Prompt:
Human: Today, we'll discuss the financial performance of KAR Global for the quarter ended September 30th 2021.
After concluding our commentary, we will take questions from participants.
Let me also mention that throughout this conference call, we will be referencing both GAAP and non-GAAP financial measures.
I'll provide an update on the commercial seller volumes and what we expect to see between now and the end of next year.
I'll also provide updates on the continued growth in our dealer-to-dealer business with a focus on our digital dealer-to-dealer businesses, BacklotCars and TradeRev.
I'll provide an update on our acquisition of Carwave and the solid performance of our finance business, AFC.
And I'll close out with some updates relating to our cost structure.
So, I'd like to start with the third quarter.
And there is no question but that the third quarter was a challenging quarter, and the challenges were volume related and principally tied to the commercial seller category, specifically to off-lease vehicles.
These industrywide volume challenges are tied to the disruption of new vehicle production, and I spoke to these dynamics in detail at our Analyst Day event back in September.
However, I will say that the situation remains largely as I described at that time.
So in the third quarter, despite operating in an environment of very constrained vehicle supply from commercial sellers, we achieved the following results.
For KAR overall, we generated $535 million in revenue, which was a decline of 10% from Q3 of last year.
We generated a total gross profit of $222 million, representing 50.1% of revenue, excluding purchased vehicles.
We generated $96.6 million in adjusted EBITDA.
Cash generated from operations for the quarter was $57 million.
Within the ADESA segment, we facilitated the sale of 586,000 vehicles, representing over $9 billion in gross auction proceeds.
Now, these volumes are down 33% versus Q3 of last year.
Within that, our total commercial volume was down by 51% versus Q3 of last year and our total dealer consigned volume actually increased by 20%.
51% of our sales in the third quarter was from off-premise locations, and this is similar to our experience in the first half of this year.
We sold 118,000 vehicles on the TradeRev and BacklotCars platforms on a combined basis.
We also set new records in terms of total active sellers and total active buyers on these digital dealer-to-dealer platforms in both the U.S. and Canada in the third quarter.
We generated $274 in gross profit per vehicle sold in the ADESA segment.
This was driven in part by strong auction revenue per vehicle sold and is higher than the gross profit per vehicle generated in the first half of this year and 10% greater than the same statistic from Q3 of last year.
SG&A for KAR overall was $134 million for the quarter and SG&A for the ADESA segment was $126 million and that was down $14 million from Q1 of this year.
I continue to be pleased with the performance of our AFC business segment.
AFC had 351,000 loan transactions in the quarter.
This was an increase of 8% versus the same quarter last year and it was in line with the levels that we'd expect.
Revenue per loan transaction was also higher, 20% higher than Q3 of last year, at $215 for the quarter.
Key drivers of this were higher vehicle values and lower credit losses.
AFC continues to experience lower-than-normal levels of risk, driven by the current market conditions combined with strong operations.
AFC continues to grow its volume of business, as well as reengineered business processes to have a more efficient service delivery.
And for all those reasons, I expect to see continued strong performance from AFC, given the current environment.
So, I'd like to speak for a few moments about the supply dynamics of used vehicles within our marketplaces, particularly supply from commercial sellers.
So, as I see it, our challenges in the quarter were tied to the lack of commercial seller volumes across our marketplaces.
As I mentioned, commercial seller volumes were down by 51% versus the same quarter last year.
In our last earnings call and subsequently in our Analyst Day, I went into quite a lot of detail on the drivers of commercial vehicle supply within our industry.
My fundamental assessment has not changed.
I do believe that we're at the bottom in terms of the disruption with the supply of off-lease vehicles and rental vehicles at physical auctions, being very close to zero in both categories.
Most meaningful to KAR is the disruption in the off-lease volumes, which historically have represented approximately 60% of our total commercial seller volumes.
Now, volumes of repossessed vehicles also remain below normal.
I would say that repossession volumes are relatively stable at about 70% of normal levels right now.
And our analysis of the quarter's results indicate that we have maintained our market share with commercial sellers in the quarter.
