Prompt:
Human: I'm Chris Miorin, Vice President of Investor Relations, and joining me is Vicente Reynal, President and Chief Executive Officer; and Vik Kini, Chief Financial Officer.
Both are available on the Investor Relations section of our website, www.
In addition, a replay of this conference call will be available later today.
In addition, in today's remarks, we will refer to certain non-GAAP financial measures.
For today's Q&A session, we ask each caller keep to one question and one follow-up to allow time for other participants.
And as you can see on Slide 3, anchoring to our purpose, we're realizing the achievement of our desired targets.
You will hear three key themes today: First, we're effectively allocating capital to advance our portfolio transformation to generate significant value for our shareholders; second, you will hear about how we are outperforming and raising guidance, which illustrates our organic investments in new product development and demand generation are also working; and third, we will touch on our ESG journey.
I have never been more excited about the state of Ingersoll Rand.
The combination of a highly engaged workforce who think and act like owners, and the use of IRX is what makes us highly unique.
We continue to support our employees with an unwavering focus on health, safety and mental well-being.
Moving to Slide 4.
Our five strategic imperatives are how we stay grounded on priorities and areas of focus.
You will see on the right-hand side, during Q2, we have achieved substantial traction in all five imperatives.
Within our operate sustainably strategic imperative, we achieved another major milestone that I'll touch on the next slide.
Moving to Slide 5.
A couple of weeks ago, we published our 2020 sustainability report.
The report reflects our 2020 ESG data, celebrates our progress and details our further goals with a high focus on measurable targets and accountability.
We'll spend more time on this next Friday, during our scheduled ESG and sustainability report investor update.
What I want to emphasize right now is the team's strong bias for action over the last year, as you can see on this page.
We have focus and deliver on diversity within our Board and extended leadership team, which is now 50% and 43%, respectively.
We have launched aggressive 2030 and 2050 goals and improve our new product development process to address these goals.
We expanded a stockholder rights through corporate governance changes.
And one of the things I am most proud of on behalf of our employees is granting $150 million in equity to our employees, which we believe is the largest employee equity grant ever provided by an industrial company.
We see broad-based employee ownership as a game changer.
We know underrepresented populations increase our earnings on wealth if they're employed in organizations that offer equity grants.
And that's a powerful aspect of our thinking and acting like an owner that even ties into how directly impact global ESG efforts.
And I look forward to sharing more with you next week.
Moving to Slide 6.
The signing of definitive agreements to acquire Seepex and Maximus Solutions, both of which will become part of the Precision and Science Technologies segment, a representative of the key characteristics we're targeting to drive our inorganic growth strategy.
Seepex is, by our estimation, the #2 global progressive cavity pump manufacturer, and it is a highly recognized brand as a premium player in the market that adds a new positive displacement pump technology to our portfolio.
Maximus Solutions is a leader, player in the agritech software and controls market.
With technology, we intend to pull through to other markets and leverage across the Ingersoll Rand portfolio.
Both of these companies have shown strong high single-digit to double-digit organic growth since at least lease 2017, and our focus on sustainable end markets that tend to grow well above GDP rates.
In addition, both have strong aftermarket profiles enhanced by digital revenue streams, including software as a service.
We anticipate both acquisitions to yield single-digit post-synergy adjusted EBITDA purchase multiples by year three of ownership.
With these two acquisitions, we're expecting to add approximately $3.8 billion to PST addressable market, which is an impressive 40% expansion.
The profiles and characteristics of this high-quality, high return on capital and highly strategic acquisitions are indicative of how we're structuring our M&A funnel, which leads us to Slide 7.
We continue to execute our M&A funnel using IRX at its backbone.
Our funnel is comprised of six stages and its probability-weighted according to likelihood of closing when we calculate our funnel size.
For instance, Seepex has been in our funnel for some time.
And it was not until the owner became actively engaged, and we were in active negotiation that it was moved from 0% weighted revenue contribution to 50% and then 100% assigning.
And now it is out of our funnel calculation.
Last quarter, we described how our M&A funnel has grown materially since the Ingersoll Rand Gardner Denver transaction was completed.
At its current state, the funnel size remains approximately 5 times the size it was versus Q2 of 2020, with average revenue larger and velocity accelerating minutely.
And to be clear, this describes the funnel even after removing the 32 targets we passed on in the second quarter as well as our signed deals of Seepex and Maximus, and it also excludes SPX Flow.
As you can see, we have significant momentum in the funnel but our flywheel is in full motion.
Our $85 per share offer was pre-emptive, and fully accounted for SPX Flow's Investor Day plan, which is ahead of consensus estimates.
In terms of SPX Flow's strategic alternative presence, if we participate, we intend to remain disciplined in our approach as we do with all of our M&A transactions, and there can be no assurances that we will confirm our pre-emptive offer as part of any such process.
It is important -- it is very important also to note that when we received the second rejection from SPX Flow more than a month ago, we pivoted to executing on other funnel opportunities.
We have always demonstrated a very decisive and highly disciplined approach with everything we do.
And we believe it is much more important now in this current environment.
As stated, even with SPX Flow excluded, our funnel remains as robust as it did last quarter, which exemplifies the volume and quality of our future potential opportunities.
And we have sufficient cash on hand to execute on these opportunities with $4.7 billion in liquidity.
However, as noted, we intend to remain very disciplined in this environment.
It is also important to know that we continue to review our capital allocation priorities with our Board and plan to communicate more formally on this topic later in the year.
Moving to Slide 8.
We continue to be pleased with the performance of the company in Q2.
Q2 saw a strong balance of commercial and operational execution fueled by the use of IRX with continued performance across industrial end markets.
Total company orders and revenue increased year-over-year 48% and 25%, respectively, with strong double-digit organic orders growth across each segment.
And we are very pleased with the momentum we are seeing as organic orders in Q2 were up 9% and 6% on a quarter-to-date and year-to-date basis, respectively, as compared to 2019.
Our organic growth on both orders and revenue in the quarter were records for the company, eclipsing Q1 and setting us up well as we move into Q3.
Our commitment to delivering $300 million in cost synergies attributable to the Ingersoll Rand Industrial segment acquisition remains intact as we continue to drive performance on productivity and synergy initiatives using IRX as the catalyst.
The company delivered second quarter adjusted EBITDA of $292 million, a year-over-year improvement of $75 million and adjusted EBITDA margin of 22.8%, a 160 basis point improvement year-over-year.
We will not report on either segment moving forward.
Free cash flow for the quarter was $136 million, yielding total liquidity of $4.7 billion at quarter end, up approximately $2 billion from Q1 as we received the gross proceeds from both divestitures in Q2.
This takes our net leverage to 0.2 times, a 1.7 times improvement from Q1.
Turning to Slide 9.
For the total company, orders increased 40% and revenue increased 19%, both on an FX-adjusted basis.
The IT&S and P&ST segments both saw strong double-digit organic orders growth in the quarter.
Overall, we posted a strong book-to-bill of 1.14 for the quarter, an improvement from the prior year level of 0.96.
We remain encouraged by the strength of our backlog moving into Q3 and beyond.
The company delivered $292 million of adjusted EBITDA, which was an increase of 34% versus prior year.
And the IT&S and P&ST segments both saw year-over-year improvements in adjusted EBITDA and strong margin expansion.
Finally, corporate costs came in at $38 million for the quarter, up year-over-year, primarily due to higher incentive compensation costs as well as targeted commercial growth investments in areas like demand generation and other targeted strategic investments.
We expect corporate costs to remain elevated at comparable levels in both Q3 and Q4 due to the same drivers.
Turning to Slide 10.
Free cash flow for the quarter was $136 million on a continuing ops basis, driven by the strong operational performance across the business and ongoing prudent working capital management.
capex during the quarter totaled $12 million and free cash flow included $12 million of outflows related to the transaction.
In addition, free cash flow also included $36 million in cash tax payments related to the historical earnings profile of the HPS and SVT segments.
As is customary in these types of divestitures, cash tax payments are included in flows from continuing operations due to the complexities involved in specific attribution with consolidated returns.
However, the $36 million represents our best quantification of the impact.
From a leverage perspective, we finished at 0.2 times, which is a 1.7 times improvement as compared to prior quarter, and this included the gross cash proceeds received from both the HPS and SVT divestitures.
We expect to pay the cash taxes for both divestitures later in 2021, and if you were to pro forma the Q2 leverage to account for these tax outflows, leverage would have been closer to 0.6 times.
On the right side of the page, you can see the breakdown of total company liquidity, which now stands at $4.7 billion based on approximately $3.7 billion of cash and nearly $1 billion of availability on our revolving credit facility.
We have considerable balance sheet flexibility to continue our portfolio transformation strategy with M&A coupled with targeted internal investments to drive sustainable organic growth.
Moving to Slide 11.
We continue to see strong momentum on our cost synergy delivery efforts.
Due to the funnel we have built that stands in excess of $350 million and strong execution, we are reaffirming our stated $300 million cost savings target.
To date, approximately $250 million of annualized synergies have already been executed or are in motion, which is slightly higher than 80% of the overall target.
As a reminder and consistent with previous guidance, we delivered approximately 40% of our $300 million target in 2020, which equaled approximately $115 million of savings.
In addition, we expect to deliver an incremental $100 million of savings in 2021, which would bring the cumulative total to approximately 70% at the end of this year.
We expect a cumulative 85% to 90% up to $300 million in savings by the end of 2022 with the balance coming in 2023.
The bottom of the page shows the progress we've made across the different areas of synergy delivery, with the most notable progress coming from direct material initiatives in procurement as well as I2V.
In addition, we're starting to see some of the initial wave of savings from our footprint actions, and we expect these savings to ramp into 2022.
