned so far about ceiling systems and will provide a space for us to collaborate, innovate with other leading interior component manufacturers.
By working together, we will be able to better design integrated, holistic and effective Healthy Spaces solutions.
Healthy Spaces remains the dominant topic in the commercial construction conversations today.
92% of architects and designers surveyed said they are having conversations with their clients on how to make their spaces healthier and safer.
As you all know, Armstrong has always had a strong presence in the A&D community.
And its presence is strengthening as we are at the forefront of these conversations on how to create healthy spaces.
Today, I'll be reviewing our fourth quarter and full year 2020 results and provide guidance for 2021.
But before I begin, as a friendly reminder, I'll be referring to the slides available on our website.
Beginning on slide four for our overall fourth quarter results.
Sales of $239 million were down 3% versus prior year, a continued sequential improvement from the third quarter, when year-over-year sales were down 11%.
Adjusted EBITDA fell 19% and margins contracted 580 basis points.
Adjusted diluted earnings per share of $0.77 fell 31% as our 2019 fourth quarter tax rate benefited from stock-based compensation deductions.
Adjusted free cash flow declined by $3 million versus the prior year.
Our cash balance at quarter end was $137 million and, coupled with $275 million of availability on our revolving credit facility, positions us with $412 million of available liquidity, down $42 million from last quarter as we completed the Arktura acquisition during this past quarter and down $18 million from the fourth quarter of 2019.
Net debt of $578 million is $12 million higher than last year as a result of our acquisitions, partially offset by cash earnings.
As of the quarter end, our net debt-to-EBITDA ratio is 1.8 times versus 1.5 times last year as calculated under the terms of our credit agreement.
Our covenant threshold is 3.75 times.
So we have considerable headroom in this measure.
Our balance sheet is in solid shape.
In the quarter, we repurchased a 126,523 shares for $10 million for an average price of $79.04 per share.
Since the inception of our repurchase program, we have bought back 9.7 million shares at a cost of $606 million for an average price of $62.35.
We currently have $594 million remaining under our share repurchase program, which expires in December 2023.
slide five illustrates our Mineral Fiber segment results.
In the quarter, sales were down 7% versus prior year but improved sequentially from the third quarter, when year-over-year sales were down 14%.
COVID-19-driven volume declines continued at a reduced rate.
And AUV was a headwind as relative strength in the big-box channel and, to a lesser degree, territory mix put pressure on sales and adjusted EBITDA in the quarter.
Positive like-for-like pricing and favorable product mix continued their year-long positive trend.
Adjusted EBITDA was down $15 million or 19% as the volume decline in channel-driven AUV weakness fell through to the bottom line.
This table also clearly illustrates the quarterly progression of volume trends, which while still negative, have improved sequentially.
In the quarter, continued manufacturing productivity, our cost reduction initiatives and lower raw material and energy costs aided profitability.
SG&A was a headwind as we ramped up investment in growth initiatives that Vic mentioned.
WAVE equity earnings were down due to lower sales volume.
Moving to Architectural Specialties or AS segment on slide six.
Sales were up $6 million or 13% as the 2020 acquisitions of Turf, Moz and just recently, Arktura, contributed $11 million in the quarter and offset COVID-driven organic sales decline of 9%.
AS organic sales also improved sequentially from the third quarter when year-over-year sales were down 14%.
Despite flat sales, direct margins expanded significantly, driven by the higher margins of Turf, Moz and Arktura acquisitions relative to our base AS business and ongoing productivity in the network, particularly at acquired facilities.
Manufacturing costs and SG&A were up, driven by the cost of Turf, Moz and Arktura and higher overhead allocations.
Our AS business continues to win significant projects to build a strong pipeline.
Among others, in the fourth quarter, we were awarded the Virgin Voyages port of Miami Terminal V project.
This job includes metal, glass, reinforced gypsum, wood and mineral fiber products, a comprehensive solution that demonstrates Armstrong's competitive strengths.
This multimillion-dollar project is scheduled to begin shipping late this year but will primarily benefit 2022 sales.
slide seven shows drivers of our consolidated adjusted EBITDA results for the quarter.
We've enhanced this page to break out the impact of our 2020 acquisitions.
Sales from our 2020 acquisitions offset organic volume declines.
Mix, organic SG&A investments and WAVE equity earnings were only partially offset by positive like-for-like pricing, deflation and manufacturing productivity.
Our 2020 acquisitions added a net $3 million adjusted EBITDA benefit and delivered a 27% adjusted EBITDA margin.
slide eight shows our adjusted free cash flow performance in the quarter versus fourth quarter of 2019.
Cash flow from operations was down $8 million on lower sales and partially offset by lower capital expenditures of $5 million.
As referenced in the footnotes and detailed in the appendix, adjusted free cash flow excludes two significant and largely offsetting adjustments.
First, we received $13 million related to environmental insurance recoveries in the quarter.
Second, we made a $10 million one-time endowment-level contribution to the Armstrong World Industries Foundation with funds earmarked from a portion of the $22 million of proceeds from the sale of our Qingpu, China facility that we received earlier in the year.
These items are excluded from adjusted free cash flow as they are unrelated to our core quarterly performance.
slide nine shows our full year results.
Versus prior year, sales were down 10% and adjusted EBITDA was down 18%.
Adjusted earnings per share was down 24%, driven by a lower 2019 base period tax rate due primarily to deferred state tax adjustments and, to a lesser degree, the stock-based compensation deduction that impacted Q4 in 2019.
slide 10 is the full year adjusted EBITDA bridge.
Again, COVID-related volume declines are the main driver as they impacted EBITDA by $65 million and were partially offset by volume-driven contributions of $14 million from our 2020 acquisitions.
COVID volume declines also drove the WAVE results.
Mix headwinds from the territory and channel drivers we have called out impacted the AUV fall-through to adjusted EBITDA.
As Vic mentioned, product mix and like-for-like pricing were both positive in 2020.
Input cost deflation and the savings we are driving in manufacturing and SG&A, despite our acquisitions and growth investments, helped mitigate the sales fall-through to EBITDA.
slide 11 reflects full year adjusted free cash flow of $212 million.
As with the quarter, operating cash flow and dividends from WAVE were lower.
Capital expenditures reflect the delaying action we took to prioritize and conserve cash in 2020.
Interest expense is lower as a result of our refinancing in September 2019.
In a year significantly impacted by the pandemic, we delivered a 23% adjusted free cash flow margin.
slide 12 is our guidance for 2021.
Against a backdrop of a recovering economy.
We anticipate revenue in the range of $1.03 billion to $1.06 billion, or up 10% to 13% versus prior year.
Driving this growth is a return to positive mix starting in the second quarter, continuation of like-for-like pricing with the backdrop of rising inflation, which will result in the resumption of our historic 4% to 6% AUV growth rate.
In addition, our digital growth initiative, kanopi, that Vic will discuss in a moment, will support Mineral Fiber growth.
Healthy Spaces product sales will contribute to both volume and mix gains.
The Architectural Specialties segment will benefit from the full year impact of our 2020 acquisitions as well as a resumption of organic sales growth.
We expect adjusted EBITDA to grow 9% to 13% as the benefits of sales growth falls through and we continue to drive productivity in our plants and benefit from improved results at WAVE.
We will continue to invest in our growth initiatives and, as previously communicated, reinstate some of the 2020 temporary cuts in SG&A in 2021.
At the midpoint, our EBITDA margin of 35% is slightly down in 2021, driven by the impact of 2020 acquisitions on a full year basis.
Adjusted free cash flow will be 19% of sales as we resume our historic levels of capital spending and as working capital expands to support sales growth.
We expect to return to our greater than 20% historical average in the short term.
page 13 is not something we typically share as our seasonality across the quarters is usually very consistent year-to-year.
However, given the disruption experienced in 2020, the seasonal pattern of our year-on-year sales will be unusual in 2021.
So we've included this page to assist you with your modeling.
Sales in Q1 will still be impacted by the pandemic and one less shipping day but will sequentially improve versus Q4 of 2020.
We expect Q2 sales to improve as we wrap the significant decline in Q2 of 2020 in the benefit of our 2020 acquisitions.
In conclusion, I'm excited about the outlook of 2021.
With an improving health and economic backdrop, an evolving portfolio of Healthy Spaces products and a new digital tools and capabilities, Armstrong is well positioned to advance our value creation model in 2021.
2020 was a busy and, by any measure, a productive year.
We took care of our people first, and we built out our capabilities and capacity for future growth.
We took care of our customers.
We didn't shut them down.
We stayed connected with them digitally and kept them supplied.
We launched 35 new products, many industry-leading, to serve today's most pressing needs for improving indoor air quality, including our AirAssure and VidaShield products.
We established a dedicated Healthy Spaces team for a holistic approach to lead the industry forward in the new normal.
We completed three strategic acquisitions, again a record level of activity for us.
And we advanced our digitalization initiative, just to name a few.
And there's more to come in 2021 with digitalization remaining front and center.
I mentioned earlier and Brian mentioned our new digital platform, kanopi, which is focused on identifying and cost effectively serving more of the renovation and smaller new construction marketplace.
I want to provide a little more history here and perspective as to what this is and what opportunities this provides for Armstrong.
For the past several years, we have been talking to you about our digital initiatives, and we've shared a number of them with you, initiatives to make our customer experience frictionless, to better enable design collaboration, to improve our service levels, to increase reliability and quality in our manufacturing operations.
During 2020, we took steps to increase the intensity and the pace of these efforts.
And the result is kanopi, a solution we have never discussed publicly before and a critical enhancement to our existing business model.
kanopi by Armstrong, spelled with a lower case K, is online and I invite you to visit the website at kanopibyarmstrong.com, to explore its capabilities.
Utilizing artificial intelligence and machine learning, kanopi provides early access and enhanced visibility to a large part of the market opportunity we were previously unable to efficiently track.
This technology allows us to influence an Armstrong solution and makes follow-through easier.
kanopi offers facility owners and managers an end-to-end solution, including diagnostic tools, consulting and precertified installation services.
Online, consumer-friendly and fulfilled by our existing best-in-class distribution network, kanopi will tap into pent-up renovation demand in smaller-scale commercial spaces.
We are investing in the sales and technical resources to roll kanopi out on a national level throughout 2021.
The Projectworks and kanopi represent an unrivaled set of digital platforms in the ceiling space, providing access and solutions to previously inaccessible opportunities.
We are using digital capabilities and Healthy Spaces solutions to drive Mineral Fiber volume growth, irrespective of the underlying market.
As Brian mentioned, this will help 2021 as the projects ramp up.
But I'm really excited about what these initiatives can deliver in the medium and long term.