So while we may be at the bottom, I still believe we should expect to remain here for some time.
In order for the volumes in our marketplaces to increase, we need to see an increase in new vehicle production, sufficient to reduce the very high used vehicle values and allow more off-lease vehicles to flow into the wholesale channel.
In our Analyst Day, we said that we expected new vehicle production to start to improve toward the end of the first half of next year and to continue to improve in the second half, but that we expected it to remain below normal throughout 2022.
Based on our continued analysis, as well as our ongoing conversations with customers, that assessment has not changed.
What that implies for our business is that we expect the current commercial seller volume constraints to continue through the first half of next year and we expect to see a small improvement in the second half.
We expect to see an acceleration in the volume recovery in 2023 and beyond.
So now, I'd like to provide an update on our progress in the dealer-to-dealer vehicle category.
So first of all, if we look at our total dealer consignment volumes at KAR, and by which I mean digital and physical combined, we sold 274,000 dealer consigned vehicles in the third quarter.
That represented an increase of 20% compared to KAR's total dealer volume in Q3 of last year.
Some of that increase is driven by the acquisition of BacklotCars, but I'm pleased that we were able to increase our overall volume by 20%, given the tight supply dynamics that exist across our industry.
If we look at the digital dealer-to-dealer category only, our Q3 volume of 118,000 -- was 118,000 vehicle sold.
The comparable metric for Q3 of last year was 58,000.
So, we grew our total digital dealer-to-dealer volume by 105%.
However, BacklotCars was not part of KAR in Q3 of last year.
And if we include BacklotCars in last year's number, the growth is approximately 19%.
We saw record numbers of participating sellers and buyers on our digital dealer-to-dealer platforms in both the U.S. and Canada in Q3.
We also saw continued growth in average vehicle value sold on both TradeRev in Canada and BacklotCars in the U.S. And finally, in Canada, our TradeRev business continued to perform very well, delivering strong volumes in the second consecutive quarter of solid profitability.
I'd like to spend a few moments on the acquisition of Carwave.
We closed on the acquisition of Carwave in early October.
So, our Q3 volumes do not reflect any volume from Carwave.
The Carwave acquisition has approximately 100,000 vehicles sold per annum.
Carwave originated in California and is the leading platform for dealers in that market.
California, as you might imagine, is a large automotive market.
If we look at new vehicle registrations statistics, there are more new vehicle registrations in California each year than in the smallest 20 states combined.
Also, California has almost as many new vehicle registrations as the next two largest markets, which are Texas and Florida, combined.
It's in our diligence that Carwave platform delivers excellent performance for the sellers and buyers.
The average vehicle value sold on Carwave is higher than that sold on BacklotCars, and it also generates a higher revenue per vehicle sold and is profitable.
And of course, the acquisition of Carwave also brings a strong team.
I believe the acquisition strengthens our map and increases the network effect for digital dealer-to-dealer business in the U.S. Carwave's strength out West and BacklotCars's strength in the middle of the United States means that we now have a stronger footprint than ever before in terms of both geography and depths within any given market.
Ultimately, we see an opportunity to combine those two businesses, bringing the best of both and creating an ever more powerful offering for sellers and the buyers.
We also see an opportunity to continue to move up market and sell a larger number of higher value vehicles.
This in turn will help drive further increases in revenue per unit sold and stronger margins.
So, our integration planning is ongoing.
But ultimately, we envision a single solution in the market; a solution that aligns with the needs and preferences of our dealers and that leverages the best technology, features, functionality and economic model of both platforms.
Now, given the strength of both businesses and the positive momentum that both businesses have, we would likely take a little longer to execute this than was the case with the TradeRev migration.
We want to make sure that we don't disrupt our customers and that to the extent we make changes, we're delivering an experience that is better than before for all of our customers.
And finally, the addition of Carwave means that our current run rate with digital dealer-to-dealer transactions is now very close to 600,000 vehicles sold per annum and continuing to grow.
So, we are well on our way toward achieving the target that I established in -- on our Analyst Day of 1.2 million digital dealer-to-dealer transactions annually by 2025.