On the right side of the page, we did want to highlight that despite the headwinds we have seen on the cost side, largely coming from direct material and logistics as well as some of the expected return of onetime and discretionary costs and strategic growth investments, we do continue to expect to be positive from a price versus cost perspective on a total year basis.
This is entirely due to the team's use of IRX to proactively implement and deploy targeted pricing actions in the first half of the year.
In addition, we continue to evaluate the overall landscape, particularly with regards to inflation, and are evaluating potential incremental pricing actions for the second half of the year.
Overall, we expect to achieve further adjusted EBITDA margin expansion for the total company in the second half of the year, although not at the same levels we delivered in the first half.
And moving to Slide 12.
Starting with Industrial Technologies and Services.
Overall, organic orders were up 41% and revenue up 17%, leading to a book-to-bill of 1.15.
In addition, the team delivered strong adjusted EBITDA of 41% and adjusted EBITDA margin of 24.7%, up 250 basis points year-over-year, with incremental margin of 34%.
Let me provide more detail on the order performance.
Starting with compressors, we saw orders up in the mid-40%.
A further breakdown into oil-free and oil-lubricated products shows that orders for both were up above 40%.
From a regional split for orders on compressors, in the Americas, North America performed strong at up low 40%, while Latin America was up in the mid-70%.
Mainland Europe was up low 50%, while India, Middle East, saw continued strong recovery with order rates up in excess of 100%.
Asia Pacific continues to perform well with orders up low 30% driven by low 30% growth in both China and high 20% across the rest of Asia Pacific.
From a vacuum and blower perspective, orders were up in mid-40s, on a global basis with strong double-digit growth across each of our regions.
In power tools and lifting, the total business was up high 50% in orders and so continued positive growth driven mainly by our enhanced e-commerce capabilities and improve execution on new product launches.
On the right-hand side, we're highlighting one of our new exciting products, which is a result of our continued commitment to organic investments in our portfolio.
In this case, during Q2, we completed the launch of our new line of refrigerated drive portfolio.
That's a bit of a background.
The basic function of the air dryer is to remove moisture from the air by cooling it with a refrigerant.
Does the water vapor is condensed and the air can be easily compressed.
The result is dry compressed air, which can be used in compressed air equipment without causing any damage.
Air dryer technology is sold as an accessory to all rotary oil-lubricated and oil-free air compression technology.
So it is a great adjacent technology that increases the total quality of air provided to the customer.
This is a very important requirement, especially in oil-free compression where customers demand high air quality in terms of dryness and particulate.
It is also good to note that it is a great aftermarket generator as the filters or desiccant need to be changed often.
In this case, we leverage a technology developed at [Indecipherable], which was accompanied owned by legacy Ingersoll Rand.
Since the merger of Gardner Denver and IR, not only we have accelerated our organic investments in new products [Indecipherable], but we're now leveraging the technology in order to serve Gardner Denver, Ingersoll Rand and in the future, even our champion compressor customers.
The even more exciting piece here is that we're doing this while helping the environment.
This new driver portfolio is 20% more energy-efficient and reduces greenhouse gas emissions by over 50%.
Moving to Slide 13 and the Precision and Science Technology segment, overall, organic orders were up 20% driven by, i.e., the Medical and Dosatron businesses, which serve lab, life science, water and animal health markets.
These businesses were up double digits.
And we also saw strong performance in our ARO and Milton Roy product lines.
The momentum in our Haskel Hydrogen Solution business continues to build, and we saw some strong funnel activity.
Revenue was up 12% (sic) [13%] organically, which is encouraging, as we have some tough comps due to COVID-related orders and revenue in Q2 2020 for the Medical business.
Additionally, the PST team delivered strong adjusted EBITDA of $71 million, which was up 20%.
Adjusted EBITDA margin was 30.7%, up 40 basis points year-over-year, with incremental margins of 33%.
Today, we want to highlight our hydrogen refueling business to give you an update on where we are and investments we're making.
As we have discussed before during our Q4 earnings call, we made investments in developing a hydrogen dispensing unit leveraging our Haskel high-pressure technology, and we're now ready to capture the growth in this business.
We have line of sight to about $45 million in organic investments over the next five years to both build out our capacity and fund ongoing product development in the hydrogen refueling space, with approximately $10 million of this investment expected in the next 12 months.
Since our last call, we have seen our funnel grow 3 times to over $250 million in potential projects.
And we still feel confident that this is a business where we will see meaningful growth for years to come, driving our decision to expand two of our factories in Europe to support anticipated growth.
In addition, we want to highlight that Ingersoll Rand is designing and developing a state-of-the-art hydrogen refueling stations to support the power and remote joint venture.
Moving to Slide 14.
Given the comp performance in Q2 and continued strong outlook, we're increasing guidance for 2021.
Our guidance excludes both the High Pressure Solutions and the Specialty Vehicle Technology segments as well as the pending acquisition of Seepex and Maximus.
Our prior revenue guidance was up low double digits on a reported basis, comprised of high single-digit organic growth across both of our segments.
And we're now open guiding up to be mid-teens in total with low double-digit organic growth across both segments.
This reflects approximately 250 to 300 basis point growth in organic growth for the total company as compared to prior guidance.
FX is expected to continue to be a low single-digit tailwind, and based on these revenue assumptions, we're increasing 2021 adjusted EBITDA guidance to $1.15 billion to $1.18 billion, which represents approximately a $30 million improvement from power guidance at the midpoint of the range.
We also highlight that these also includes the increased corporate cost of approximately $6 million per quarter for both Q3 and Q4 as compared to prior guidance, as mentioned on the right-hand side of the slide.
In terms of cash generation, we expect free cash flow to adjusted net income conversion to remain greater than or equal to 100%.
capex is expected to be approximately 1.5% of revenue.
And finally, we expect our adjusted tax rate for the year to be approximately 20%, and this does include a $35 million benefit due to a tax restructuring plan that was recently completed, that is reflected approximately 40% in the Q2 rate with the balance in the second half of the year.
Moving now to Slide 15.
As we wrap today's call, Ingersoll Rand brand is in an outstanding place.
2021 is poised to be a great year.
We take our role as sustainably minded industry leader seriously, and our employees eagerly embrace IRX to put us in that leadership position.
I am confident we will continue to transform Ingersoll Rand and deliver increased value to all of our shareholders.
 Assistant:

Chosen response:
raising fy 2021 adjusted ebitda guidance to $1.15 billion to $1.18 billion.
sees full-year 2021 revenue growth expectation to mid teens.


Prompt:
Human: All such statements should be evaluated together with the safe harbor disclosures and the risks and other uncertainties that affect our business, including those discussed in our Form 10-K and other SEC filings.
Actual results may vary materially from the assumptions presented today.
These results exclude certain non-operating and non-recurring items, including, but not limited to, asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
All adjustments in the quarter and expected for the full year 2021 are detailed in the reconciliations in the appendix.
Before we begin, I'd like to provide a brief overview of our first quarter GAAP results compared to prior year.
Q1 revenue increased 5.3% to $698 million.
Segment operating income increased 52.5% to $119 million, and reported earnings per share increased 4.2% to $0.99.
I continue to be extremely proud of the way our teams have responded to the crisis.
Your hard work is the reason why ITT has been able to effectively serve our customers throughout the pandemic.
Earlier this week, I spoke to our colleagues in India.
Before we discuss our quarterly results, let's spend a minute recapping how we got where we are today.
This is important as it sets the foundation on which Q1 results are based.
The health of our people has been our top priority from day 1.
Early in the pandemic, we implemented Ready, Safe, Go across ITT.
This allowed us to safely and effectively serve and support our customers faster than our competitors.
We further strengthened our balance sheet through smart cash management.
Today, we have nearly $1.5 billion of liquidity at our disposal.
Moody's recognized our cash performance with an upgrade to our credit rating in the third quarter.
Early on, we executed a plan to significantly lower our fixed costs.
This resulted in structural reductions in 2020 of nearly $65 million.
Our productivity and cost actions helped to offset the impact of materially lower volumes in 2020.
Today, we continue to drive footprint optimization and sourcing excellence at both Industrial Process and Connect and Control Technologies, while remaining diligent on cost controls.
This has resulted in a step-up in profitability above 2019 levels.
All the actions taken over the past year, combined with ITTers collective commitment and grit, have positioned us well to win in the recovery.
We will continue to invest in innovation and growth, including important green projects to become a more sustainable ITT.
We are aggressively and diligently pursuing acquisitions in our core markets to put our cash to work effectively and build on our strong businesses.
I am invigorated by the progress across our businesses and the momentum, which is accelerating.
Now moving to Q1.
We delivered a strong quarter and an encouraging start to 2021.
Let's get into it.
ITT's first quarter sales were higher than 2019.
Organic sales in Motion Technologies were up 17% after 10% organic sales growth in the fourth quarter of 2020.
The new auto platforms that we won and Friction's ability to deliver for our customers drove 1,500 basis points of outperformance versus global auto production.
And we secured positions on 9 new platforms with EV content during the quarter, 8 of which are in China, the largest automotive market in the world.
This is building on the 42 EV platforms wins in 2020.
Connectors grew sales in all regions, and orders were up 20% organically with strength primarily in the distribution channel.
This is encouraging for Connect and Control Technologies heading into Q2.
From a profitability perspective, ITT generated adjusted segment operating income growth of 27% and margin expansion of 300 basis points on 2% organic sales growth.
Incremental margin was above 70% for the quarter.
IP's margin was nearly 16%, driven by net productivity as we continue to drive supply chain improvements and better manufacturing performance.
This follows a 15%-plus margin performance in Q4 of 2020.
As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of $1.06, a sequential and year-over-year increase.
Even more telling is the fact that earnings per share was $0.15 above the first quarter of 2019.
Free cash flow was up 70%, representing a margin of nearly 16%.
On capital deployment, we repurchased ITT shares totaling $50 million early in Q1, executing on our repurchase plan and achieving half of our full year plan of $100 million.