Another area of focus you will see from us in 2021 is around ESG.
Armstrong has always been a company with a strong sense of community, purpose and responsibility.
Those of you who have spent time with us know of our commitment to safety, sustainability and ethical behavior.
We have a long history of community involvement and support.
We strive to be good stewards of the planet.
We were the first to develop a closed-loop recycling program for ceiling tiles and to remove Red List chemicals from our ceilings.
We've instituted effective wastewater management and minimized carbon emissions from our ovens.
We are passionate about developing products that make indoor spaces healthier and more sustainable, higher-performing and more aesthetically appealing, as demonstrated by our recent AirAssure and VidaShield product launches.
In the past 18 months, there's been a good deal of effort behind the scenes on ESG-related matters.
We've hired experienced professionals, Helen Sahi, as our Director of Sustainability; and Salena Coachman, to lead our diversity and inclusion initiatives.
We've appointed Mark Hershey, our General Counsel, to head up this effort from a management perspective, ensuring it has a champion on my leadership team.
And our Board's Nominating and Governance Committee has become the Nominating, Governance and Social Responsibility Committee to demonstrate the complete alignment in these critical areas.
We will be launching an enhanced sustainability website this spring and publishing a full sustainability report this summer.
This will transparently document our efforts but also publicly challenge us to get better.
These disclosures will convey our program goals and our targets, align our reporting to leading standards and frameworks and reflect our commitment across our three pillars of focus: people, planet and products.
I've always believed that Armstrong is a good corporate citizen.
And that said, I also believe we can improve.
And I want to challenge the organization and make ourselves accountable for getting even better.
Finally, regarding ESG initiatives, Brian mentioned we recently made a contribution to the Armstrong World Industries Foundation that will ensure that the foundation can increase and sustain its support for the communities, where Armstrong employees live and work for many years to come.
Armstrong is a clear leader in the commercial construction market.
And we have been for many, many years.
We've most recently demonstrated this with AirAssure and VidaShield, two exciting new solutions that demonstrate Armstrong's product leadership.
We have strengths on multiple fronts, which will allow a market leader like Armstrong to return to the top and bottom line growth trajectories we've established before the pandemic hit.
Together with our industry-leading position, our digitalization investments, our Healthy Spaces platform and our commitment to ESG, Armstrong is well positioned for the near term and the long term.
The Healthy Spaces revolution is only just beginning.
And I believe it will be a powerful catalyst driving renovation activity for years to come.
A catalyst turbocharged by a health crisis and backed by a newfound awareness as to how fundamental our health and the health of the built environment is to the strength of our economies and our communities.
We are both ready for and excited about the opportunities ahead.
This is all aligned with our commitment to continue to deliver strong results for our shareholders, making a positive difference by creating healthier spaces where we live, work, learn, feel and play.
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q4 sales fell 3 percent.
continues to expect sequential improvements in our end markets.
expects to grow sales 10% to 13% in 2021.
sees adjusted ebitda growth of 9% to 13% in 2021.
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Joining me on the call today are Arsen Kitch, President and Chief Executive Officer; and Mike Murphy, Chief Financial Officer.
Financial results for the third quarter of 2021 were released shortly after today's market close, along with the filing of our 10-Q.
On a consolidated basis, the company reported net sales of $450 million, adjusted net income of $9 million, and adjusted EBIT of $50 million.
A few highlights to mention, our paperboard business continue to see strong demand.
Based on that demand, we implemented previously announced price increases across our SBS portfolio.
As per our expectations, we saw improving trends and tissue orders and shipments.
We completed the last of our major maintenance outages for the year at our Cypress Bend, Arkansas terminal.
We also completed the closure of the high cost Neenah tissue mill and our exit from the away-from-home tissue segment.
We saw accelerating inflation across both of our businesses, particularly in energy, chemicals, wood fiber and transportation, as pulp reached its peak and started to ease.
And finally, we maintained ample liquidity of $270 million at quarter end and reduce net debt by another $7 million.
As noted during previous quarters, we remain focused on our top priorities during COVID, the health and safety of our people and safely operating our assets to serve as customers.
We're monitoring the latest trends and are adjusting protocols and policies to keep our people safe.
Let's discuss some additional details about both of our businesses.
The industry continues to experience strong backlogs even with a higher SBS pricing that has been reported by Fastmarkets RISI, the third-party industry publication.
We have benefited from these industry dynamics and previously announced price increases.
Since the beginning of this year, Fastmarkets RISI has reported price increases for the US market that totaled $250 per ton in folding carton and cardstock.
This includes a $50 per ton increase in October for both grades.
We'll continue to see strong demand from our folding carton customers and a recovery in the foodservice segments.
We're also pleased with the reception of our sustainability focused brands of NuVo cup and ReMagine folding carton.
Both are helping our customers differentiate themselves in the market.
It typically takes us a couple of quarters for price changes to be fully reflected in our financials.
It is also worth noting that our portfolio includes additional grades and price mechanisms that are not reflected in RISI's reporting.
We will discuss the estimated impact of our previously announced pricing to our 2021 financials later in our comments.
Finally, we completed a planned maintenance outage at our Cypress Bend, Arkansas mill during the third quarter.
The financial impact from this outage to our adjusted EBITDA was $5 million.
We continue to operate in a difficult market environment.
As previously discussed, COVID led to significant volatility in tissue demand and retailer behavior in 2020 and 2021.
With that said, let me provide you with our point of view on the overall market.
In North America, we view tissue demand as being approximately 10 million tons with annual demand growth of 1% to 2%, slightly exceeding population growth.
Pre-COVID, the market was about two-thirds at home and one-third away from home.
Using that math, the at home market is six million to seven million tons, of which approximately two-thirds is branded and one-third is private branded.
We operate in the private branded market, which is approximately two million tons and has grown more quickly than the branded market.
In terms of the retailer, environment, clubs and the mass merchandisers have gained share at the expense of traditional grocers over the years.
As a reminder, we have greater exposure to grocery than the overall market.
In terms of supply, tissue capacity additions have primarily targeted the private branded space with capacity growth exceeding demand growth.
To the best, we believe that private branded manufacturers will operate a depressed capacity utilization levels in the next several years.
Let me share some context pertaining to demand trends that we witnessed in the first nine months of the year.
Consumers started to return to a more normal lifestyle in the first half of the year, as vaccines were becoming available and restrictions lessened.
This led to a reduction of at home tissue purchases and destocking of consumer pantries.
Based on IRI market data, consumer purchases measured in dollars bottomed out in March.
Due to these consumer trends, retailers were faced with higher inventories in the first quarter and into the second quarter.
In response, they reduced orders to manage their inventories.
Based on RISI data, retailers shipments of finished goods bottomed out in April.
This is largely consistent with our order patterns.
We observed demand recovery at the retailer level throughout the third quarter.
There was a demand uptick in August, related to the emergence of the Delta variant that led to higher orders than we anticipated.
September order patterns return to more normal levels, but we observed another uptick in orders in late October.
This volatility is a reminder of the unpredictable nature of our market during COVID.
Let me provide some additional detail on our tissue volume trends.
We ship 12.3 million cases in the third quarter, a 21% increase from the 10.2 million cases shipped in the second quarter.
This was a bit higher than our guidance of 10% to 15% growth, partly driven by the August demand uptick.
We expect demand to be flat in the fourth quarter relative to the third quarter.
But there's a high degree of uncertainty in consumer and retailer behavior as we head into the holidays.
We will continue to selectively take asset downtime as needed to manage inventories and our cost structure, particularly while coal prices are at elevated levels.
The consolidated company summary income statement shows third quarter 2021 -- the third quarter of 2020 in the first nine months of each year.
In the third quarter 2021, our net income was $2 million, diluted net income per share was $0.11, and adjusted net income per share was $0.55.
The adjustments incorporate the impacts from the Neenah mill closure as well as other adjustments.
The impact of the Neenah closure activities in the quarter was $5.4 million, which was related to severance and related expenses.
Corresponding segment results are on slide seven.
Slide eight is a year-over-year adjusted EBITDA comparison for our Pulp and Paperboard business in the third quarter.
We benefited from our previously announced price increases and a mild mix improvement with similar sales volumes as last year.
Our costs were impacted by $5 million of major maintenance outage expenses, and higher inflation and maintenance expenses.
You can review a comparison of our third quarter 2021 performance relative to second quarter 2021 performance on slide 14 in the appendix.
Price/mix were a limited part of the story for tissue.
Our sales have converted products in the third quarter were 12.3 million cases representing a unit decline of 15% versus prior year.
Our production of converted product in the quarter was 11.4 million cases are down 25% versus the prior year.
Please note that we largely exited the away from home tissue segments in the third quarter of this year, which historically represented 3% to 4% of our overall case volume.
While inflation pressure was significant, the action that we took it at Neenah helped offset some of the higher costs that we face.
You can review a comparison of our third quarter 2021 performance relative to second quarter of 2021 on slide 15 in the appendix.
We also have finished other operational and financial data on a quarterly basis on slide 16 for both businesses.
Slide 10 outlines our capital structure, our liquidity was $270 million at the end of the third quarter.
During the third quarter, we reduced net debt by $7 million.
Maintenance financial covenants do not present a material constraint on our financial flexibility.
And we do not have near-term debt maturities.
We've continued to target the net debt to adjusted EBITDA ratio of 2.5 times, which we expect to achieve by 2023.
Slide 11 provides a perspective on our fourth quarter and full year 2021 outlook the key drivers.
Our expectations assume that we continue to operate our assets without significant COVID related disruptions.
As previously discussed, demand visibility and tissue, as well as inflation expectations have and will continue to be unpredictable.
But that said, our expectation for the fourth quarter is adjusted EBITDA of $48 million to $56 million.
Let me walk you through the build up to that range from our third quarter adjusted EBITDA $50 million.
Previously announced SBS prices is expected to positively impact us during the quarter by $7 million to $9 million which is helping to offset inflation.
Raw material and freight cost inflation is expected to negatively impact us by $7 million to $12 million.
There are no planned major maintenance outages, which will benefit us, given the $5 million Q3 outage.
Tissue shipments are expected to be flat, while we take additional asset downtime to manage inventories.
We are expected to achieve the full run rate benefit of the Neenah closure, which we previous previously stated as being more than $10 million annualized.
If we take actuals for the first nine months and add our expectations for the first quarter, we expect adjusted EBITDA of $167 million to $175 million for the full year 2021.
We wanted to comment on some of the key drivers for 2021 relative to 2020.
We are expecting continued positive impact from previously announced SPS price increases, which are expected to result in year-over-year benefits of $53 million to $55 million.