So, I'd like to spend a few moments talking about our cost structure.
On recent earnings calls and, again, on the Analyst Day event, we've discussed our strategic focus on reducing our cost structure to reflect our transition to a more digital marketplace.
The reality of lower-than-normal commercial seller volumes likely persisting through much of 2022 means that our continued focus on cost remains a top priority for me and for the management team.
So, I'd like to provide an update on that.
During this last quarter, we initiated a project into prioritizing and accelerating key areas for growth while refining our operating model toward a more digital future and also to address the lower-than-normal commercial seller volumes that we are currently experiencing.
We've committed significant resources toward that initiative and there are four principal work streets.
I referred to these in our Analyst Day, but to recap them here, they're are as follows.
Our sales and go-to-market opportunities, the evolution of our service operations, our technology investments and the overall management of our SG&A.
So, I believe we've made very good progress on this project and we're now nearing the end of the assessment phase.
In fact, it will be completed within the next couple of weeks.
Now, I expect that you will be all interested to know the scale and the timing of all this.
Rather than committing to a number before I have the full report, I'd like to allow our team the opportunity to complete their work and I look forward to providing more in-depth assessment on our future call.
However, I am comfortable enough with the preliminary analysis to report the following.
First, in terms of the sizing of these opportunities.
Our Analyst Day materials pointed to an SG&A opportunity of $30 million.
I'm confident that our SG&A opportunity will be at least that amount.
However, SG&A is just one part of the mix.
We're also looking at opportunities to reduce our direct costs.
I believe that we have opportunities to do so and that these will be in addition to that number.
And finally, we're also looking at opportunities to improve revenue and improve the monetization of our services, while also accelerating growth in key areas.
These will be an important part of the overall target as well.
In terms of the timing.
First of all, I want to be clear that what I'm describing here are not short-term or temporary cost cuts.
What we're looking at are permanent changes in our operating model and our cost structure, reengineering the way we do business and ultimately, reducing our cost to serve over the long term.
I don't expect to see an impact from this in the current quarter, but I do expect to see positive impacts in 2022 and in all of the years following from that.
And finally, in terms of our strategy to manage and communicate these initiatives, we will be setting specific goals and there will be a clear process in place to measure the impacts to make sure we stay on track.
And of course, I expect myself and the management teams to be held accountable to those.
So, I look forward to providing greater detail and more precise metrics in a future call.
My last point is to make a few remarks on our expectations for the current quarter.
As discussed in September, it is difficult to predict the supply of vehicles in the wholesale market at this time.
We withdrew our guidance in September and I'm not providing guidance until our visibility into volume improves.
With that said, we typically experienced some seasonal impacts in the fourth quarter and I would expect that our fourth quarter performance, by which I'm referring to adjusted EBITDA, will be less than our Q3 levels.
So to summarize my key messages from today, clearly, the commercial volume challenges continue.
I believe that we're at the bottom now, but I think the volume challenges will continue well into next year.
However, I also expect we will see some improvement before the end of next year.
My longer-term view has not changed.
I believe that the outlook for off-lease, repossessed and rental vehicles will be one of increasing volume over time, ultimately returning to historical levels.
The recovery will take time, but it's clear to me that we should be a strong beneficiary of this when it happens.
In terms of dealer-to-dealer, we are growing our volume with our combined digital and physical volume up 20% versus the same quarter last year.
In terms of our digital dealer-to-dealer platform, we delivered solid growth in transactions and we had a record quarter in terms of marketplace participation in both the U.S. and Canada.
The addition of Carwave means that we're now at an annual run rate of close to 600,000 vehicles sold per annum and growing.
I'm pleased that despite lower volumes, we were able to deliver our best quarter yet in terms of gross profit per vehicle sold.
We also saw solid profitability for TradeRev in Canada and a strong performance at AFC.
Notwithstanding the growth levers that exist for us, we continue to be very focused on costs.
We have initiated a significant initiative, and we are committed to following through with it.
We look forward to providing more updates going forward.