As a result of our strong Q1 performance and our confidence in ITT's ability to outperform, we are raising our outlook for 2021 across all facets of our guidance.
On organic sales, we now anticipate growth of 5% to 7%, a 300 basis point increase on both the low and high end of our original guidance.
This is driven by continued share gains in Motion Technologies amid the broader auto market recovery, stronger growth in Connectors and demand in the Industrial Process short cycle.
On adjusted earnings per share, the increased sales volume and the strong productivity expected in 2021, combined with the carryover impact of our 2020 cost actions, will generate earnings per share in the range of $3.80 to $4 at the high end, which equates to 19% to 25% growth versus prior year.
This is a $0.30 improvement at the midpoint from our prior guidance and puts ITT on pace to surpass 2019 EPS.
From a top line perspective, Motion Technologies delivered a solid performance driven by strong auto growth and continued share gains in our 3 main regions.
Our Friction OE business grew nearly 30% organically with impressive 42% growth in North America.
We drove high single-digit organic growth in Connectors, mainly through distribution.
Together with Ryan Flynn, our CCT President, in April, I visited our U.S. distributors and sales representative in the Northeast and on the West Coast to work on our ongoing initiatives.
We saw clearly that we have many opportunities to grow this business from a product and customer service standpoint.
And while some of the Q1 growth may have been due to pent-up demand, especially in North America, our dedicated teams continue to work on the optimal commercial actions to gain market share.
Our focus on operational excellence produced 280 basis points of net productivity in Q1.
These included $50 million of savings from our 2020 cost actions.
Industrial Process grew margin 450 basis points to 15.8% despite a 12% organic sales decline.
And Motion Technologies expanded margin nearly 300 basis points to 20.6%.
This included triple-digit margin expansion at both KONI and Wolverine.
This quarter, I was fortunate to visit our world-class Friction plant in Barge, Italy.
I saw firsthand the continuous improvement in plant productivity.
Our team there has improved its processes to increase machine utilization and to respond more quickly to ever-changing order patterns from customers impacted by supply chain challenges.
The strong MT and IP performances offset Connect and Control Technologies' margin decline driven by the pandemic's impact on aerospace.
Rising raw material costs partially offset the strong productivity.
The impact was 100 basis points this quarter, substantially higher than what we were expecting.
We believe this trend will continue to affect our results for the remainder of 2021.
Emmanuel will speak further about this in a moment.
We continue to reinvest in our businesses to drive future organic growth.
We are funding the most promising growth initiatives in key markets, including EVs, to ensure we keep winning in the marketplace.
When I was in Barge, I also saw the expansion of our state-of-the-art Friction R&D center, including the testing and fast prototyping capabilities, which will be powered by solar panels later this year.
This smart growth investment drove roughly 50 basis point impact this quarter.
Rounding out the story of the quarter with free cash flow, we saw a substantial improvement in Q1.
This was mainly driven by higher operating income generation in the segment and slightly lower capex.
Our plan for the year still assumes approximately $100 million of capex, an increase of over 50% relative to 2020.
In summary, ITTers around the world delivered a strong performance.
We drove positive organic growth at an incremental margin of over 70%.
We generated nearly 300 basis points of productivity and invested in ITT's future.
We repurchased ITT shares worth $50 million and raised our dividend 30%, the ninth consecutive dividend increase.
And we surpassed 2019 first quarter results in revenue, segment margin, earnings per share and free cash flow.
Let me begin with Motion Technologies.
Q1 organic revenue growth of 17% was primarily driven by strength in auto.
Our strong momentum from last year carried forward as Q1 grew 5% sequentially over Q4 2020.
Friction OE grew 29% organically, and we outperformed global auto production by 1,500 basis points.
Segment margin expanded 280 basis points versus prior year and 110 basis points versus Q4 2020.
This was mainly due to higher volumes and productivity benefits, partially offset by higher commodity costs.
We are very pleased with the performance at KONI and Wolverine.
Both delivered triple-digit margin expansion from operational efficiencies and higher volumes, and we continue to see more room to grow these margins.
For Industrial Process, revenue was down 12% organically, driven by short-cycle declines, primarily in oil and gas and chemical markets.
However, we continue to see steady sequential progress in short-cycle orders with 9% sequential growth from Q4 and a strong book-to-bill of 1.1.
We continue to see healthy customer quoting activity, especially in the Middle East and North America.
In fact, we have seen sequential strength versus the lower Q4 bookings.
However, this quarter, we saw sales and order declines as large project spend continues to be slow.
IP margin expanded 450 basis points to a segment record of 15.8%.
This represents $6 million of operating income growth on $25 million of lower sales.
Margin expansion was driven mainly by productivity benefits, including our global sourcing performance, significant cost actions taken in 2020 and favorable nonrecurring items, which collectively more than offset the decline in volume.
As an example of our progress in IP, when we visited our Seneca Falls site last month, we were really pleased to see the strategies deployed by the manufacturing and engineering teams to reduce machining bottlenecks and accelerate output.
We continue to drive further footprint optimization.
And this quarter, we announced a third consolidation project in IP.
Lastly, in Connect and Control Technologies, we generated sustained orders progress.
Our Connector business was up 20% versus prior year and up 3% sequentially, driven by continued North American distribution strength.
As expected, sales in aerospace continued to be weak on lower OE production and commercial passenger traffic.
We expect that aero demand will remain low in Q2, but will begin to pick up in the second half of 2021.
CCT margin decline was the result of lower volumes, partially offset by the benefits of our aggressive cost structure reset in 2020.
As Luca mentioned, we are seeing early signs of performance improvement in CCT as we deploy MT's operational excellence playbook from shop floor productivity and improved on-time delivery to customer intimacy.
And we delivered a much improved 29% decremental margin in Q1.
As a reminder, for both our CCT and IP businesses, the impact of the COVID-19 pandemic was minimal until early Q2 2020.
We expect favorable compares to peak in Q2.
Just a few additional comments on earnings per share for the quarter.
In addition to lower corporate costs, we also saw a benefit from both the CARES Act and foreign currency.
Partially offsetting the share count benefit was a roughly $0.01 headwind from a higher-than-planned effective tax rate of 22%.
Our end markets are continuing to show signs of recovery.
Global auto production is increasing, albeit constrained by the global semiconductor shortage causing inventory levels to remain relatively low.
We expect that demand will continue to be strong in the next few quarters, especially in North America and Europe despite headwinds related to supply chain challenges and rising raw material costs.
Weekly run rates in our short-cycle businesses, primarily in Industrial Process and Connectors, showed encouraging signs of recovery in Q1, and April orders are in line with expectations.
We believe that there is some pent-up demand from 2020 that has carried over into 2021.
Given our Q1 performance and momentum in certain end markets, our outlook is more favorable than we anticipated in February.
We expect that Connectors growth as well as the stronger growth in Friction stemming from continued share gains in auto will be partially offset by declines in pump project activity and commercial aerospace.
Our assumption is that commercial aerospace may begin to recover in the second half of the year as passenger air traffic continues to increase.
We are not anticipating a recovery in oil and gas in 2021, consistent with our initial outlook.
The increase in adjusted segment margin expansion by 40 basis points across our range reflects our expectations for higher volumes and continued productivity generation in addition to the stronger-than-planned margin expansion from Q1.
We expect this will be partially offset by inflation and higher raw material costs, driven by steel, copper and to a lesser extent, tin.
As you will see on Slide 7, our revised guidance assumes the incremental impact from this global trend will be $0.25 to $0.30 for the remainder of 2021.
However, we remain optimistic in our team's ability to continue to mitigate this impact through strategic pricing and demand generation.
We will continue to monitor this closely throughout the year.
Our revised earnings per share guide reflects a $0.30 improvement at the midpoint of our range to $3.90, which would put us $0.09 above 2019.
Some other items to note.
Given the strengthening of the U.S. dollar, the foreign currency benefit contemplated in our guidance is less than originally planned.
Our 4-year effective tax rate is now expected to be approximately 22%.
This will likely be partially offset by a slightly higher benefit from share repurchases given the execution in Q1.
Our guidance also continues to assume a reduction of approximately 1% in our 4-year weighted average share count.
We are raising our free cash flow guidance by $25 million at the midpoint to reflect the impact of higher operating income, and we now expect free cash flow margin of 11% to 12%.
Our higher growth outlook will require further working capital investment.
However, we expect working capital to continuously decline as a percent of sales during the year and over the long term.
On Slide 7, let's look at the components of our revised 2021 adjusted earnings per share guidance.
As you can see, the majority of our earnings growth will be generated by stronger volumes and net productivity, partially offset by the incremental headwinds from rising raw material costs and our continued investment for growth.
The deltas in the second quarter will likely look incredibly strong given the pandemic impact in Q2 of 2020.
Organic sales growth is expected to be above 20%, driven by MT's strong performance and an easy 2020 compare.
This will be partially impacted by the global semiconductor chip shortage.
The other segments are each expected to grow mid-single digits with anticipated strength in IP's short cycle.
Our outlook for CCT has improved, given the strong organic sales and orders growth in Connectors in Q1.
The margin expansion is expected to be several hundred basis points, driven by MT and to a lesser extent, CCT.
From a total ITT perspective, adjusted segment margin should be equal or slightly above second quarter of 2019 of 16.1%, which we believe is a more representative comparison.
The combined impact of higher sales and strong productivity will drive significant adjusted earnings-per-share growth.
On a dollar basis, we expect Q2 will be slightly below the second quarter of 2019, and the second half of the year may look very similar to 2019.
As a reminder, Q4 of 2020 was especially strong, therefore, we will have a tough comparison in the fourth quarter.
With that, let me pass it back to Luca for closing remarks.
I am very pleased with ITT's results in the first quarter.