In our paper board business, planned major maintenance outages are expected to reduce our earnings for 2021 compared to 2020 by $27 million.
Our guidance for 2022 planned major maintenance outages is on slide 20.
We expect to have additional major maintenance outages in 2023.
And we'll provide an update when we refine our estimates.
Our current view is that our tissue volume decline year-over-year will be above 20%, which is not adjusted for the impact of our exit from the away-from-home business.
In total, from 2020 to 2021, input cost inflation, including pulp, packaging, energy, and chemicals, as well as freight is expected to be $80 million to $85 million relative to our previous estimate of $60 million to $70 million.
Increasing energy, chemicals and fiber prices, drove our inflation expectations higher.
While pulp pricing has started to decrease, we do not expect for that to have a material impact on our financials until early next year.
The Neenah mill recently generated negative adjusted EBITDA by closing the site, we will avoid these losses and lower our overall cost structure by producing our retail volume at other lower cost sites.
These actions are helping us to fully realize the benefits of the Shelby North Carolina mill investment.
In total, the benefit from the Neenah closure is expected to exceed $10 million annually.
For the full year 2021, we are also anticipating the following.
Interest expense between $36 million and $38 million; depreciation and amortization between $104 million and $107 million; capital expenditures of approximately $42 million and $47 million, which is lower than our prior expectations; and historical average of around $60 million, excluding extraordinary projects, and our effective tax rate is expected to be 26% to 27%.
It has certainly been an interesting with robust SBS market conditions, significant inflationary headwinds and volatility and tissue demand.
As we mentioned previously, we believe that supply and demand drive near to medium term pricing and margins.
Our paperboard business is benefiting from these dynamics, while tissue remains challenged.
I'm proud of how our people have managed these challenges and opportunities.
We're committed to a strong finish in 2021 in positioning Clearwater Paper for future success.
For the last couple of quarters, I spoke about performance improvement efforts, focused on our core operations in the medium to long term.
These efforts are well underway and are aimed at offsetting inflationary and competitive pressures that we face in our industry.
It is important for us to invest in these efforts to maintain and grow our cash flows in the long run.
We're encouraged by the work to-date as we start moving from planning to execution, and believe that we are well positioned to combat margin compression in the next several years.
Let me remind you, why I think these businesses are well positioned in the long run.
For our paperboard division, we believe that the key strengths of this business are the following.
First, we operate well-invested assets with a geographic footprint, enabling us to efficiently service our customers.
We have a diverse customer base, which serves end markets that have largely stable demand.
Second, not being vertically integrated enables us to focus on independent customers with unparalleled service and quality commitment.
Third, we believe through product and brand development, the business is well positioned to take advantage of trends toward more sustainable packaging and food service products.
Lastly, our paperboard business has demonstrated an ability to generate good margins and solid cash flows.
Our Consumer Products division is a leader within the growing private branded tissue market.
From our vantage point, we believe the key strengths of this business are the following.
First, we have a national footprint with an ability to supply a wide range of product categories and quality tiers, which is an attractive sales proposition to our customers.
Our expertise in manufacturing, supply chain and transportation is a key differentiator.
Second, there are long-term trends away from branded products to private brand.
Private brand tissue share in the US rose to over 30% recently, up from 18% in 2011.
While these trends are impressive, we're still a long way from where many European countries are in which private brands represent over half of total tissue share.
Lastly, tissue is an economically resilient and an essential need-based product.
Historically, demand has not been negatively impacted by economic uncertainty.
We are optimistic that this business will generate meaningful cash flows over the long run.
We're committed to improving our business to be successful both in the near and long-term, and I firmly believe that we will come out of 2021, a better and stronger operation than where we started.
In addition, in addition to appropriately sustaining our asset base, our capital allocation plan is focused on paying down debt and improving our cost structure and operating performance.
As Mike mentioned earlier, with this plan, we will achieve our near-term target leverage ratio of 2.5x by 2023.
Our long-term capital allocation prioritizes maintaining a strong and flexible balance sheet with a focus on shareholder value.
We will share additional perspectives on our long-term capital allocation prioritization when we reach our near term leverage ratio target.
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compname posts q3 earnings per share of $0.11.
q3 earnings per share $0.11.
q3 adjusted non-gaap earnings per share $0.55.
q3 revenue $450 million.
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We hope you and your families are continuing to stay safe and well.
Now a few reminders before we go into the results.
These statements are based on management's current expectations, but may differ from actual results or outcomes.
In addition, we may refer to certain non-GAAP financial measures.
I'll start by covering our top line commentary, with highlights from each of our segments.
Kevin will then address our total company results as well as our FY '21 outlook.
Finally, Linda will offer her perspective, and we'll close with Q&A.
For the total company, Q2 sales increased 27%, with growth in every reportable segment.
It reflects about one point of net benefit from the July acquisition that gives us a majority share in our Saudi Arabia joint venture and unfavorable foreign currency exchange rates.
On an organic basis, Q2 sales grew 26%.
I will now go through our results by segment.
In our Health and Wellness segment, Q2 sales were up 42%, reflecting double digits increases in two of three businesses.
Our Cleaning business had double-digit sales growth behind strong ongoing demand across our portfolio.
Consumption remains high and, importantly, we're continuing to see increases in household penetration and repeat rates among existing and new users, driven by new routines developed from the prolonged pandemic as well as strategic brand investments.
While we expect tough comparisons as we lap these very high growth rates, we'll continue to work to retain the larger base of loyal consumers we've built for our cleaning and disinfecting products even after a critical mass of the population has been vaccinated.
We're continuing to make progress on our supply expansion, including a new line of wipes plant coming online this quarter.
We're also continuing to identify new sources of supply for other products experiencing constraints, including our disinfecting spray products.
As we're able to better meet consumer demand for our base products, we're looking forward to bringing back our Clorox compostable wipes, along with a stream of exciting innovation in the coming months.
Our Professional Products business had another quarter of double-digit sales growth behind continued high demand for our cleaning and disinfecting products.
It's worth noting, though, that while demand from businesses such as healthcare facilities has remained high, we've seen softer demand from businesses negatively impacted by ongoing mobility restrictions, like commercial cleaning and foodservice institutions.
That's why we're leaning into other out-of-home spaces through strategic alliances, and are encouraged by our progress.
While not yet a meaningful contributor in Q2, our out-of-home partnerships are expanding.
We're excited to announce a new multi-year deal with the NBA, an existing partner.
Lastly, within this segment, our sales in Vitamins, Minerals and Supplements business decreased in Q2.
This is a business where results have not been consistent, and we clearly have more work to do.
As you remember, we relaunched RenewLife last fall.
While we've seen improvements in all outlet consumption, it is not yet delivering the consistent results we want.
With more than half American consumers saying they intend to continue taking vitamins and supplements, we continue to believe in the attractiveness of this category.
Now turning to Household segment.
Quarterly sales were up 20%, with growth in all three businesses for a third consecutive quarter.
Grilling sales were up double digits, driven by continued strong consumption, which reflects the dramatic rise in in-home meal occasion as people continue to spend more time at home.
Behind our strategic collaboration with retailers, we've been able to grow household penetration for a third consecutive quarter, including among millennials and low-income consumers.
As we begin planning for the next growing season, we're building on our innovation through expanded distribution of our new Kingsford pellets and bringing new flavors to our Kingsford product lineup.
With consumer spending more on their backyard and growth, we feel optimistic about the future of this business.
Cat Litter sales were up by double digits in Q2, supported by innovation and continued strong performance online.
Our Fresh Step with Gain Original Scented Litter with the power of Febreze as well as our Fresh Step Clean Paws litter continued to perform very well, and we're supporting them through a new advertising campaign.
A record number of people have become pet parents since the onset of the pandemic in 2020, making this yet another example of how our diverse portfolio is particularly suited to the times.
Glad sales increased in Q2 behind strong demands across our portfolio of trash bags, wraps and food bags as people continue to spend more time at home.
Our latest innovation, Glad ForceFlex with Clorox trash bags, launched in September and is building distribution quickly, earning positive reviews.
In our Lifestyle segment, Q2 sales were up 9%, with double-digit growth in two of three businesses.
Brita sales were up by double digits for a fourth consecutive quarter behind continued strong shipments of pitchers as well as filters.
Just as with wipes and sprays, we're continuing to work through supply chain constraints in our Brita business, which has been impacting our shares.
We feel good about the long-term prospects of this business, especially since once people buy a Brita pitcher, they tend to stay in our franchise with continued purchases of filters.
Importantly, as household penetration for Brita keeps growing, we're building brand loyalty among these consumers.
The Food business had double-digit sales increase for a third straight quarter behind ongoing strong consumption of our Hidden Valley Ranch products, particularly dry seasonings and bottled dressings.
With more and more people eating at home during the pandemic, household penetration has grown to an all-time high, including above-average growth among millennials.
We're building on this momentum with a stream of innovation, including Hidden Valley Secret Sauces and, most recently, Hidden Valley plant-based ranch dressing, which is being supported by strong advertising investments.
Burt's Bees sales decreased by double digits as the business continued to be impacted by mobility restrictions as well as changes to consumer shopping and usage habits as a result of the pandemic.
This quarter, unseasonably warm weather also impacted lip balm sales.
Despite these challenges, we're making progress in the fast-growing online channel, where the brand had double-digit growth in Q2, and we remain confident in the long-term trajectory of this business.
Q2 sales grew 23%, driven by double-digit shipment growth in all major regions.
The growth reflects about nine points of benefit from the Saudi acquisition and about four points of unfavorable foreign currency headwinds.
Organic sales grew 18%.
The recent investment we made to create a dedicated international supply chain for Clorox disinfecting wipes is starting to pay off, giving us the ability to not only meet ongoing elevated demand in existing markets, but also to expand to new countries.
This is a strategic growth platform for the company, and we're supporting it through additional advertising investments.
We hope you and your families are well.
Our sales growth for the second quarter was broad-based, resulting in double-digit growth in each reporting segment for the first half of our fiscal year.
Additionally, this led to profitable growth for the first half, which enables us to capitalize on our momentum and continue investing behind our global portfolio to strengthen our competitive advantage.
Turning to our second quarter results.
Second quarter sales were up 27%, driven by 23 points of organic volume growth, three points of favorable price/mix and one point of net benefit from acquiring majority control of our Saudi joint venture, partially offset by FX headwinds.
On an organic basis, sales grew 26%.
Gross margin for the quarter increased 130 basis points to 45.4% compared to 44.1% in the year ago quarter.
Second quarter gross margin included the benefit of strong volume growth as well as 160 basis points of cost savings and 140 basis points of favorable price/mix.