Sanjeev became an observer on our Board through Periphas Capital's participation in our 2020 pipe transaction, and he previously served on our Board from 2007 to 2013.
You can read more about Sanjeev's background in our 8-K.
We are very fortunate to have his deep industry knowledge and his strategic mindset on our Board, and I'm confident he will continue to be a vocal advocate for KAR Global and for our stockholders.
So with that, Eric will now provide a more detailed review of our financial results for the quarter.
I have a few things to add to Peter's commentary today.
First, I would like to point out some bright spots in the current situation we are facing.
We all know that the supply of wholesale vehicles is constrained primarily for our commercial vehicle business.
However, this has led to strong used car pricing.
Gross auction proceeds are at record levels in all segments of our business.
The average selling price in our commercial off-premise segment primarily openly was $21,500 in the third quarter compared to $19,400 per vehicle in the third quarter of 2020.
Digital dealer-to-dealer representing BacklotCars and TradeRev had an average sale price of $10,400 in Q3 compared to $8,900 last year.
And our on-premise auctions, which includes a mix of commercial and dealer consignment, had an average selling price of $15,000 per vehicle compared to $13,300 one year ago.
This strong pricing situation has led to higher option fees per transaction across all of our marketplaces.
The only marketplace that has been -- has seen a significant decline in fees is the OPENLANE private-label programs.
The high percentage of transactions being grounding dealer purchases caused auction fees per transaction on this platform to decline 20% year-over-year in the third quarter.
Another positive in the third quarter was the gross profit per vehicle in the ADESA segment, achieving $274 gross profit per car sold in Q3 compared to $249 in the prior year, and this was a strong performance.
This reflects a positive mix of revenue with more of our revenue coming from higher margin auction services than other lower-margin services.
The lack of commercial supply, especially off-lease vehicles, reduces revenue from lower margin services like transportation and end-of-lease inspections.
I want to be clear though.
While we are very focused on improving our cost structure and increasing gross profit per unit over historical levels, our business prospers when there are more transactions, even if gross profit per unit were lower than $274.
The third quarter did benefit from royalty revenue received from Insurance Auto Auctions based on the number of non-insurance vehicles sold by IAA over the previous 12 months.
And a positive in Q3 was performance at AFC.
Consistent with the growth in volume in the dealer-to-dealer channel at ADESA, AFC saw an increase in the number of loan transactions, 8%; an increase in revenue per loan transaction, 20%; and an increase in adjusted EBITDA, 63%.
The AFC segment was able to improve all of its key performance metrics and reduced SG&A as compared to last year.
While the current supply situation has put pressure on the wholesale used car remarketing industry, these same factors have made floorplan lending perform at very high levels of profitability.
Average loan values are increasing due to higher used car prices.
Low used car inventories at retailers means faster turns in our floorplan lending has a majority of its revenue in fees and not interest earnings.
And most importantly, loan losses are at very low levels.
In fact, in the third quarter, recoveries of previously written off loans exceeded the loan losses experienced during the quarter.
As a reminder, our floor plan lending business is collateralized by the vehicles and typically all assets of the dealer principles.
We obtained personal guarantees on substantially all floorplan lines.
When losses are realized, we set judgments for recovery of the losses when assets, including real estate, are monetized by the dealer principles.
We are currently benefiting from the strong real estate market and high real estate values.
This allows us to recover past losses.
Most recoveries are losses that occurred one to three years prior to the actual recovery.
Now despite the positives in our performance that I have highlighted, our overall performance was still challenging due to the low number of transactions completed.
As Peter pointed out, the pressure is on our commercial volumes as we have begun to see year-over-year growth in our dealer-to-dealer volumes due to the strong growth in digital dealer-to-dealer.
Even though gross profit per unit at ADESA was $274, the gross profit as a percent of revenue, excluding purchased vehicles, declined to 43% in Q3 as compared to the prior year's 49% gross profit.
My first concern is to determine this is not a change in our cost structure going forward.
After analyzing our costs, I have determined that most of the decrease relates to fixed direct costs that just could not be leveraged with the low volumes in Q3.