We see signs of a recovery in our end market, and our people continue to differentiate ITT from the competition.
We are leveraging and building upon the cost actions we executed in 2020 to drive solid incremental margins as sales volumes increase.
And we are investing our capital effectively.
As we said before, Friction continues to win in the marketplace and will be the springboard for growth in 2021.
This performance should continue throughout the year, notwithstanding some of the macro headwinds related to supply chain and rising raw material costs that we will need to manage effectively.
From an operational standpoint, we made further progress in our transformations at both Industrial Process and Connect and Control Technologies.
I'm encouraged by what I saw during my visits over the past few months and what I heard in my conversations with employees, customers and shareholders about the strength of ITT.
We also appreciate the partnership with our distributors and sales reps, working as a team with ITT to deliver these results.
We are laser-focused on growing ITT through acquisitions while funding high-return growth investments, and the momentum is accelerating.
Our financial health is as strong as ever, and this will allow ITT to effectively deploy our capital on all fronts.
We continue to deliver on our commitments, and Q1 has positioned us to surpass 2019.
With that, Stephanie, please open the line for Q&A.
 Assistant:

Chosen response:
q1 adjusted earnings per share $1.06.
q1 earnings per share $0.99.
qtrly organic revenue up 2%.
now expect revenue growth of 8% to 10%, or up 5% to 7% on an organic basis for 2021.
sees adjusted earnings per share of $3.80 to $4.00 per share for 2021.


Prompt:
Human: Today's call will cover ITT's financial results for the three months period ending July 3, announced yesterday evening.
These statements are not guarantees of future performance or events and are based on management's current expectations.
Actual results may vary materially, due to, among other items, the factors described in our 2020 Annual Report, on Form 10-K and other recent SEC filings.
These adjusted results exclude certain non-operating and non-recurring items, including but not limited to asbestos-related charges, restructuring, asset impairment, acquisition-related items and certain tax items.
Before we begin, I'll provide a brief overview of our second quarter GAAP results.
Revenue increased 34% to $692 million.
Segment operating income increased 206% [Phonetic] to $114 million, which equates to segment operating margin of 16.5%.
Reported earnings per share decreased 15% to $0.45, driven primarily by a $28 million after-tax loss on the divestiture of InTelCo Management LLC, formerly a wholly owned subsidiary that holds legacy asbestos liabilities and related insurance assets, as well as prior-year income tax benefits, and increased corporate and environmental costs.
We are all focused on ensuring ITT delivers on its commitments hour after hour, while taking care of each other, our families, and our customers.
This has been a pivotal quarter for ITT.
On July 1, we divested a subsidiary that holds all of our legacy asbestos liabilities to a portfolio company of Warburg Pincus.
Importantly, ITT is indemnified from any further responsibility for all pending and future legacy asbestos claims.
This transaction follows the successful transfer of our U.S. pension liability in October 2020 and will allow us to focus more on growing the core business organically and through acquisitions.
We are now beginning the next chapter in ITT's history.
On the operational front, over the past few months, I've had the privilege of meeting our teams in person at our sites in Italy, California, the Netherlands, and the Northeast.
I continue to be encouraged by the progress we are making, by the opportunities that remain, and by the commitment and the passion I see from our workforce.
Before reviewing our results, let me talk a little bit about ITT's sustainability efforts.
In the coming weeks, we will be releasing our 2021 Sustainability Report Supplement, which will show our commitment to environmental, social, and governance initiatives.
It is clear that while we have made significant progress in 2020 despite the impact of the pandemic, there is still more that we can do.
Our employees' efforts during the pandemic to take care of each other and our customers have strengthened our resolve to continuously improve our ESG practices and this is what we will do.
Some of our accomplishments, which you can soon read about it in the supplement, include a 25% reduction in greenhouse gas emissions and a 25% reduction in workplace incidents.
Further, we maintained an A rating for our ESG profile, as measured by MSCI, a recognized leader in global ESG assessment.
Now, let's review our results for the second quarter, beginning with sales.
Friction continued to outperform global auto production growth.
In fact, the outperformance we drove this quarter was significantly above our historical average.
The auto businesses in MT grew organic revenue nearly 80% and MT's revenue exceeded pre-COVID levels from 2019 once again this quarter.
More importantly, we continue to win key awards in both conventional vehicles and our new electric vehicle platforms, which will fuel future outperformance.
This quarter we were awarded content on 10 new electric vehicle platforms, seven of which were in China and two on key strategic platforms in the growing North American market.
We also continue to differentiate ourselves from the competition.
In July, Friction's outer ceramic brake pads sold in the aftermarket were ranked the highest among five competitors according to ADAC, Europe's largest motoring association based in Germany.
This is a testament to the supplier excellence and innovation of the Friction team.
Let's get back to the quarter.
Building on the first quarter momentum, our connectors business in Connect and Control Technologies grew sales by 17% organically, after 8% organic in Q1.
We saw continued strength in the North American distribution channel; and sequentially, industrial connectors in Q2 grew 6% versus Q1, due to distribution strength worldwide.
We also drove 8% organic revenue growth in Industrial Process, driven by strong pump project deliveries, which were up 52% organically in the quarter due to strength in the chemical and oil and gas markets.
We achieved this by remaining focused on serving our customers and ensuring we commission their projects on time, despite significant supply chain disruptions.
Turning to orders, I'm energized by the growth our commercial teams generated this quarter across all three segments.
In total, we drove 47% organic orders growth across ITT with order levels surpassing 2019, positioning us well for the second half of the year and for 2022.
First, Motion Technologies grew orders by 76% organically, driven mainly by auto, and we also saw a strong performance in valve [Phonetic], which grew over 20% organically.
Second, in Industrial Process, orders were up 18% organically and up 7% sequentially, driven by continued recovery in our short-cycle business, where orders grew 24% across parts, valves and service.
Our pump project orders were relatively flat year-over-year.
However, we are increasingly confident that project activity in the funnel is strengthening and we expect to successfully leverage this momentum in the second half.
Finally, in CCT, orders were up 47% organically, driven largely by industrial connectors and aerospace components.
As we mentioned last quarter, we saw some positive signs in commercial aerospace, which we expect it will start to pick up in Q2, and we are seeing the momentum in orders today.
From a profitability perspective, despite increasing pressure from commodity costs and supply chain disruptions, we delivered nearly 400 basis points of adjusted segment margin expansion, with triple-digit margin expansion in each segment.
This was a result of the incredible growth in volumes, I mentioned earlier, and the team's ability to generate productivity, net of inflation, while successfully navigating challenging market conditions.
This was aided in part by the actions we took in 2020 to reduce our structural costs.
As a result of the revenue growth and margin expansion, ITT delivered adjusted earnings per share of $0.94, growing 65% and surpassing our pre-COVID adjusted earnings per share levels in Q2 2019.
Given the strong first-half performance and our confidence in ITT's ability to outperform, we are again raising our outlook for 2021.
We now anticipate organic revenue growth will be 8% to 10% for the year, a 300 basis point increase on both the low- and high-end of our already increased guidance from the first quarter.
These will be driven by the strength in Friction, and short-cycle orders growth in both IP and CCT.
The increased sales volume and strong productivity expected in 2021 will generate adjusted earnings per share in the range of $3.90 to $4.05 at the high end, which equates to 22% to 27% growth versus prior year.
This is an $0.08 improvement at the midpoint, after a $0.30 increase after the first quarter, and this puts ITT on pace to comfortably surpass 2018 adjusted earnings per share despite significant inflationary pressure.
From a top line perspective, Motion Technologies delivered a solid performance, driven by strong growth in the OE business and continued share gains despite the global chip shortage and supply chain disruptions.
Our Friction and Wolverine OE businesses grew over 60% organically.
As I always do, this quarter, I traveled to a number of our facilities, including our world-class friction plant in Barge, Italy.
Here, I saw the teams' engineering expertise on full display, which will enable us to continue winning an outsized share of global EV platforms.
Our continued investment in automation in all our plants and hour-by-hour management allows us to continuously meet customer demand, despite constantly changing production schedules; and we continue to invest in and develop new technologies to address the needs of a new and more environmentally friendly automotive braking system.
In CCT, we drove nearly 19% organic revenue growth in industrial connectors, mainly through distribution, continuing the momentum we saw in the first quarter.
Demand in commercial aerospace is increasing, exhibited by the nearly 70% growth in aerospace orders.
The book to bill in CCT was an impressive 1.18 for the quarter, which positions us well for the future.
Now, moving to operating margins.
Our focus on operational excellence produced 250 basis points of expansion in Q2 at the ITT level and 390 basis points at the segment level.
By segment, MT grew margin 660 basis points, Connect and Control 230 basis points with an incremental margin of 37%, and Industrial Process grew margin 100 basis points to nearly 15% once again.
The strong performance was a combination of higher sales volume, commercial actions and productivity, offset by raw material inflation and unfavorable mix, given the growth in pump projects and continued investments for growth, which are critical to sustain ITT's outperformance.
Regarding raw materials' inflation, the impact this quarter was approximately 240 basis points, which was higher than what we expected.
And while we are deploying pricing actions with our customers, based on current prices for material purchases for the remainder of 2021, we expect this phenomenon will have a significant impact in the second half.
Free cash flow for the quarter was impacted by the sale of our legacy asbestos liabilities.
Excluding this one-time non-recurring item, adjusted free cash flow was $131 million.
The decline compared to prior year was the result of higher operating income generation in the segments that was more than offset by strategic investments in working capital to support growing customer demand.
Wrapping up, our ITTans [Phonetic] around the world delivered another outstanding performance in Q2.
Organic growth was strong across all three segments and we converted to higher sales at good margins.
We generated over 400 basis points of productivity while investing for future growth and successfully navigated challenging market conditions; and our nearly 50% organic growth in orders position ITT for a strong second half.