These factors were partially offset by 420 basis points of higher manufacturing and logistics costs, which, similar to last quarter, included temporary COVID-19 spending.
Second quarter gross margin results also reflect about 50 basis points of negative impact from higher commodity costs, primarily from resin.
Selling and administrative expenses as a percentage of sales came in at 14.6% compared to 14.5% in the year ago quarter.
Advertising and sales promotion investment levels as a percentage of sales came in at about 10%, where spending for our U.S. retail business coming in at about 11% of sales.
This reflects higher investments across our portfolio, strengthening our value proposition to support higher levels of household penetration and lasting brand loyalty among new and existing consumers.
Our second quarter effective tax rate was 21%, which was equal to the year ago quarter.
Net of these factors, we delivered diluted net earnings per share of $2.03 versus $1.46 in the year ago quarter, an increase of 39%.
Turning to our updated fiscal year outlook.
We now anticipate fiscal year sales to grow between 10% to 13%, reflecting the strength of our first half results and higher expectations for the back half.
With our overall demand for our products remaining quite strong, we now expect back half sales to be about flat, on top of 19% growth in the year ago period.
We also anticipate about one point of contribution from our Saudi joint venture, offset by one point of foreign exchange headwinds.
On an organic sales basis, our outlook assumes 10% to 13% growth.
We now expect fiscal year gross margin to be down slightly, reflecting higher commodity and manufacturing and logistics costs as well as temporary costs related to COVID-19.
These factors are expected to be partially offset by higher sales.
As a reminder, we expect gross margin contraction over the balance of the fiscal year, primarily from two factors: first, we are lapping very strong operating leverage from robust shipment growth during the initial phase of the pandemic; and second, we're facing commodity headwinds this year versus last year's commodity tailwinds.
As a reminder, our gross margin expanded 250 basis points in the back half of fiscal year '20.
We continue to expect fiscal year selling and administrative expenses to be about 14% of sales, reflecting ongoing aggressive investments and long-term profitable growth initiatives and incentive compensation costs, consistent with our pay-for-performance philosophy.
Additionally, we continue to anticipate fiscal year advertising spending to be about 11% of sales.
We spent about 10% in the front half of the year and continue to anticipate about 12% in the back half in support of our robust innovation program.
We continue to expect our fiscal year tax rate to be between 21% to 22%.
Net of these factors, we now expect fiscal year '21 diluted earnings per share to increase between $8.05 and $8.25 or 9% to 12% growth, reflecting strong top line performance, partially offset by a rising cost environment.
We now anticipate fiscal year diluted earnings per share outlook to include a contribution of $0.45 to $0.50 from our increased stake in our Saudi Arabia joint venture, primarily driven by a onetime noncash gain.
I'm pleased we've raised our fiscal year '21 outlook.
Of course, it's important to note, we continue to operate in a highly dynamic environment and are monitoring headwinds that could result in impacts moving forward.
In closing, I'm also pleased with our broad-based strong results in the first half, which enables us to continue investing in our brands, capabilities and new growth opportunities, all in support of our ambition to accelerate long-term profitable growth for our shareholders.
I hope you and your families are well.
It's great to be here today showing Clorox's results for the first half of our fiscal year.
My messages this quarter largely reinforce what we discussed in Q1, with the most important point being that our global portfolio of leading brands continues to play a critical role in people's everyday lives.
My first message is that our first half results are rooted in purpose-driven growth.
Our purpose as a company is to champion people to be well and thrive every single day.
And our portfolio of leading brands is the bedrock of our ability to deliver on that promise.
Our first half results reinforce the important role our brands play in addressing people's everyday needs.
We continue to see broad-based strength in our portfolio, with double-digit sales growth for most of our businesses.
Clorox disinfecting products continue to be in high demand among consumers, businesses and healthcare settings.
And as people spend more time at home, we're continuing to see strong performance in other parts of our portfolio.
Kingsford is a great example.
As Lisah mentioned, our Grilling business delivered double-digit sales growth in the quarter.
And with a recharge strategy emphasizing innovation, I'm optimistic about the long-term prospects of this business.
They understand that, more than ever, people and communities need us.
I'm so grateful for their passion and commitment.
My second message is that Clorox will stay in the driver seat, continuing our posture of 100% offense to make the most of the opportunities in front of us while navigating an ongoing dynamic environment.
There's no question, Clorox has built significant momentum over the last year, and we have every intention of extending that longer term.
Our brand portfolio is especially relevant for this environment and for the consumer trends I mentioned last quarter, which we expect to persist beyond the pandemic, prioritizing hygiene and health and wellness, caring for pets and accelerating digital behaviors related to practically every aspect of their lives.
More than ever, as home is where the heart is, it's also where consumers are directing their investments with spending across many categories to support quality of in-home experiences.
This certainly bodes well for our portfolio.
We continue to see strong levels of household penetration.
Importantly, what we mentioned last quarter about repeat rates across our portfolio is playing out.
We're accelerating purchase frequency.
And repeat users are the source of most of our sales growth across our portfolio.
In addition, our strategic investments are creating a virtuous cycle around engaging and retaining new and existing users, resulting in a consumer retention rate of nearly 90%.
As I mentioned, 100% offense will help us extend this momentum, which, as a reminder, includes: investing more across our portfolio to retain the millions of people buying our brands; expanding our public health support to more out-of-home spaces; increasing capital spending for immediate and future production capacity, including wipes expansion in international; and partnering with our retailers to grow our categories.
Given the dynamic environment we continue to face, 100% offense also means actively planning for challenges and disruptions in the near and long term, including an inflationary cost environment, elevated competition in light of category tailwinds and accelerating advancements in digital technology that we expect to impact all areas of our business.
What's important is we'll continue to make strategic choices that position us to achieve our ambition to accelerate long-term profitable growth.
And finally, my third message is this.
As we continue to address immediate priorities related to unprecedented demand, we're also accelerating our progress against our strategy to deliver long-term shareholder value.
Our IGNITE Strategy continues to put people at the center of everything we do and helps us make the most of our strategic advantage in the near and long term.
Addressing unprecedented consumer demand for much of our portfolio continues to be an immediate priority.
We continue to make progress on a number of businesses.
We're bringing in more third-party supply sources and launching our new wipes line in our Atlanta facility in the third quarter.
Importantly, simplification is our mantra, and we're seeing the benefit of focusing on fewer SKUs, which we expect to continue beyond the pandemic.
As I mentioned earlier, we're growing Clorox Disinfecting Wipes international, supported by a dedicated supply chain.
Our expansion plans are going very well, and we expect to double the number of countries where Clorox wipes are sold.
Another immediate priority is to continue supporting people's safety when they're outside their homes through strategic alliances to support public health.
We're expanding our programs with Uber Technologies and Enterprise Holdings.
We recently established a multi-year deal with the NBA and look forward to pursuing similar opportunities with other organizations.
And as the pandemic continues to take a toll in the economy, we know that far too many people feel financial pressure from unemployment and less discretionary spending.
We're mindful of the role we can play to support those who are particularly value-sensitive, and we'll continue to deliver superior value through meaningful innovation.
Importantly, we're also making progress in laying the foundation for long-term growth.
We will continue to invest strongly in our global portfolio of leading brands, particularly behind robust innovation that differentiates our products and deliver superior value.
We will continue to reimagine how we work to ensure a strong culture, with a highly engaged team that works simpler and faster on strategic priorities.
I'm proud of how we've been operating during the pandemic, including accelerating our speed to market.
And finally, as we've said before, we view ESG as a contributor to competitive advantage, which is why it's embedded in our business.
Achievements this quarter include: being included in the 2021 Bloomberg Gender-Equality Index; achieving 100% renewable electricity in the U.S. and Canada four years early; signing on to the Energy Buyer Federal Clean Energy Policy statement, which calls for a 100% clean energy power sector; and donating $1 million to Cleveland Clinic to establish the Clorox public health research grant in support of science-based public health research.
We are grateful to play a role in supporting people and communities as we continue to navigate the global pandemic.
It only strengthens our resolve in pursuing purpose-driven growth, ensuring a strategic link between our impact on the world and long-term value creation for our shareholders.
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compname posts q3 earnings per share of $0.11.
q3 earnings per share $0.11.
q3 adjusted non-gaap earnings per share $0.55.
q3 revenue $450 million.
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We will be referring to that slide deck throughout today's call, and a recording of the call will be available for replay through June 5.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; Damon Audia, Vice President and Chief Financial Officer; Patrick Watson, Vice President, Finance and Corporate Controller; Alexander Broetz, President, Widia Business segment; Franklin Cardenas, President, Infrastructure business segment; Pete Dragich, President, Industrial business segment; and Ron Port, Vice President and Chief Commercial Officer.
These risks factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
Despite the many headwinds we faced this quarter, we posted solid results.
As you recall, even before COVID-19, we were experiencing industrial downturn across all our end markets and had taken cost control actions accordingly.
Well, with the onset of COVID-19, we quickly instituted additional cost control actions during the quarter, being careful to maintain operational capability and execute our strategic initiatives, such as simplification/modernization that are fundamental to driving long-term shareholder value.
Slide two details our approach during this period of uncertainty created by the COVID-19 pandemic.
As you heard me say before, it is important to stay focused on the things we can control, and that is particularly important in a crisis environment.
First and foremost, our approach has been to protect the health and safety of our employees while continuing to serve customers as an essential business.
Early in the crisis, we instituted protocols at our facilities to ensure the safety of our workforce, including social distancing, increased cleaning protocols, self-quarantine and other preventative measures such as work from home where possible.
We also established a global task force to react quickly to the evolving challenges and share best practices and solutions in real time.
And as a result, we were able to continue to operate with minimal disruption.
The only exceptions have been when there was a government-mandated lockdown in a region where we have a customer-serving facility, such as in China and India.
As with many other manufacturers, our China operations were disrupted in the early part of Q3, but were operational before the end of the quarter.
And our Bangalore, India plant, which was closed on March 26, is reopening this week.
Continuing to operate during the crisis well positions us for the eventual recovery.
We've already learned how to operate safely in a world with COVID-19.
Our production and distribution employees are acclimated to the new protocols and ramping up production of operational plants when the markets recover will be much easier than restarting plants that have been shut down.
In addition, we've supported our customers so they can continue to operate, and that includes some customers that are on the front line of the COVID-19 battle.
In fact, we are assisting with products and solutions for some customers that are converting their manufacturing lines to critical need products like ventilator components made from high-strength aluminum.
And of course, we continue to support other medical applications for customers within general engineering.
Now given the lack of visibility into the length and depth of the COVID-19 challenge, maintaining our strong liquidity position is, of course, a key focus.