The largest contributor to the decline in gross profit percent was supervisory labor and facilities costs that is included in cost of services.
We also experienced increased losses on purchased vehicles, primarily inherited vehicles, which are acquired through arbitration activities.
We believe the increased losses were unique to Q3, as we pushed to sell these vehicles quickly to meet customer demand.
The one item that will be a permanent increase in our costs as compared to the last 18 months is the loss of the Canadian employee wage subsidy.
We have been benefiting from the Canadian program since early 2020 and approximately $1.5 million to $4 million of direct cost per quarter going back to the second quarter of 2020 were subsidized in Canada.
Changes in the requirements to receive these subsidies were made effective July 1 2021, and our Canadian business is no longer qualified for the subsidy.
This represents about a 70 bps increase in gross -- increase in cost or decrease in gross profit percent that will be recurring.
I do expect the impact on gross profit to be less though, as volumes begin to increase going forward.
Turning to our balance sheet and capital allocation.
Our total leverage is at 3.2 times adjusted EBITDA.
This has moved above 3 times due to the low performance over the past 12 months.
Our last 12 months adjusted EBITDA is $404 million.
We continue to have a leverage target of three times or less.
Subsequent to quarter end, we completed the acquisition of Carwave.
We funded the $450 million purchase price with cash on hand.
We did not purchase any KAR shares in Q3.
We have $109 million remaining on our share repurchase authorization that was set to expire at the end of October.
The Board of Directors has extended our existing share repurchase authorization through December 31, 2022.
We have used a substantial amount of our available cash for the Carwave acquisition and our total net leverage is temporarily above three times.
Even after funding the Carwave acquisition, our cash balances remained strong though.
In times of supply constraint, the free cash conversion of our business generally improves.
That concludes my remarks.
 Assistant:

Chosen response: q3 revenue fell 10 percent to $535.2 million.


Prompt:
Human: On the call are Jeff Mezger, Chairman, President and Chief Executive Officer; Matt Mandino and Rob McGibney, Executive Vice Presidents and Co-Chief Operating Officers; Jeff Kaminski Executive Vice President and Chief Financial Officer; Bill Hollinger, Senior Vice President and Chief Accounting Officer; and Thad Johnson, Senior Vice President and Treasurer.
And with that, here's Jeff Mezger.
Our performance in the third quarter reflected significant year-over-year increases across the majority of our key metrics as we produced solid results in housing market, experiencing great demand, while also facing industrywide challenges in getting homes completed and delivered.
These results will help drive our returns focused growth as we continue to expand our scale, while generating a higher return on equity.
Before I get into the highlights for the quarter and there are many, I want to address our shortfall in deliveries and revenues.
Disruptions to our supply chain intensified as the quarter progressed and along with municipal delays resulted in our build times extending by about two weeks sequentially.
This pushed many deliveries into our fourth quarter and will similarly delayed some fourth quarter deliveries into our 2022 first quarter.
We are taking aggressive steps to manage through these delays, including expanding our subcontractor base, partnering with our national suppliers and simplifying our products to stabilize our build times.
We produced total revenues of $1.47 billion, up nearly 50% as compared to the prior year period and diluted earnings per share of $1.60.
We achieved an operating income margin of 12.1% excluding inventory related charges, which grew 250 basis points year-over-year, driving a 40% expansion in our profitability per unit to nearly 52,000.
This was accomplished even with the leverage we lost from the delayed deliveries.
Our related gross margin of 22% was a particular highlight and demonstrates that we are effectively managing pace, price and starts to optimize each asset.
As to capital allocation, we continue to take a balanced approach with disciplined investments in growth remaining our top priority.
In the third quarter, we invested about $780 million in land acquisition and development.
We expanded our lot position to almost 81,000 lots owned or controlled, with our inventory continuing to rotate into a higher quality portfolio of communities.
In addition to these investments, we returned a significant amount of cash to stockholders through both our regular quarterly cash dividend and the repurchase of $188 million of our stock.
These repurchases will further enhance our return on equity in 2022 beyond this year's expected 20% level, especially when combined with our projected increase in scale to over $7 billion in revenue and higher operating and gross margins.