Motion Technologies' Q2 organic revenue growth of 64% was primarily driven by strength in auto.
As you know, the second quarter of last year was down significantly, due to the pandemic.
However, Friction continued to outperform global auto production by a very wide margin.
And from an operating standpoint, our OE business performed very well, with 99%-plus on-time performance.
This was a key reason MT's revenue eclipsed pre-COVID levels in the second quarter of 2019 by 8%.
The strong orders growth in MT, this quarter, was a combination of both auto and valve, where we continue to gain share.
Segment margin expanded 660 basis points versus prior year to 18.8%, mainly due to higher volumes and productivity, offset by the impact of higher raw material costs for steel, tin, and copper.
As we indicated last year, MT's margins declined sequentially in the second quarter, given the increasing commodities pressure.
However, MT delivered almost 30% incremental margin, in spite of these headwinds.
Wolverine sales growth was over 60%, driven by OE shims in North America and Europe, and in sealings, while KONI grew by double digits organically.
Margins in Wolverine, KONI and Axtone were all double digits in the quarter.
For Industrial Process, revenue was up 8% organically.
This was driven partially by an easy prior-year comparison, stemming from steep declines in project shipments, which resulted in over 50% revenue growth this quarter.
We also saw minor short-cycle declines, driven by lower service sales and flat growth in baseline pumps, due to the materials' shortage.
As we have indicated, given the order trends we see across IP, we continue to expect the short-cycle businesses to accelerate in the second half.
From an end market perspective, growth was spread across general industrial, oil and gas, and chemical markets.
IP grew 18% organically and 7% sequentially, due to the short cycle; namely, parts, valves and service.
Our daily order rates continue to be strong into the third quarter.
Orders in all product categories, except baseline pumps, were above 2019 levels, and the month of June was our largest month of project orders since 2015.
We believe this positions us well for the remainder of 2021.
IP's margin expanded 100 basis points to 14.7%, with an incremental margin of 24%.
This was partially impacted by unfavorable mix, given the higher proportion of project versus short-cycle sales.
We expect the mix to improve from here as short cycle continues to recover.
Lastly, in Connect and Control Technologies, we continued to turn the corner with incremental margins of 37% this quarter.
This was the result of continued volume leverage and strong productivity, despite inflationary headwinds and continued declines in commercial aerospace, while OE production continues to improve our largest aerospace customers and managing through elevated inventory levels on key platforms which will delay a significant recovery in aero components demand until 2022.
Similar to the rest of ITT, orders growth was incredibly strong, driven by our connector business, with continued North American distribution strength and growth in aerospace OE and aftermarket.
The book to bill was largely above 1 and backlog was up 16% compared to year-end 2020, which again position us well heading into 2022.
Before we move on, just a few additional comments on earnings per share for the quarter.
As you can see on the Q2 adjusted earnings per share walk on Slide 11, the year-over-year comparisons were negatively impacted by prior-year benefits, related to environmental, temporary cost actions, and CARES Act credits.
Partially offsetting these items was a roughly $0.03 benefit from foreign currency, consistent with our outlook, and a roughly $0.01 benefit from a lower-than-planned effective tax rate of 21.5%.
On July 1, ITT divested 100% of its equity of a subsidiary that holds legacy asbestos liabilities and related insurance assets to Delticus, a portfolio company of Warburg Pincus.
At closing, ITT contributed $398 million in cash and Delticus contributed $60 million in cash to InTelCo.
As a result of the transaction, ITT removed all asbestos obligations, related insurance assets, and associated deferred tax assets from our consolidated balance sheet as of the second quarter.
The benefits of this transaction include the indemnification for all legacy asbestos liabilities and stronger free cash flow generation in the absence of asbestos-related payments that we previously estimated at $20 million to $30 million per year on average over the next 10 years, prior to the divestiture.
Additionally, the transaction freeze up management time and resources to focus more on growing the core business and executing other more strategic initiatives, including ESG and M&A.
Coupled with our successful U.S. pension plans transfer executed in October 2020, we are well positioned to grow with a flexible balance sheet and without the risks and uncertainty of managing these legacy liabilities.
As we saw in Friction's results, global auto production is increasing, albeit constrained by the global semiconductor shortage which is causing inventory levels to remain low.
And while we expect demand will remain strong throughout 2021, the impact of higher raw material prices will weigh on margins and adjusted earnings per share during the second half.
The growth we're seeing in IP orders is mainly in short cycle.
On projects, however, we continue to expect the large project spend, particularly in oil and gas, will not fully recover until 2022.
In the meantime, we're seeing continued momentum in weekly run rates in our short-cycle businesses in Industrial Process and connectors, which we believe will drive organic revenue growth to a new range of 8% to 10% for the year.
Our assumption regarding commercial aerospace is that a substantial recovery will not occur until early 2022, given the level of inventory at our largest OE customers.
However, we see encouraging signs in orders, as production levels continue to increase.
Our outlook for adjusted segment margin remains at approximately 17.1% at the midpoint.
We expect a pronounced impact from raw material inflation, mainly in Motion Technologies.
However, our teams are driving commercial actions and additional productivity to minimize the impact.
We're planning for raw materials to remain at these elevated levels throughout 2021.
As you will see on Slide 7, our revised guidance assuming the incremental impact from this trend will be $0.09 at the high-end for the remainder of 2021.
Our revised adjusted earnings per share guidance reflects an $0.08 improvement at the midpoint of our range, eclipsing 2019 levels and our previous high end.
The net impact of all other items is roughly $0.01 benefit to full-year adjusted EPS, including a slightly lower-than-planned effective tax rate.
Foreign currency and other items will be a minor benefit, compared to our previous guidance.
And we continue to expect a 1% reduction in the weighted average share count, given our share repurchases to date.
Additionally, we are raising our adjusted free cash flow guidance by $5 million at the low- and high-ends of our previous range to reflect the higher operating income generated in the first half, offset by further working capital investments to support future growth, especially given the supply chain disruptions we are experiencing today.
In summary, we are again raising our outlook for 2021 across sales, earnings and free cash flow.
And with this raise, we now expect to eclipse 2019 levels in terms of adjusted segment margin and adjusted earnings per share.
As you can see, the majority of the improvement in adjusted earnings per share is operational in nature.
The higher volumes will likely be partially offset by incremental headwinds from rising raw material costs, which we have already discussed; the remaining changes to our outlook are rather immaterial.
From an end market perspective, the trends we saw in the second quarter have remained largely consistent throughout July.
Auto and the short cycle businesses in IP continue to perform well and CCT remains comfortably on path to recovery from both a sales and margin perspective.
On the other hand, our outlook reflects increased commodity pressure and we do not see any near-term improvements related to the supply chain.
Organic sales growth is expected to be in the mid-teens range, driven by growth across the portfolio and led by MP's strong performance.
IP and CCT should both improve to approximately high-single-digit organic growth, driven by short cycle.
Segment margin should be approximately flat sequentially to Q2 and above prior year, even with the significant raw material headwinds we anticipate primarily in MT. This negative impact on MT's margin will largely be offset by margin improvements in CCT, followed by Industrial Process.
Despite the margin challenges in Q3, we still expect all three businesses to be up over 100 basis points for the full year, which will eclipse ITT's segment margin for 2019.
The combined impact of higher sales and strong productivity will drive adjusted earnings-per-share growth in the low- to mid-teens.
With that, let me pass it back to Luca for closing remarks.
ITT continues to execute on its strategic priorities to position the company for long-term success.
The actions we took to eliminate our legacy asbestos liabilities will allow our teams to drive better growth in the core and up our game in capital deployment.
We are now even more laser-focused on growing ITT organically and through acquisitions while funding high-return growth investments, given our capital flexibility and strengthened cash flow profile.
We continue to outperform across all our businesses and we see encouraging signs in our orders growth, which will position us well for the remainder of 2021, 2022 and beyond, and simultaneously [Phonetic] continue to drive strong cash generation through increased income and effective working capital management.
The second half of 2021 will be challenging, given the supply chain disruptions, commodities pressure and emergence of COVID variant around the world.
However, I'm confident in ITT's ability to navigate these headwinds effectively, and drive growth and profitability, while leveraging our optimized cost structure and doing it all in a safe sustainable and efficient manner.
Crystal, please open the line for Q&A.
 Assistant:

Chosen response:
itt q2 earnings per share $0.45.
q2 earnings per share $0.45.
sees fy adjusted earnings per share $3.90 to $4.05.
q2 adjusted earnings per share $0.94 excluding items.


Prompt:
Human: I'm joined by our Chairman and CEO, Scott Santi; and our Vice Chairman, Chris O'Herlihy.
Senior Vice President and CFO, Michael Larsen, is recovering from a sports-related injury and is not available to participate in today's call.
During today's call, we will discuss ITW's second quarter financial results and update our guidance for the full year 2021.
In the second quarter, we saw continued recovery momentum across our portfolio, and we delivered strong operational execution and financial results.
Revenue was up 43% with organic growth up 37%, and we saw double-digit growth in every segment and geography.
Earnings per share of $2.45 was up 143%, 108% if you exclude the onetime tax benefit of $0.35 that we recorded in the quarter.
In this strong demand environment and in the face of very challenging supply conditions, our teams around the world leveraged our long-held close to the customer manufacturing and supply chain approach, and the benefits of staying fully staffed and invested through our winter recovery positioning, to continue providing world-class service levels to our customers while also continuing to execute on our long-term strategy to achieve and sustain ITW's full potential performance.
We're certainly encouraged by our organic growth momentum as order intake rates remained pretty much strong across the board.
And during the second quarter, we saw multiple examples of how our ability to sustain our differentiated delivery capabilities by remaining fully invested through the pandemic resulted in incremental share gain opportunities for our businesses.