This quarter, we decreased our operating expenses by 18% year-over-year in dollar terms, maintaining our operating expense at a target of 20% despite substantially reduced sales.
This was achieved by early and aggressive cost control actions, such as furloughs in the U.S. and similar actions around the world, reduced discretionary spending and extensive travel restrictions.
These actions, along with production furloughs aligned with volume decreases and reduced variable compensation, supported our margins and helped maintain our strong liquidity position at quarter end.
This not only allows us to continue to manage through these uncertain times, but also to continue with our simplification/modernization program.
Furthermore, these types of cost control actions allow us to manage our costs while minimizing the effect on our ability to react quickly once markets recover.
Using furloughs and similar actions globally allow us to keep employees in place as much as possible.
Looking ahead, it's our expectation that Q4 will be even more challenging than Q3.
With that in mind, these kind of cost control actions will continue and may potentially need to increase depending on how long the economic environment and end markets remain depressed.
Also, in keeping with our cautious approach in this environment, we pre-emptively drew on our revolver after quarter end and now have those funds available in cash.
We took this precautionary measure to mitigate the potential increased uncertainty in capital markets due to COVID-19, consistent with our conservative philosophy to maintain our strong liquidity position.
Together, these actions help enable us to continue our simplification modernization program, which I will talk in more detail about later.
Now I'll move on to slide three to review our quarterly results.
Organic sales declined by 17% in the quarter versus 3% growth in the third quarter last year.
This is the third consecutive quarter of double-digit organic declines, which speaks to the severity of the downturn we are experiencing and weakened state of our end markets.
The energy end market continued to be challenged with a year-over-year percentage decline in the mid-20s again this quarter.
Our expectation is that it will be tested further in Q4, given the recent extreme drop in oil price and the related effect on rig counts and the sector in general.
Transportation weakened sequentially in Q3 from Q2 and posted a percentage decline year-over-year in the high teens with several auto plant closures across the globe.
General engineering and aerospace also saw year-over-year percentage declines in the high teens this quarter as well and sequential declines from Q2, with the 737 MAX production challenges continuing and lower demand expectations worldwide due to COVID-19.
Finally, earthworks was negative year-over-year this quarter, but mixed, reflecting slight improvement in seasonal U.S. construction activity and pockets of growth in mining.
By region, all posted double-digit declines this quarter and higher year-over-year declines compared to Q2.
Although Asia Pacific experienced the smallest year-over-year decline, reflecting easier comps, it was the most affected mainly in China by COVID-19 in the quarter.
By quarter end, we were seeing some signs of stabilization in China at low levels.
EMEA and the Americas were less affected by COVID-19 this quarter, but our expectation is the effect will be amplified in Q4.
Adjusted EBITDA margin decreased 80 basis points year-over-year to 18.6% on revenues that were down almost 20%.
And sequentially, the margin improved by 720 basis points on lower sales.
The year-over-year decline in margin was primarily driven by lower volume and associated under absorption.
This was partially offset by positive raw materials, which contributed 280 basis points year-over-year as well as increased simplification/modernization benefits, lower variable compensation and the previously discussed cost control actions.
Adjusted earnings per share decreased year-over-year to $0.46 versus $0.77 in the prior year quarter, but increased sequentially by $0.31.
Given the uncertainty created by COVID-19, we are withdrawing our annual outlook.
We do understand, however, the need for transparency and therefore, want to provide some color around our expectations for Q4.
Preliminary April sales were down approximately 35% year-over-year, which speaks to the severity of the market headwinds.
Now to put April in perspective within the quarter, it's important to consider that this is essentially the first month we are seeing the significant effects of COVID-19 outside of China.
Therefore, April may not reflect the full effect that we can expect to see on sales in Q4.
Considering these trends, our strong cost control actions will continue.
Additionally, we expect the effect of raw materials to remain positive in Q4, but lower than the Q3 benefit and be roughly neutral for the full year.
To help you gauge profitability, assuming the April sales decline turns out to be indicative of the full quarter, we would expect to deliver a modest adjusted operating profit despite the significant decline in sales, and would expect free cash flow to improve sequentially from Q3.
This would be driven by continued strong cost control actions as well as simplification/modernization benefits and implies decremental margins within our expected range.
However, as we discussed, the biggest source of uncertainty is the effect of COVID-19 on volume, which of course, remains to be seen.
That being said, I am confident in the actions we are taking to manage the company through this period of uncertainty and in our ability to position the company for growth when markets recover.
As I mentioned, using production furloughs and similar actions to adjust operational capacity enables us to keep employees connected so we can quickly ramp up when markets recover.
Furthermore, we are able to continue with our strategic initiatives, such as launching new products like the HARVI I TE end mill.
This is a new product for metal milling components for aircraft, automobiles and other applications in general engineering.
It sets a new performance standard by enabling machinists to use a single tool to mill many types of metals faster and more efficiently than the previous standard, which required multiple tools.
And we were honored that the product was recognized recently as a gold medal winner by the prestigious Edison Awards.
Even in the current market conditions, our sales for this product have exceeded expectations, which shows the power of innovation and the importance of continuing to focus on our strategic initiatives.
So let me take a minute to update you on our strategic simplification/modernization program.
Overall, we are pleased, having achieved an incremental $34 million savings fiscal year-to-date, and we still expect full year savings this fiscal year to be modestly higher than the $40 million achieved last year despite lower volumes.
On our last earnings call, we indicated that our expectation was that approximately 90% of the incremental capital spend associated with simplification/modernization will be complete by this fiscal year-end, and the remaining 10%, as we previously discussed, will be reserved for future volume needs.
So really, not much change in our schedule, and we remain confident in delivering our adjusted EBITDA targets once markets recover such that we can achieve sales in the range of $2.5 billion to $2.6 billion.
I will begin on slide five with a review of our operating results on both a reported and adjusted basis.
As Chris mentioned, demand trends remained soft in Q3 and deteriorated significantly at the end of March, driven by the effects of COVID-19.
Sales declined 19% year-over-year or negative 17% on an organic basis to $483 million.
Foreign currency had a negative effect of 1% and our divestiture contributed another negative 1%.
Adjusted gross profit margin of 33.3% was down 170 basis points year-over-year, though up sequentially from 26.8% in the second quarter.
The year-over-year performance was largely the result of the effect of lower volumes, partially offset by the positive effect of raw materials in the amount of approximately 280 basis points and increasing benefits from simplification/modernization.
It should be noted that we still expect the effects of raw materials to be neutral for the full year.
As Chris mentioned, adjusted operating expenses of $99 million were down 18% year-over-year and increased only 30 basis points to 20.4% on significantly lower sales.
Although much of this decrease is temporary, it is reflective of our aggressive approach to managing costs as our markets have been weakening prior to the global onset of COVID-19.
Taken together, adjusted operating margin of 12.2% was down 210 basis points year-over-year, though improved 740 basis points sequentially.
Reported earnings per share was $0.03 versus $0.82 in the prior period.
On an adjusted basis, earnings per share was $0.46 per share versus $0.77 per share in the previous year.
The main drivers of our adjusted earnings per share performance are highlighted on the bridge on Slide six.
The effect of operations this quarter amounted to negative $0.39.
This compares to negative $0.02 in the prior year period and negative $0.62 in the second quarter.
The largest factors contributing to the $0.39 was the effect of significantly lower volumes and associated under absorption.
This was partially offset by positive raw materials of $0.16 and lower variable compensation.
Simplification/modernization contributed $0.15 in the quarter, on top of the $0.11 in the prior year quarter and up from the $0.10 last quarter.
This brings our year-to-date simplification/modernization savings of $0.32.
As Chris mentioned, our expectation for this fiscal year is that these simplification/modernization benefits will be modestly higher than the $0.40 we achieved last year.
The savings from our FY 2020 restructuring actions are now expected to deliver $30 million to $35 million in run rate annualized savings by the end of FY 2020.
The slight decrease of $5 million is due to the significantly lower volume assumption in the fourth quarter.
We remain on track with our FY 2021 restructuring actions that are expected to contribute an additional $25 million to $30 million of annualized run rate savings by the end of FY 2021.
Slides seven through nine detail the performance of our segments this quarter.
Industrial sales in Q3 declined 17% organically compared to 1% growth in the prior year.
All regions posted year-over-year sales decreases with the largest decline in EMEA at negative 19%, followed by the Americas at 16% and Asia Pacific at 12%.
The decline in Asia Pacific was partially affected by the lower demand associated with the early onset of COVID-19 in China and continued lower end market demand in India.
From an end market perspective, the weakness in demand remains broad-based, with the biggest declines in transportation and general engineering, down 17% and 18%, respectively.
This was primarily driven by continued decelerating global manufacturing and auto production activity as well as the early effect of COVID-19 outside of China.
Sales in aerospace experienced a significant decline, both year-over-year and sequentially, driven by the 737 MAX production halt and corresponding effect on the supply chain as well as demand declines associated with COVID-19.
Adjusted operating margin came in at 13.1% compared to 18.3% in the prior year.
This decrease was primarily driven by the decline in volume, partially offset by increased simplification/modernization benefits and a 90 basis point benefit from raw materials.
On a sequential basis, the adjusted operating margin increased approximately 240 basis points despite lower sales.
The improvement was primarily driven by incremental simplification/modernization benefits, lower raw materials, lower variable compensation and aggressive cost control actions.
Turning to slide eight for Widia.
Sales declined 16% organically against positive 3% in the prior year period.
Widia faced similar macro challenges as the Industrial segment during the quarter.
Regionally, the largest decline this quarter was in Asia Pacific, down 25%, EMEA down 14% and the Americas down 10%.
The decline in Asia Pacific was primarily due to the continued transportation downturn in India, which is also affecting the general engineering market.
This decline was further amplified in March when India initiated its countrywide COVID-19 shutdown.
Adjusted operating margin for the quarter was 4.9%, and an increase year-over-year due to increased simplification/modernization benefits, a raw material benefit of 240 basis points and lower variable compensation, partially offset by volume declines.
Turning to Infrastructure on slide nine.
Organic sales declined 17% versus positive 6% in the prior year period.
Regionally, the largest decline was in the Americas at 21%, then Asia Pacific at 16% and EMEA at 6%.
By end market, these results were primarily driven by energy, which was down 29% year-over-year, given the extreme drop in oil prices and the corresponding significant decline in the U.S. land-only rig count.
General engineering and earthworks were down 17% and 6%, respectively.
These end markets reflected the general economic downturn.
However, there were some bright spots, such as seasonal U.S. construction in earthworks, which was up year-over-year and which has continued into early Q4.
Adjusted operating margin of 13% improved 130 basis points from the prior year margin of 11.7%.