While there's no doubt that the raw material supply environment is as challenging as we have experienced in a long time, maybe ever in my 38 years at ITW, we are as well positioned as we can be to continue to set ourselves apart through our ability to respond for our customers.
We've worked hard over the last nine years to position ITW to deliver differentiated performance in any environment, and I have no doubt that the ITW team will continue to execute at a high level as we move through the balance of the year and beyond.
Now for some more detail on our performance in the second quarter.
As I mentioned, organic growth was 37% with strong performance across our seven segments.
The two segments that were hardest hit by the pandemic a year ago led the way this quarter, with Automotive OEM up 84% and Food Equipment up 46%.
By geography, North America was up 36% and international was up 38%, with Europe up 50% and Asia Pacific up 20%.
GAAP earnings per share of $2.45 was up 143% and included a onetime tax benefit of $0.35 related to the remeasurement of net deferred tax assets in the U.K. due to a change in the statutory corporate tax rate there.
Excluding this item, earnings per share of $2.10 grew 108%.
It was a Q2 record and was 10% higher than in Q2 of 2019.
Operating income increased 99% and incremental margin was 40% at the enterprise level.
Operating margin of 24.3% improved 680 basis points on strong volume leverage, along with 150 basis points of benefits from our enterprise initiatives.
Year-to-date, our teams have delivered robust margin expansion, with incremental margins for our seven segments ranging from 37% to 48%, inclusive of price/cost impact.
Speaking of price/cost, price/cost headwind to margin percentage in the quarter was 120 basis points.
While the pace of raw material cost increases accelerated in the second quarter, our businesses have been active in implementing pricing actions in response to rising raw material costs since early in the year, consistent with our strategy to cover raw material cost inflation with price adjustments on a dollar-for-dollar basis.
In Q2, we ended up just short of that goal due to some timing lags, and as a result, net price/cost impact reduced earnings per share by $0.01 in the quarter.
We continue to expect price/cost impact to be EPS-neutral or better for the year, and I'll come back and provide more color on the price/cost environment a little later in my remarks.
In the quarter, after-tax return on invested capital was a record at 30.8%.
Free cash flow was $477 million, with a conversion of 72% of net income when adjusted for the onetime tax benefit I mentioned earlier.
And that was due to the additional working capital investments necessary to support our strong organic growth.
We continue to expect approximately 100% conversion for the full year.
We repurchased $250 million of our shares this quarter as planned.
And finally, our tax rate in the quarter was 10.1% due to the onetime tax benefit.
Excluding this item, our Q2 tax rate was 23%.
Now moving to Slide four for an update on price/cost.
We continue to experience raw material cost increases, particularly in categories such as steel, resins and chemicals and now project raw material cost inflation at around 7% for the full year, which is almost five percentage points higher than what we anticipated as the year began.
And just for some perspective, this is roughly 2 times what we experienced in the 2018 inflation tariff cycle.
We learned a lot from that experience.
And as a result, the timeliness and pace of our price recovery actions are well ahead of where we were in 2018.
As I mentioned, we expect price/cost impact to be EPS-neutral or better for the full year, with pricing actions more than offsetting cost increases on a dollar-for-dollar basis.
Price/cost will continue to have a negative impact on our operating margin percentage, however, in the near term, as we saw in Q2, and that impact will likely be modestly higher in Q3 versus Q2 before it starts to go the other way.
For the full year, we expect price/cost impact to be dilutive to margin by about 100 basis points, which is 50 basis points higher than where we were as of the end of Q1.
That being said, margin benefits from enterprise initiatives and volume leverage will provide us with ample ability to offset the negative effect of price/cost on margin percentage and deliver strong overall margin performance for the year.
And beyond the near-term price/cost impact, we remain confident that we have meaningful additional structural margin improvement potential from the ongoing execution of our enterprise initiatives.
Starting on Slide five, the table on the left provides some perspectives on the growth momentum in our businesses with a look at sequential revenue from Q1 to Q2.
As you would expect, the pace of recovery in our Auto OEM segment has been dampened by the well-publicized shortage of semiconductor chips despite very strong underlying demand.
And for that reason, we added a row to the table to show portfolio demand trends ex Auto.
Our Q2 revenue ex Auto increased 8% versus Q1.
This year, Q2 had one more shipping day than Q1, so on an equal days basis, our Q2 versus Q1 revenue growth ex Auto is 6%, which is 2 times of our normal Q2 versus Q1 seasonality of plus 3%.
In addition, we added more than $200 million of backlog in Q2.
Both of these factors show that demand accelerated meaningfully in Q2 across our portfolio.
So let's go to a little more detail for each segment, starting with Automotive OEM.
Demand recovery versus prior year was most evident in this segment with 84% organic growth.
This, of course, was against easy comps versus a year ago when most of our customers in North America and Western Europe were shut down from mid-March to mid-May.
North America was up 102%, Europe was up 106% and China up 20%.
We estimate that the shortage of semiconductor chips negatively impacted our sales by about $60 million in the quarter.
Operating margin of 18.8% was up 26.6 percentage points on volume leverage and enterprise initiatives.
Price/cost with a significant headwind of more than 200 basis points due to the longer cycle time required to implement price recovery actions in this segment.
Given the ongoing semiconductor chip supply uncertainty, we now expect full year organic growth in Automotive to be approximately 10% versus our original range of 14% to 18% at the beginning of the year.
To be clear, this is not lost revenue but simply delayed into next year.
Furthermore, the slower-than-expected growth in Auto is offset by strength elsewhere in the enterprise.
In Food Equipment, organic revenue rebounded 46%, with recovery taking hold across the board and the backlog that is up significantly versus prior year.
North America was up 39% with equipment up 42% and service up 33%.
Institutional revenue was up more than 30%, with healthcare and education growth in the low to mid-30s and lodging up in the mid-20s.
Restaurants were up about 60% with the largest year-over-year increases in full service and QSR.
Retail grew in the mid-teens on continued solid demand and new product rollouts.
International recovery was also robust at 58%, with Europe up 66% and Asia Pacific up 29%.
Equipment sales were strong, up 66% with service growth of 39%, which continued to be impacted by extended lockdowns in Europe.
Operating margin was 22% with an incremental of 46%.
Test & Measurement and Electronics revenue of $606 million was a Q2 record with organic growth of 29%.
Test & Measurement was up 20%, driven by solid recovery in customer capex spend and continued strength in semicon.
Electronics grew 38%, continued strength in consumer electronics and automotive applications and the added benefit in timing of some large equipment orders in electronic assembly.
Operating margin of 28.1% was 240 basis points -- was up 240 basis points and a Q2 record.
Moving to Slide seven.
Welding growth was also strong in Q2 at 33%.
Equipment revenue was up 38% and consumables growth of 25% was the first time in positive territory since 2019.
Our industrial business grew 52% on increased capex spending by our customers, and the commercial business remains solid, up 26%, following 17% growth in the first quarter.
North America was up 38% and international growth was 13%, primarily driven by recovery in oil and gas.
Polymers & Fluids organic growth was 28%, led by our automotive aftermarket business up 33% on robust retail sales.
Polymers was up 34% with continued momentum in MRO applications and heavy industries.
Fluids was up 8% with North America growth in the mid-teens and European sales up low single digits.
Operating margin was an all-time record 27.3% with strong volume leverage and enterprise initiatives partly offset by price/cost.
Moving to Slide eight.
Construction organic growth of 28% reflected double-digit growth and recovery in all three regions.
North America was up 20%, with 16% growth in residential renovation and with 26% growth in commercial construction.
Europe grew 61% with strong recovery versus easy comps in the U.K. and Continental Europe.
Australia and New Zealand organic growth was 13%, with continued strength in residential and commercial.
Operating margin in the segment of 27.6% was up 390 basis points and was a Q2 record.
Specialty organic revenue was up 17% with North America up 15%, Europe up 24% and Asia Pacific up 14%.
Our flexible packaging business was up mid-single digits against a tougher comp than the rest of this segment.
The majority of our businesses were up double digits, led by appliance up more than 50%.
Consumable sales were up 19% and equipment sales up 12%.
Let's move on to Slide nine for an update on our full year 2021 guidance.
We now expect full year revenue to be in the range of $14.3 billion to $14.6 billion, up 15% at the midpoint versus last year, with organic growth in the range of 11% to 13% and foreign currency translation impact of plus 3%.
This is an increase in organic growth of one percentage point at the midpoint versus the updated guidance that we provided at the end of Q1, driven largely by the incremental revenue impact of pricing actions implemented in Q2 in response to accelerating raw material cost increases.
We are raising our GAAP earnings per share guidance by $0.35 to a range of $8.55 to $8.95 to incorporate the onetime tax benefit realized in the second quarter.
The midpoint of $8.75 represents earnings growth of 32% versus last year and 13% over 2019.
Factoring out the onetime Q2 tax item, the midpoint of our 2021 guidance is 10% higher than 2019.
With regard to margin percentage, as discussed earlier, the incremental cost increases that we saw in Q2 will result in full year margin dilution of 100 basis points versus the 50 basis points that we projected as of the end of Q1.
And we are adjusting our margin percentage guidance accordingly to a range of 24.5% to 25.5%, which would still be an improvement of more than 200 basis points year-over-year and an all-time record for the company.
And again, we expect zero earnings per share impact from price/cost for the full year.
We expect free cash flow conversion to be approximately 100% of net income, factoring out the impact of the onetime noncash tax benefit we recorded in Q2.
Through the first half, we have repurchased $500 million of our shares and expect to repurchase an additional $500 million in the second half.
Finally, we expect our tax rate in the second half to be in our usual range of 23% to 24% and for a full year tax rate of around 20%.
Lastly, today's guidance excludes any impact from the previously announced acquisition of the MTS Test & Simulation business, which we expect to close later this year.
And once that acquisition closes, we'll provide you with an update.
 Assistant:

Chosen response:
compname reports q2 earnings per share of $2.45.
q2 gaap earnings per share $2.45.
sees fy gaap earnings per share $8.55 to $8.95.
raising full year organic growth guidance to a range of 11 to 13 percent.
sees full year gaap earnings per share of $8.55 to $8.95 per share.


Prompt:
Human: During today's call, we will discuss ITW's fourth quarter and full year 2021 financial results and provide guidance for full year 2022.
In Q4, the ITW team delivered another quarter of excellent operational execution and strong financial performance.
Six of our seven segments combined delivered 12% organic growth, while our Auto OEM segment continued to be impacted by near-term limitations on auto production due to component supply shortages and, as a result, was down 16% in the quarter.
At the enterprise level, we delivered organic growth of 5%, GAAP earnings per share of $1.93, operating margin of 22.7%, and free cash flow of $695 million or 114% of net income.
Throughout the entirety of 2021, our teams around the world did an exceptional job of delivering for our customers while responding quickly and decisively to rapidly rising input costs and aggressively executing our Win the Recovery strategy to accelerate profitable market penetration and organic growth across our portfolio.
As a result, for the full year, we generated organic growth of 12%, with each of our seven segments delivering organic growth ranging from 6% to 18%.
And despite a seemingly constant barrage of input cost increases, we expanded operating margin by 120 basis points to 24.1%, with another 100-basis-point contribution from enterprise initiatives.
GAAP earnings per share was an all-time record at $8.51, an increase of 28% versus the prior year.
And in 2021, we also raised our dividend by 7%, returned $2.5 billion to our shareholders in the form of dividends and share repurchases, and closed on a very high-quality acquisition in the MTS test and simulation business.
Most importantly, we delivered these results while continuing to drive meaningful progress on our path to ITW's full potential through the execution of our long-term enterprise strategy.
As you may recall, early in the pandemic, we made the decision to remain fully invested in our people and in our long-term strategy.
The people that we retained and the marketing, innovation, and capacity investments that we continue to fund as a result of that decision are fueling the results that ITW is delivering today and have the company very well positioned to continue to accelerate organic growth, add high-quality bolt-on acquisitions and sustain our best-in-class margins and returns in 2022 and beyond.
Their performance throughout 2021 provides another proof point that ITW is a company that has the enduring competitive advantages, the agility, and the resilience necessary to deliver top-tier performance in any environment.
The strong growth momentum that we experienced in the third quarter continued into the fourth quarter as revenue grew 5.9% year over year to $3.7 billion, with organic growth of 5.3%.
The MTS acquisition added 1.3% and foreign currency translation impact reduced revenue by 0.7%.
Sequentially, organic revenue accelerated by 6% from Q3 into Q4 on a sales per-day basis as compared to our historical sequential of plus 2%.
By geography, North America grew 9% and international was up 1%.
Europe declined 2%, while Asia Pacific was up 7%, with China up 2%.
GAAP earnings per share of $1.93 included $0.02 of headwind from the MTS acquisition and related transaction costs.
Operating margin was 22.7%, 23.1% excluding MTS.
As expected, in the fourth quarter, we experienced price cost margin headwinds of 200 basis points, the same as in the third quarter.
Our businesses continue to respond appropriately and decisively to rising raw material costs.
And in the fourth quarter and the full year, we were positive on a dollar-for-dollar basis.
Overall, for Q4, excellent operational execution across the board and strong financial performance in what remains a pretty uncertain and volatile environment.
OK, let's go to Slide 4 for segment results, starting with Automotive OEM.
As expected, organic revenue was down 16%, with North America down 12%, Europe down 29%, and China down 3%.
Despite these near-term pressures on the top line, operating margin was resilient and remained solidly in the mid-teens.
While supply chain challenges continue to persist for the industry in the near term, we are confident that the inevitable recovery of the auto market will be a major contributor to organic growth for ITW over an extended period of time as these issues ultimately get resolved.
Food Equipment led the way this quarter with the highest organic growth rate inside the company and 21%.
North America was up 22%, with equipment up 26% and service up 15%.
Institutional growth of 28% was particularly strong in education and restaurants were up around 50%.
International growth was strong and on par with North America at 20%, mostly driven by Europe, up 23%, with Asia Pacific, up 9%.
Both equipment and service grew 20%.
Turning to Slide 5 for Test and Measurement and Electronics.
Organic growth was 11% with Electronics up 4% and Test and Measurement up 17% driven by continued strong demand for semiconductors and capital equipment, as evidenced by our organic growth rate of 17% in our install business.
Scott said, in December, we closed on the MTS acquisition, which we're excited about as it's a great strategic fit for ITW and highly complementary to our Instron business.
We acquired Instron in 2006, and today it's a business growing consistently at 6% to 7% organically, with operating margins well above the company average.
We're confident that MTS has the potential to reach similar levels of performance over the next five to seven years through the application of the ITW business model.
Moving to Slide 6.
Welding delivered broad-based organic revenue growth of 15%, with 30% operating margin in Q4.
Equipment revenue grew 14% and consumables were up 16%.
Industrial revenue grew 18%, and the commercial business grew 8%.
North America was up 15%, and international growth was 14%, driven by 18% growth in oil and gas.
Polymers and Fluids organic growth was 3%, with 8% growth in Polymers, with continued strength in MRO and heavy industry applications.
Fluids was down 5% against a tough comp of plus 16% last year when demand for industrial hygiene products surged.
Automotive aftermarket grew 4% with continued strength in retail.
On to Slide 7.
Construction organic revenue was up 12% as North America grew 22%, with residential renovation up 23%, driven by continued strength in the home center channel.
Commercial construction, which is about 20% of our business, was up 21%.
Europe grew 2% and Australia and New Zealand was up 10%.
Specialty organic growth was strong at 7%, with North America up 10% and international up 2%.
With that, let's go to Slide 8 for a summary of 2021.
Operationally, the teams around the world continue to execute with discipline in a challenging environment as they sustained world-class customer service levels, implemented timely price adjustments in response to rapidly rising raw material costs, and executed on our Win the Recovery initiatives to accelerate organic growth across the portfolio.
As a result, revenue grew 15% to $14.5 billion, with broad-based organic growth of 12%, 14% if you exclude Auto OEM, where growth was obviously very constrained due to component shortages at our customers.
Operating income increased 21% and operating margin was 24.1%.
The incremental margin was 32%, which is below our typical 35% to 40% range due to price cost.
Excluding the impact of price cost, incremental margin was 40%.
GAAP earnings per share increased 28% and after-tax ROIC improved by more than 300 basis points to 29.5%.
Free cash flow was $2.3 billion with a conversion rate of 84% of net income which is below our 100% plus long-term target for free cash flow due to higher working capital investments to support the company's 15% revenue growth and the strategic decision that we have made to increase inventory levels on select key raw materials, components and finished goods to help mitigate supply chain risk and sustain service levels to our key customers.
Moving to Slide 9 for our full year 2022 guidance.
So, we're headed into 2022 with strong momentum and the company is in a very good position to deliver another year of strong financial performance, with organic growth of 6% to 9% and 10% to 15% earnings growth.
Per our usual process, our organic growth guidance is established by projecting current levels of demand into the future and adjusting them for typical seasonality.
As you can see by segment on the next page, every segment is positioned to deliver solid organic growth in 2022 with organic growth of 6% to 9% at the enterprise level.
Our total revenue growth projection of 7.5% to 10.5% includes a 3% contribution from MTS, partially offset by 1.5% of foreign currency headwind at today's exchange rates.
Specific to MTS, guidance includes full-year revenue of $400 million to $450 million, the expectation that margins are dilutive at the enterprise level by approximately 50 basis points and, finally, consistent with what we've said before, EPS-neutral.
Operating margin, excluding MTS, is forecast to expand by about 100 basis points to 24.5% to 25.5% as enterprise initiatives contribute approximately 100 basis points.
We expect price cost headwind of about 50 basis points.
Incremental margin is expected to be about 30%, including MTS.
And our core incremental margin, excluding MTS, is in our typical 35% to 40% range.
We expect GAAP earnings per share in the range of $8.90 to $9.30, which is up 10% to 15%, excluding one-time tax items from last year.
The tax rate for 2022 is expected to be 23% to 24% as compared to 19% in 2021.
We are forecasting solid free cash flow with a conversion rate of 90% to 100% of net income, with further working capital investments to support the company's growth, mitigate supply chain risk, and sustain service levels to our key customers as needed.
Our capital allocation plans for 2022 are consistent with our long-standing disciplined capital allocation framework.
1 remains internal investments to support our organic growth efforts and sustain our highly profitable core businesses.
Second, an attractive dividend that grows in line with earnings over time remains a critical component of ITW's total shareholder return model.
Third, selective high-quality acquisitions, such as MTS, that enhance ITW's long-term profitable growth potential, have significant margin improvement potential from the application of our proprietary 80-20 front-to-back methodology and can generate acceptable risk-adjusted returns on our shareholders' capital.
Lastly, we allocate surplus capital to an active share repurchase program, and we expect to buy back $1.5 billion of our own shares in 2022.
In addition, we have reactivated our previously announced divestiture plans.
And in 2022, we will reinitiate divestiture processes for five businesses, with combined annual revenues of approximately $500 million.
While these businesses are performing quite well coming out of the pandemic, they operate in markets where growth expectations are not aligned with ITW's long-term organic growth goals.
When these divestitures are completed over the next 12 to 18 months, we expect approximately 50 basis points of lift to ITW's organic growth rate and operating margins.
Given the timing uncertainties associated with these divestiture transactions, 2022 guidance assumes we own them for the full year.
Finally, last slide is Slide 10 with the organic growth projections by segment.
You can see that based on current run rates, we are expecting some solid organic growth rates in every one of our seven segments, with organic growth of 6% to 9% at the enterprise level.