This improvement was mainly driven by favorable raw materials that contribute 550 basis points, coupled with simplification/modernization benefits and aggressive cost actions, partially offset by significantly lower volumes.
Now turning to slide 10 to review our balance sheet and free operating cash flow.
Before I review the numbers, I would like to emphasize that we view liquidity as extremely important, particularly in such uncertain times.
Even in a normal macro environment, we operate in highly cyclical end markets and therefore, know that a strong focus on cash flows, scenario analysis and contingency planning are all part of the required skill set to navigate the uncertainty we deal with.
This has become even more important now.
Our current debt maturity profile is made up of two $300 million notes maturing in February 2022 and June 2028 as well as a USD700 million revolver that matures in June of 2023.
As of March 31, we had combined cash and revolver availability of approximately $750 million.
As Chris mentioned, in April, in an abundance of caution, we pre-emptively drew $500 million on our revolver.
This action was taken due to our conservative approach to liquidity, coupled with the unprecedented environment we are dealing with as well as an uncertainty that COVID-19 could potentially bring in the capital markets.
At quarter end, we were well within our covenants.
We have two financial covenants in our revolver, which is our net debt-to-EBITDA ratio of 3.5 times and an EBITDA to interest ratio of 3.5 times.
Primary working capital decreased both sequentially and year-over-year to $656 million.
On a percentage of sales basis, it increased to 33.4%, a reflection of the decline in sales in the quarter.
Net capital expenditures were $57 million, the same level as the prior year.
As Chris mentioned, we are pleased with the progress we have made in simplification/modernization.
Under the current demand environment, we are taking a cautious stance toward capital expenditures in the short-term while continuing to advance our simplification/modernization strategy.
We now expect capital expenditures for the fiscal year to be approximately $240 million, which is at the low end of our original outlook.
Our third quarter free operating cash flow was $2 million and represents a year-over-year decline of $37 million, reflecting lower income due to volume and increased cash restructuring costs.
We expect to deliver increased free operating cash flow in the fourth quarter compared to the third quarter, but given the current market environment, we expect free operating cash flow for the full year to be slightly negative given the $240 million of capital expenditures and cash restructuring charges.
Overall, I remain confident in the strength of our balance sheet even in the face of the current macro uncertainty.
Our strong liquidity position, coupled with our debt maturity profile and overfunded U.S. pension plan limit the significant near-term cash obligations and allow us to stay committed to our simplification/modernization initiatives.
And as Chris said, we are nearing the end of the capital investment required for this program, which will significantly lower the capital spend in FY 2021.
We remain conservative to ensure the company has ample liquidity to weather the current environment as well as continue to execute our strategy.
Dividends were approximately flat year-over-year at $17 million.
In this time of uncertainty, we reviewed our dividend program and believe that the current level is still appropriate given our strong liquidity position.
Should demand trends deteriorate more significantly than we currently anticipate, we know our dividend program, like other cash flow and cost control actions, is a lever that could be used to preserve cash and liquidity.
The full balance sheet can be found on slide 14 in the appendix.
As discussed, we are focused on managing through this crisis with an eye to strengthening the company and being prepared for the recovery.
We have a solid plan to navigate through these challenging times by aligning costs with volumes through aggressive but measured cost control actions to position us for when markets recover.
We feel good about our liquidity position and have the wherewithal to continue with our strategic initiatives like simplification/modernization to drive improved customer service and profitability with more than half of the benefits yet to be realized.
Furthermore, we are approaching the end of the incremental capex for the program, significantly lowering the overall capital spend in FY 2021.
I have confidence that we will not only navigate through this environment successfully, we will also be in a better position for improved profitability coming out of it.
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q3 sales $483 million versus refinitiv ibes estimate of $515.9 million.
q3 earnings per share $0.03.
excluding china, effect of covid-19 on q3 was minimal from a revenue standpoint.
all but one production facility is operating, and this facility is expected to reopen mid-may.
company is taking other aggressive cost-control measures to offset market headwinds.
cost cutting measures include, reductions in all discretionary spending, furloughs, extensive travel restrictions.
company is withdrawing its previously announced outlook for fiscal year 2020.
kennametal - has adequate liquidity & access to credit to meet cash flow requirements & expects to remain in compliance with relevant debt covenants.
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New factors emerge from time to time and it is simply not possible to predict all such factors.
On our call today Allan will review highlights from the first quarter, explain the basis of our confidence in the new home market, and discuss our improving expectations for fiscal 2021.
He will also describe two significant commitments we recently made as part of our ESG strategy.
I will cover our first quarter results in greater depth, and provide detailed expectations for the second quarter and full year of fiscal 2021.
I will then update our expectation for continued growth in our land position, followed by a wrap up by Allan.
With an acute focus on health and safety, we generated outstanding operational and financial results in the first quarter.
Operationally, orders were up more than 15% year-over-year, driven by a sales pace that was up more than 40%.
In fact, both orders and our sales pace reached their highest first quarter levels in more than a decade, even as we intentionally slowed sales with price increases.
We also expanded our lot supply, creating a path for future growth.
Financially, we delivered big improvements in gross margin, adjusted EBITDA and net income.
The strength in demand for new homes has exceeded our expectation over the past six months.
We have known that pent-up demand was building, based on the disconnect between demographics and strong affordability on the one hand, and anemic housing starts for most of the last decade on the other.
What we did not anticipate was, that a pandemic would be a catalyst for that demand to begin to materialize.
Many consumers are now focused on improving their living situation.
Whether their motivation is more space, better space, outdoor space or an entirely new location, demand for housing has been excellent.
The question on everyone's mind is how long will this strength last?
Well, we believe it's likely to persist for some time.
From a supply perspective, our industry has delivered far fewer homes in the last 10 years, than job growth and household formation would have predicted.
We think this cumulative deficit is conservatively well above 1 million homes, which means that a few good quarters are unlikely to exhaust the need for new homes.
So what about the durability of demand?
Well, to buy a home, perspective homeowners typically need two things, income security in the form of a job, and homes for sale that they can afford.
With vaccines at hand, we are optimistic that economic and job growth may resume as soon as this spring.
In that case the concern about the durability of demand may be better seen as a question about affordability.
Affordability ultimately boils down to mortgage rates and home prices, however the Fed is on record is supporting low rates for an extended period, we know we have to work hard to keep home prices within the reach of most buyers, and that is exactly why our positioning is so important.
We believe we're in the right markets, with the best job growth.
We're targeting the largest buyer segments baby boomers and millennials, and we focus on delivering exceptional value at an affordable price, not competing primarily on price.
Ultimately this positioning gives us confidence that our pivot toward growth will allow us to fully participate in a strong housing market over the next several years.
As we enter this springs' selling season we have an unusually high degree of visibility and therefore confidence in our likely full-year results.
That's because the dollar value of our backlog is up nearly 60% compared to last year.
So today, we are increasing our expectations for each of the objectives we outlined for fiscal 2021.
Dave will provide more precise figures in his comments, but we now expect higher earnings and increased land activity this year, while exceeding earlier debt repayment objectives.
In summary, we're going to make significant progress on our balanced growth strategy, which is designed to grow profitability faster than assets and revenue from a more efficient and less leveraged balance sheet.
Although ESG is receiving increased attention, it isn't something new at Beazer.
We have been addressing all three facets of ESG for years, because we see it as fundamental to fulfilling our purpose statement which we've included on Slide 7.
Today, I'd like to draw your attention to the significant commitment we announced in our most recent proxy statement, that will result in a reduction in greenhouse gas emissions.
In short, we have committed that by the end of 2025, every home we build will be Net Zero Energy Ready.
In numeric terms, it means all of our homes will achieve a Home Energy Rating System or HERS rating of 45 or less, which is an energy conservation standard that is far beyond most existing Building and Energy codes.
At this level our homes will generate as much energy as they consume by attaching a properly sized alternative energy system.
Underscoring this commitment, we're a proud builder partner of the Department of Energy's Zero Energy Ready Homes Program and we're the first national production builder to commit to building 100% of our homes in accordance with the program.
Improving energy efficiency is so important that we've made it a part of our long-term compensation plans as well.
Before turning the call back over to Dave, I want to talk about one more aspect of our ESG strategy, namely our commitment to social responsibility.
We have a long-standing relationship with Fisher House Foundation, an organization that build homes where military and veteran families can stay free of charge, while a loved one is in the hospital.
Our work with Fisher House has had a profound impact on our employees, our customers and our partners and that's caused us to want to do more.
To fund this ambition, last year we started a title insurance agency called Charity Title, that will donate 100% of its profits to charity.
By creating an innovative, dedicated funding source for our philanthropic efforts, we expect to be able to expand both our contribution levels and the number of organizations we can support.
We encourage you to review the ESG materials contained in our proxy statement in 2020 annual report, which are available in the Investor Relations section of our website.
Looking at the first quarter compared to the prior year, new home orders increased 15% to 1,442, despite a lower community count.
Sales pace was up over 40% to 3.5 sales per community per month.
Homebuilding revenue increased about 2% to $424 million on flat closings.
Our gross margin, excluding amortized interest, impairments and abandonments was 22.1%, up approximately 230 basis points.
SG&A was down approximately 60 basis points as a percentage of total revenue to 12.7% driven by controlling overhead expenses.
This led to adjusted EBITDA of $43.6 million in the quarter, up nearly 50% and exceeding 10% of revenue.
Total GAAP interest expense was down about 3%.
Our tax expense for the quarter was about $4.1 million, for an effective tax rate of 25.5%.
As a reminder, on a cash basis, our deferred tax assets offsets substantially all of our tax expense.
Taken together, this led to $12 million of net income from continuing operations or $0.40 per share, up over 3 times versus the same period last year.
Looking at the second quarter, we expect the following versus the prior year.
New home orders should be down slightly.
While we expect sales pace to be up, we do not expect it to fully offset our reduced community count, as we focus on increasing margin and returns.
Closings are likely to be up 10% to 15%.
There are couple of factors impacting our expectation for closings next quarter.
First, given the strength in demand, we have fewer spec homes to sell and close this quarter.
And second, we are balancing cycle time pressures with our commitment to delivering an exceptional customer experience.
Our ASP is expected to be approximately $390,000.
We note that the change in our ASP isn't reflective of our pricing power or margin opportunity, as we are constantly adjusting features and product mix to retain affordability.
In fact, this quarter we had two segments with lower ASPs and substantially higher margins.
As we described last quarter, increases in lumber prices in September and October would create a modest headwind on gross margin for the second quarter.
Despite this, we expect gross margin to be up slightly versus the same quarter last year.
SG&A as a percentage of total revenue should be down at least 50 basis points, reflecting the benefit from top-line leverage.
We expect EBITDA to be up more than 20%.
Interest amortized as a percentage of homebuilding revenue should be in the low 4s.
Our tax rate is expected to be about 25%, and combined, this should drive net income and earnings per share up more than 60%.
At the start of our fiscal year we provide our expectation for our full-year results.
Given our first quarter performance, as well as our positive outlook, we are now able to increase each of those expectations.
First, we previously expected EBITDA to be up slightly versus the prior year.
We now expect EBITDA to grow at a double-digit rate to over $220million, much faster than the growth in assets or revenue.
This improvement is largely driven by increased profitability, as we expect gross margin to be up at least 50 basis points versus the prior year in the second half of fiscal 2021.
Second we targeted double-digit earnings-per-share growth on our last call.
At the low end this would have represented earnings per share of less than $2 per share.
We now expect earnings per share of at least $2.50.
And finally, we committed to reduce debt by more than $50 million last quarter.
We now intend for that to be closer to $75 million.
We expect to end fiscal 2021 with a book value per share in excess of $22.
Our expected level of profitability, our return on average equity for the full year should be approximately 12%, and if you exclude our deferred tax assets, which don't generate profits, our ROE should be over 17%.
During the quarter, we spent $110 million on land acquisition and development and ended with nearly $500 million of liquidity, up more than $200 million versus the prior year.
We expect land spending to accelerate in the remaining quarters of 2021, ultimately exceeding the $600 million we initially anticipated, funded by our cash from this liquidity and cash from operations.
On Slide 12, we depict our expectations for near-term community count, which we still anticipate will likely trough in the 120s later this year.
We expect community count growth will be evident in fiscal 2022, as we benefit from our increased land spending.
Last quarter we said 2021 would be an important inflection here as we allocated more capital to growth and expanded our use of options.
The initial results of this effort were evident in the first quarter as we grew our active lots by about 8% to over 18,000, and importantly, we control 42% of our active lots through options at quarter end, a 7 point sequential increase.
Given our current pipeline of deals, we expect to continue to grow our land position as we move through the remainder of the year.
The first quarter of fiscal 2021 was very productive for Beazer, as we increased our sales pace, grew our backlog and improved both gross margins and SG&A, while expanding our lot position in a highly efficient manner.
Even better, we expect this operational momentum to persist through the fiscal year in the new home market, characterized by healthy demand and constrained supply.
In November, we described fiscal 2021 as an inflection year, where we expected to modestly improve profitability, while investing for future growth.
In fact it is shaping up to be much more than that, allowing us to raise our expectations for profitability investment and debt reduction, ultimately one should demonstrate our opportunity to improve shareholder returns from our balanced growth and ESG strategies.
I'm confident that we have the people, the strategy and the resources to create durable value over the coming years.
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board reinstates quarterly dividend, increases payout to $0.15 per share.
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Today's call will be led by Chief Executive Officer, Doug Dietrich and Chief Financial Officer, Matt Garth.
And I'll also point out the Safe Harbor disclaimer on this slide.
Statements related to future performance by members of our team are subject to these limitations, cautionary remarks and conditions.
We appreciate you taking the time to join today's call and I hope you are all staying safe and healthy.
Let me outline a brief agenda for the call.
I'll begin by taking you through our third quarter highlights, including improving trends in our sales results, strengthened operational and financial profile, and progress made on the business development front.
First, I want to comment on the 8-K we filed this week related to a ransomware attack we recently experienced which impacted access to some of our company's IT systems.
We have procedures and protocols in place for situations like this.
Immediately after detecting the incident, we implemented our comprehensive cyber security response plan, including taking steps to isolate and carefully restore our network to resume normal operations as quickly as possible.
We've notified law enforcement and have been working with industry-leading cyber security experts to conduct a thorough investigation.
Throughout this situation, we operated our facilities safely and met our customer commitments.
Before going through the third quarter review, I'd like to note that I'm very pleased with how our global team and businesses have performed in what continues to be a complex and challenging environment.
We remain focused on managing our company with an unwavering commitment to keeping our employees safe, operating our plants efficiently and serving our customers with value-added products.
Dedication, engagement and resilience of our employees has been nothing short of exemplary during these times.
Let me take you through how our third quarter unfolded.
As we previewed in July, we anticipated that demand conditions in our end markets would improve with the second quarter having the most acute impacts from COVID-19, and that's largely how the quarter played out as we were prepared to respond to the volume recovery, which led to sequential sales growth in nearly all of our product lines.
Overall, we had a solid quarter from an operational and commercial standpoint.
These results reflect our team's disciplined execution related to cost control, pricing and productivity, which resulted in higher sequential and year-over-year operating margins.
We also demonstrate how our strong product portfolio and end market mix has enabled us to capture opportunities with existing and new customers.
From a financial perspective, total sales in the quarter were $388 million, an increase of about 9% sequentially, but still at lower levels compared to last year.
As we indicated on our last call, our July sales were trending upwards and demand conditions in several markets continued to strengthen throughout the rest of the quarter.
We generated $52 million of operating income and earnings per share were $0.92.
In addition, we delivered $54 million in cash from operations, continuing our solid cash generation profile.
After experiencing volatile conditions in our businesses that serve industrial-related end markets through the second quarter, we saw considerable demand improvements in the third quarter, one with continued strength in our consumer-oriented product lines.
Let me touch on some of the highlights.
Metalcasting business continued to rebound as our foundry customers in North America ramped up production to meet the demand increase in the automotive sector.
At the end of the third quarter, our Metalcasting facilities were operating at about 95% of last year's levels, a noticeable improvement from the reduced levels seen earlier.
In addition, penetration of our pre-blended products remains on a strong growth trajectory in China as sales increased 20% over last year and this momentum should continue moving forward.
Sales in our portfolio of consumer products which includes Pet Care, Personal Care, and Edible Oil Purification remained resilient, led by an 11% year-over-year growth in Pet Care.
We continue to strengthen our robust private label Pet Care portfolio in North America and Europe and have expanded our presence through partnerships with several new customers.
Another area to highlight is our global PCC business which benefited from satellite restarts in India and North America, combined with an improved demand environment from the low levels in the second quarter.
As we indicated on our last call, July volumes were trending approximately 15% higher compared to June, and these dynamics continued through the third quarter.
Of note, Paper PCC sales in China continue to deliver a solid performance with 18% growth over last year.
In addition, Specialty PCC sales increased sequentially as automotive and construction demand strengthened through the quarter and food and pharmaceutical applications remained at strong levels.
Other pockets of strength came in our Talc and GCC business as demand improved for our products used in residential and commercial construction, as well as automotive applications.
And in our Refractories business, we see steel utilization rates increased in the U.S. from a low of 50% in the second quarter to 65% at the end of September.
While many of our businesses returned to a positive trajectory, we've had some challenges in our project-oriented businesses, such as Environmental Products, Building Materials and Energy Services, which are still experiencing volatility in order patterns and timing delays.
Energy Services was further impacted by several hurricanes that occurred in the Gulf of Mexico during the quarter.
As our volumes began to trend upward through the quarter, we were able to leverage these sales into income, resulting in overall operating and EBITDA margin improvement on both a sequential and year-over-year basis.
We've maintained our focus on operational efficiency, including variable cost adjustments and structural overhead savings, as well as on continued pricing increases, capturing favorable raw material costs and increasing sales of higher-value products.
As markets continue to recover, we are well-positioned to expand margins further on increased volumes.
Our focus on strengthening our financial position also remains a priority with an emphasis on tightly controlling our cash generation cycle and creating more flexibility around our capital structure.
We delivered another quarter of strong cash flow generation, the majority of which was used to pay down debt.
While navigating through the current environment, we've remain focused on advancing our growth initiatives and made further progress this quarter on several fronts.
Let me go through some of these highlights in more detail.
The commissioning of two new PCC satellites scheduled for the fourth quarter continue to move ahead, currently ramping up production at our 45,000 ton facility in India, our 150,000 ton satellite in China should be operational by December.
We will also be resuming production in November at our previously closed satellite in Wickliffe, Kentucky to support Phoenix Paper's restart of that mill.
During the quarter, we made a small acquisition of a hauling and mining company to further strengthen our vertically integrated position at our bentonite mines in Wyoming.
This transaction improves our cost position and enhances our flexibility with our mining and/or transportation in the region.
In our Refractories business, we signed two new five-year contracts to supply our refractory and metallurgical wire products in the U.S. These contracts total approximately $50 million or about $10 million of incremental revenue on an annual basis.
Our new product development efforts are progressing well as we look to accelerate the pace of commercialization and drive new revenue opportunities.
We commercialized 36 value-added products so far in 2020 with contributions from each of our businesses.
12 of these products were introduced in the third quarter.
We kept at a similar pace to last year, while conducting many of these product development activities virtually.
All in all, there are a number of positives about our performance in the quarter, especially, how we've executed as a company, while navigating through difficult conditions.
There are still some challenges ahead.
With strong momentum across many of our businesses and with an enhanced cost profile, we expect to continue to deliver improved profitability as volumes recover.
I'll now review our third quarter results, the performance of our four segments, as well as our cash flow and liquidity positions.
Now, let's get into the review of the third quarter results.
Third quarter sales were $388.3 million, 9% higher sequentially and 14% below the prior year.
Gross margin, EBITDA margin and operating margin all improved sequentially and versus the prior year, driven by our continued pricing and productivity actions.
SG&A expense was flat with the second quarter, and also contributed to the margin expansion.
Earnings per share, excluding special items was $0.92 and we incurred special charges of $3.2 million after-tax in the third quarter or $0.09 per share.
Our effective tax rate for the quarter was 19.8% versus 19.1% in the prior year and 16% in the prior quarter.
Going forward, we expect our effective tax rate to be approximately 20%.
Now, let's review the changes in sales and operating income in more detail.
On this slide, we are presenting the year-over-year comparisons of sales and operating income on the left side, and the sequential quarter comparisons on the right side.
Third quarter sales were 13% lower than the prior year on a constant currency basis.
Slowdown in economic activity brought on by the COVID-19 pandemic continue to impact our volumes on a year-over-year basis in the quarter.
The operating income bridge on the bottom left shows we were able to significantly offset the impact of lower sales versus the prior year, the favorable pricing and cost performance driven by the actions we have taken after the last year.
These actions resulted in higher operating margin versus the prior year despite the lower volume.
On a sequential basis, we saw significant improvement in demand with sales up 7% adjusting for currency and up 9% overall.
Conditions improved across most of our end markets and we maintained pricing levels across the company.
On our last call, we told you that sales rates in July were trending approximately 5% higher than June, and this trend accelerated through the rest of the third quarter.