For Automotive OEM, our guidance of 6% to 10% is based on a risk-adjusted forecast of automotive production in the mid-single digits, plus our typical penetration gains of 2% to 3%.
 Assistant:

Chosen response:
q4 gaap earnings per share $1.93.
q4 revenue rose 6 percent to $3.7 billion.
sees fy gaap earnings per share $8.90 to $9.30.
sees fy total revenue growth of 7.5% to 10.5% with organic growth of 6 to 9% including mts.


Prompt:
Human: Kathie will be reviewing our second quarter 2021 financial results and providing investors with an update on our full year outlook.
Further information can be found in our SEC filings.
Starting on Slide three, we entered the year with confidence that our second quarter will be a pivotal quarter moving beyond the going to grow revenue.
I'm pleased to announce that we achieved constant currency net sales growth of 7.8%, with increases in all key product categories.
Importantly, mobility and seating products rebounded strongly at constant currency net sales growth of nearly 18% in Europe and over 12% in North America.
By region, net sales in both Europe and North America achieved significant growth that Healthcare has improved in key markets and customers showed strong interest in new products.
We continue to see increasing demand for all of our products as evidenced by strong order intake in quote rates and higher than normal backlog.
As a result, in addition to strong sales in the second quarter, demand continues to support elevated order backlog.
We ended the second quarter with $15 million of higher backlog than normal, similar to the level at the end of the first quarter.
The continued higher backlog is expected to convert to sales over the next two quarters as we work to fulfill higher demand in the enrolling supply chain disruption.
On the cost side, we saw a good improvement in gross margin from favorable sales mix and the benefit of prior actions to optimize the business.
These were more than offset by supply chain-related disruptions as our factories ended more changeovers and shifting production plans to deal with intermittent part shortages and chipping plays, which accounted for 80% of the margin decline.
Higher material, freight and logistics costs, offset by variable sales is accounted for the other 20%.
Our operations team is very focused on improving efficiency and costs.
We view the impact on gross margin is temporary and are taking actions to rectify it.
Importantly, we expect gross margin to rebound through the remainder of the year.
[Indecipherable] cash flow to support sales growth during the quarter, usage increased due to higher accounts receivable balances and elevated inventory levels, which Kathie will expand on later.
We expect working capital to normalize by the end of the year cash is collected and inventory is converted to sales.
Overall, second quarter results were largely in line with expectations with strong revenue growth both year-over-year and sequentially in all major product lines in Europe and North America.
We're please with the progress we're making year-to-date and look forward to even stronger results in the second half.
Turning to Slide four, the business environment and access to healthcare continue to improve and remain well positioned to achieve our full year guidance.
As a reminder, while the economy and in variance of the world continues to reopen, we're still flattish in North America and Europe, where access to our key customers and challenge some of the [Indecipherable].
As we experienced this quarter, we anticipate sales will continue in the back half of the year.
Interest in recently launched products in helping invasive customers to provide end users with even more capable devices.
Early in the third quarter, we launched a new rear-wheel drive power wheel share in North America, the AvivaSTormRx, which complements our full portfolio of best-in-class seating across all drive segment.
Our [Indecipherable] wheelchairs allows end users the best in seating and complex control solutions and the best driving front or percent we drive share for their environment.
In addition, in respiratory, our new T5 NXG visionary oxygen cone is now commercially available in the United States with plans to roll out further in the coming months.
As we focus on sales growth and increased customer demand, we look forward to meeting our customers with new tools and our expanding IT platform, especially with more modern customer self-service features.
At the same time, we're very focused on improving operating efficiency by reducing friction and removing costs from our business system.
While we expect the global supply chain will persist in the near term, we're taking proactive measures to offset them, such as investing in additional inventory, looking and planning freight further into the future to ensure time in receipt and delivery and more precisely planning manufacturing schedules to better match the anticipated reliable component.
As these mitigation efforts become more effective, we expect gross margin to expand significantly from second quarter results, which, coupled with sales growth should meet profitability.
All things taken together, we remain confident in our ability to achieve our full year guidance as we continue to see strong demand across all product categories to convert our excess order backlog into sales with actions to sustain gross margin and leverage SG&A.
All of these positive indicators support our conviction that Invacare is pivoting to a period of long-term gorwth.
Turning to Slide six.
Reported net sales increased 15.1%, with growth in all product categories and in all regions.
Constant currency net sales increased 7.8% driven by double-digit growth in both mobility and seating and respiratory products.
We are pleased to have achieved strong sales growth, driven by new orders received during the quarter.
And for mobility and seating, we are also seeing increased revenue from new products.
Gross profit increased $4.2 million due to higher revenue and the benefit of favorable sales mix.
As Matt mentioned, gross margin was significantly impacted by supply chain-related client disruptions and to a lesser extent, higher freight and material costs.
The company has taken and continues to implement various actions to reduce the impact on the business, including reduced work hours in certain locations, into the anticipated timing of the receipt of components and investing in increased inventory, much of which was received in the latter part of the second quarter.
SG&A expense returned to a more normalized and was higher than the prior year as the second quarter 2020 benefited from reduced commercial expenses and discretionary spending given the significant impact of the pandemic on the business.
This year, SG&A expense includes increased funding for sales, marketing and commission programs to support and drive revenue growth.
As sales strengthened, free cash flow was also impacted higher levels of accounts receivable that we expect to be collected during the second half of the year.
In addition, as previously disclosed, the company increased inventory levels to mitigate supply chain disruption and to prepare for the expected sequential sales growth in the latter half of the year.
We anticipate this investment in inventory will convert to cash in the second half 2021 and enable us to achieve our free cash flow guidance.
Turning to Slide 7.
Reported net sales in all product lines improved year-over-year despite supply chain challenge, which limited the conversion of orders for shipments and resulted in excess order backlog of $15 million, primarily in Europe.
Mobility and seating products achieved net sales growth of 15% to strong growth in both Europe and North America, benefiting from the increased adoption of new products introduced over the past 18 months.
Constant currency net sales increased 2.9% for lifestyle products even compared to a particularly strong Q2 2020 that benefited from pandemic-related bed sales.
Growth this quarter was led by higher sales of manual welters, hygiene products as well as growth.
Retinal respiratory products was driven by continued strong demand in North America related to the pandemic.
Turning to Slide eight.
Europe constant currency net sales increased 7% driven by an 18% growth in mobility and seating and over 6% increase in lifestyle products, partially offset by lower sales of respiratory products.
Gross profit increased $507 million due to strong revenue growth and favorable sales mix, offset by supply chain-related plant disruptions and higher freight costs, resulting in flat gross margin.
Driven by higher net sales, operating income increased by $2.8 million.
Overall, we are encouraged by the improving healthcare access in key European markets, which helped drive our significant rebound in sales and profitability.
Turning to Slide nine.
North America achieved constant currency net sales growth of 10.1%, driven by increased revenues in all product categories.
Mobility and seating products generating constant currency net sales growth of 12.6% and respiratory products grew by 24%.
We achieved exceptionally strong growth in the quarter for mobility and seating products, benefiting the increased adoption of new products.
Gross profit declined $900,000 as favorable sales mix was more than offset by previous mentioned supply chain challenges, driving 150 basis points decline in gross margin.
Operating income decreased $3.2 million due to reduced gross profit and higher SG&A expense to support revenue growth.
Turning to Slide 10.
Constant currency net sales in the Asia Pac region decreased 7.7% due to lower sales in lifestyle and mobility and seating products partially offset by growth in respiratory products.
While the Asia Pacific region continues to see strong demand, net sales growth was impacted by global shipping issues to stabilate the receive of products.
Operating loss increased by $1.8 million, primarily due to lower profitability in the Asia Pacific region impacted by lower net sales favorable gross margin and higher SG&A expense.
Moving to Slide 11.
As of June 30, 2021, the company had total debt of $322 million excluding financing and operating rate obligations and $78 million of cash on the balance sheet.
As a result of revenue growth, the company had higher receivable, which led to an increase of 7.4 days in sales outstanding as compared to the end of the first quarter of 2021, impacted by the timing of collections from revenue recognized in the quarter.
In addition, the company had higher inventory levels to mitigate supply chain challenges and to prepare for the expected sales growth in the second half of the year.
As discussed, we anticipate both metrics to normalize by the end of the year and drive positive free cash flow for the full year of 2021.
Turning to Slide 12.
Based on our visibility into the third quarter, we are reaffirming our full year guidance for 2021, consisting our constant currency net sales growth in the range of 47%, adjusted EBITDA of $45 million and free cash flow of $5 million.
Constant currency net sales are anticipated to increase sequentially in the third and fourth quarters of 2021.
Our outlook is supported by positive sales trends such as strengthening order demand, mobility and seating product sales, which historically peak in the summer months, the conversion of excess backlog in the sales, increased adoption of new products and the continuing reopening of key markets and channels.
In addition, gross margin is expected to improve driven by revenue growth, favorable sales mix and actions to resolve supply chain challenges at our [Indecipherable].
Over the next few quarters, we are taking steps to mitigate this impact where possible.
As a result, improvements in adjusted EBITDA and free cash flow could accelerate for the second half of 2021.
Turning to Slide 13.
As we enter the second half of the year, I'm incredibly excited about the positive trends in our favor, which bodes well for a strong finish for the year.
We anticipate the continued easing of healthcare restrictions, combined with strong demand, favorable sales mix and the fulfillment of excess backlog will drive robust revenue growth and profitability.
As seen in previous years, Invacare has a long history of generating a substantial majority of its adjusted EBITDA in the second year, and this year is expected to be similar.
Taken together, we have continued confidence in our ability to meet our 2021 goals and to remain focused on executing our long-term growth strategy.
We'll now take questions.
 Assistant:

Chosen response: full year 2021 financial guidance reaffirmed.