Daily sales rates in August were 6% higher than July and September was 7% higher than August.
Operating income increased 18% sequentially on a constant currency basis, primarily due to the improvement in our end markets and continued cost control.
Operating margin was 13.3% in the quarter versus 13.2% in the prior year, and 11.8% in the second quarter.
Now, let's take a closer look at the operating margins and how they have improved on the next slide.
On this slide, we are showing year-over-year and sequential operating margin bridges for the third quarter.
Starting with the prior year comparison, our pricing and cost actions contributed 190 basis points of improvement, which more than offset the unfavorable volume impact.
On a sequential basis, we leveraged additional volume into 60 basis points of margin improvement and our continued cost control contributed another 70 basis points of favorability.
The actions we have taken on pricing, productivity, cost control and new product development have positioned us well to leverage incremental volumes into improved margins going forward.
Another margin related highlight for the third quarter was that EBITDA margin improved by 70 basis points versus both the prior year and the prior quarter.
Now, let's turn to the segment review, starting with Performance Materials.
Performance Materials sales increased 10% sequentially and were 8% lower than the prior year.
Metalcasting sales grew 26% sequentially as foundry production improved in North America and demand remained strong in China.
The improvement in North America was primarily driven by the ramp up of automotive production.
China Metalcasting sales grew 11% sequentially and 20% versus the prior year on continued strong demand from our customers and continued penetration of our specially formulated blended products.
Household, Personal Care and Specialty Product sales remained resilient, up 7% sequentially and flat with the prior year on continued strong demand for consumer-oriented products.
Meanwhile, Environmental Products and Building Materials continued to experience COVID-19-related project delays, and sales remained below prior year levels.
Operating income for the segment was $28.2 million, up 34% sequentially and up 5% versus the prior year.
Operating margin was 14.8% of sales, up 270 basis points from the second quarter and up 180 basis points from the prior year.
Continued pricing actions, strong cost control and expense reductions, more than offset the operating income impact of lower sales versus the prior year.
The chart on the bottom right shows daily sales rates by month this year compared to the prior year.
This segment experienced a clear rebound in demand and sales increased steadily throughout the third quarter.
We would normally expect a seasonal decrease in sales for this segment between the third and fourth quarters, driven by our construction and environmental end markets.
However, this year, we expect to offset the typical seasonality with continued positive momentum in our other markets.
Overall, we expect fourth quarter sales to be similar to the third quarter, despite the typical seasonal effects.
I'd also like to note that we experienced higher mining and energy costs, while operating in colder months, and this will temporarily impact segment margins in the fourth quarter.
Now let's move to Specialty Minerals.
Specialty Minerals sales were $125.1 million in the third quarter, up 14% sequentially and 13% below the prior year.
PCC sales increased 14% sequentially as paper mill capacity came back online in the U.S. and India, following temporary COVID-19-related shutdowns.
Paper PCC sales in China grew 11% sequentially, and 18% over the prior year on continued penetration and strong customer demand.
Specialty PCC sales increased 16% sequentially as automotive and construction demand improved through the quarter and consumer-oriented products remained strong.
Processed Minerals sales increased 13% as end market steadily improved through the quarter.
Operating income excluding special items was $18 million, up 18% sequentially and 17% below the prior year and represented 14.4% of sales, which compared to 13.9% in the second quarter and 15.2% in the prior year.
The impact of lower volume versus the prior year was partially offset by continued pricing actions and cost control.
Daily sales rates charged for this segment also shows improving conditions through the third quarter and we expect this trend to continue into the fourth quarter as paper production in the U.S., Europe and India continues to ramp up.
In addition, we are bringing online new capacity in the next several months and most of this capacity will come online late in the fourth quarter.
The sequential improvement in Paper PCC will offset the typical seasonality we experience in the residential construction markets served by the other path lines [Phonetic].
Overall, for the segment, we expect fourth quarter sales to be similar to the third quarter.
Now let's turn to Refractories.
Refractories segment sales were $59.3 million in the third quarter, up 6% sequentially as steel mill utilization rates gradually improved from second quarter levels in both North America and Europe.
Segment operating income was $7.3 million, up 24% from the prior quarter and represented 12.3% of sales.
Again, you can see improvement in the daily sales rates through the third quarter.
We expect continued improvement in the fourth quarter as steel utilization rates improve and laser equipment sales pickup.
And, overall, for the segment, we expect a modest sequential improvement in sales in the fourth quarter versus the third quarter.
Now let's turn to Energy Services.
Energy Services segment experienced significant customer project delays in the third quarter.
These delays were related to COVID-19 restrictions, as well as several weather-related shutdowns in the Gulf of Mexico and what has been a very active storm season.
As a result, sales were $13.3 million and operating income was breakeven for the third quarter.
The daily sales rates chart shows the solid start to the year, followed by sales levels that have remained low relative to the prior year.
We continue to see a strong pipeline of activity and we expect sequential improvement for this business in the fourth quarter.
Now, let's turn to our cash flow and liquidity highlights.
As Doug noted, third quarter cash from operations totaled $54 million and free cash flow was $40 million.
We continued our balanced approach in deploying cash flow, paying down $30 million of debt and we resumed our share repurchases acquiring $3 million of shares in the quarter.
We continue to repurchase shares in October and completed the expiring program with $50 million of shares under the $75 million authorization.
As noted earlier, the Board of Directors has approved a new one-year $75 million repurchase program.
Our net leverage ratio is 2.1 times EBITDA and we have $682 million of liquidity including over $375 million of cash on hand.
And before I hand it back over to Doug for the market outlook, I'd like to summarize my comments on what we are expecting for the fourth quarter in each of our segments.
In our Minerals businesses, we expect continued improvement and many of our markets to offset the typical seasonality, and we expect sales to be similar to the third quarter.
Margins will remain strong on a year-over-year basis, though, sequentially, margins will be impacted by seasonally higher mining and energy costs.
In our Services business, we expect continued gradual improvement in Refractories as utilization rates improve and we expect sequential improvement in Energy Services as delayed projects resume and activity levels pick up.
Overall, we expect MTI sales in the fourth quarter to be similar to the third quarter.
Before beginning the Q&A portion of the call, I wanted to take some time to provide a little more insight into the conditions across each of our businesses and where we see opportunities to drive incremental growth.
The improving market trends experienced across most of our businesses will likely extend through the rest of the year, while our project-oriented businesses may continue to face persistent challenges with uncertain customer order patterns.
In addition, as we build on the momentum from the third quarter, we're also executing on a wide range of attractive growth projects which will accrue to revenue in 2021.
Let me now take you through what's happening by business segment, starting with Performance Materials, our largest and most diverse segment.
Our Household and Personal Care product line will continue on its strong sales trajectory as demand for these products stays high and we leverage our expanded channels and presence with new customers.
Specifically, we're growing our portfolio of premium Pet Care products in both North America and Europe with the expansion of new online retail channels with larger customers, and the introduction of new products such as our 100% carbon-neutral Eco Care product in Europe, an example of how we're satisfying customer preferences, while also contributing to our sustainability efforts.
In addition, sales of our Edible Oil Purification products have more than doubled since last year as we grow this business through an expanded global customer base.
In our Metalcasting business, we expect to continue to benefit from the automotive demand rebound in North America.
Noted earlier, we expanded our customer base in China through the continued penetration of our higher value blended products, which led to sales growth of 20% over last year.
Our solid growth trend there will continue for the rest of the year and into 2021.
I'll touch on Environmental Products and Building Materials together as they are both experiencing similar dynamics.
While each maintains a robust and active pipeline and continues to introduce more specialized products, these businesses have been impacted by timing delays around when customers will commence larger remediation and water proofing projects.
Switching to the Specialty Minerals segment where I'll begin with Paper PCC.
With paper demand in North America and Europe gradually improving, we expect sequential volume growth in all regions in the fourth quarter.
Asia and, China more specifically, will continue its solid growth trajectory.
We'll also benefit from the ramp up of our satellite in India, and our new satellite in China should be operational in December.
On the horizon, we have two new facilities coming online in the first half of 2021, one for a packaging application in Europe, and another for a standard PCC facility in India.
Overall, we're bringing online 285,000 tons of new PCC capacity over the next three quarters.
We also maintain a very active business development pipeline across our broad portfolio of PCC technologies, including high filler, packaging and recycling.
Each of these opportunities could add to our overall volume total next year.
In our Specialty PCC, GCC and Talc businesses, sales for our pharmaceutical and consumer products, including food applications will remain strong.
Demand for our high-performance sealant and plastic products that are used for automotive applications should strengthen as build rates continue to improve in North America and Europe.
And sales for products used in residential and commercial construction applications should stay steady.
For the Refractories segment, current steel utilization rates in North America and Europe are around 70% and 65%, respectively, and we expect these rates to gradually improve in the upcoming quarters.
In addition, our order book for laser measurement equipment remains strong in the fourth quarter.
As I mentioned earlier, we've recently signed two five-year contracts totaling $50 million to supply our broad portfolio of refractory and metallurgical wire products, which will start to accrue to revenue growth in 2021.
Finishing up the discussion with Energy Services, where we maintain an active pipeline of offshore services, while COVID-19 and adverse weather conditions have led to some early demobilizations or postponements from our larger offshore projects, some of these projects have been rescheduled to resume in the fourth quarter.
In addition, we've recently been awarded new large projects in the Gulf of Mexico, which we expect to commence over the next few quarters.
We're focused on navigating through a highly dynamic environment and our culture of continuous improvement positions us to do so.
Over the past six months, we've been successfully implementing virtual tools to help improve productivity, efficiency and connectivity with our employees and customers.
And I've been impressed with how quickly we've adapted to the changing environment.
These tools have enabled us to run our business smoothly as we connect seamlessly with our operating facilities for meetings and site visits, conduct problem solving Kaizen events and collaborate and communicate efficiently with our global customer base.
Many of these new ways that we're operating on, on a daily basis will become permanent and we'll balance them with in-person activities.
As we look ahead into 2021, I'm confident in the direction we're heading, the solid foundation we have in place to leverage improved market conditions and the growth projects we have in hand.
While COVID-related uncertainties still persist, our end market conditions continue to show signs of improvement.
With the operational actions we've taken, we are well-positioned to drive improved profitability.
In addition, strength and flexibility of our balance sheet provides solid resources to support both organic and inorganic growth opportunities.
With that, let's open the call to questions.
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compname reports second quarter 2021 earnings of $1.23 per share, or $1.29 per share excluding special items, a record quarter for the company.
q2 sales $456 million versus refinitiv ibes estimate of $458.7 million.
q2 earnings per share $1.29 excluding items.
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