Since we embarked on our returns focused growth strategy, we have produced meaningful expansion in our ROE.
While we recognized that returns across the industry have expanded, our rate of improvement is meaningful and we believe our return on equity in the low to mid 20% range is sustainable.
During the quarter, we announced the promotion of Rob McGibney to Executive Vice President and Co-Chief Operating Officer, a role he shares with Matt Mandino.
We created a Co-COO structure with two simple objectives in mind: to accelerate the profitable growth of our business in order to drive increasing returns on equity and to enhance our execution.
Rob is responsible for our West Coast and Southwest regions and Matt is responsible for our Central and Southeast regions.
In addition to their regional responsibilities, Matt and Rob each have oversight of key strategic corporate functions as well.
The operating environment within our industry has become more complex over the past 18 months, given the supply chain issues and municipal delays that I mentioned earlier and their impact on build times.
Having two proven leaders running our operations, will allow for a more hands on approach that is geographically focused, enabling greater day-to-day collaboration with our regional and division leadership.
We successfully opened over 40 new communities in the third quarter, marking the start of a sequential improvement in ending community count that we anticipate will continue over each of the next five quarters.
With the strong and growing lot pipeline that I referenced, driving an acceleration in new communities, we expect to expand our community count to roughly 260 by year-end 2022.
Our monthly absorption per community accelerated to 6.6 net orders during the third quarter from 5.9 in the year ago quarter and reflecting a more typical seasonal pattern sequentially, while remaining at historically elevated level.
Net orders were 4,085, represented a small decline year-over-year, against the strong results in the prior year quarter.
However, with our actions in taking price and moderating pace, our net order value was up more than 20% year-over-year.
We continue to manage our selling pace to production, limiting our lot releases to prevent our backlog from getting over extended and started over 4,000 homes during the quarter.
This compares to starts in the year-ago quarter of about 3,400.
We currently have approximately 9,000 homes in production with 93% of these homes already sold.
Only 240 of these homes are unsold past the foundation stage and our focus right now is on compression our build times to deliver our backlog.
With the rise in our net order value to $2 billion, we are laying the foundation for future margin growth.
Our pricing power is solid, while our pace remain strong and the demand for our homes at higher prices tells us that our price points remain attainable.
The credit profile of our buyers is above our historical level with an average FICO score of 7.31 and down payment of 14%, translating to almost $60,000, which is noteworthy for our first time buyer.
In addition, the internal indicators that we monitor for changes in customer behavior, including the square footage of homes purchased or spending in our design studios remain stable.
Our backlog now stands at roughly 10,700 homes, representing future revenues of over $4.8 billion.
Our backlog value is up nearly 90% year-over-year with significantly higher margins within this backlog.
This is an excellent position from which to finish 2021 and support another year of growth in revenues and expansion of margins in 2022.
Homeownership remains compelling and attainable and we believe the drivers are in place to support healthy market conditions for the foreseeable future.
An insufficient level of supply exist at our price points to meet the demand for millennials and Gen Zs, which together number roughly $140 million.
These two cohorts value the personalization and choice in our built-to-order business model, which is a significant factor in why our absorption rates have consistently been among the highest in the industry.
This together with our experience in serving first time buyers, who represent 61% of our deliveries in the third quarter, has us well positioned to capture demand going forward.
Switching gears for a moment.
I want to highlight our recent achievement in sustainability.
KB Home received a record 25 ENERGY STAR Market Leader Awards from the EPA, further demonstrating our leadership position as the most energy efficient national homebuilder.
We are proud to continue moving our environmental program forward, which is helping to lower the total cost of homeownership for our buyers, while doing our part to reduce the carbon footprint of our homes.
We have a remarkable team that is focused on execution and committed to customer service.
In closing, we are growing into a bigger business that is operating at meaningfully higher margins and generating considerably improved returns.
We anticipate a return on equity this year of about 20% and further expansion in 2022, supported by double-digit growth in revenues and community count, with higher margins, as well as our recent share repurchase.
Beyond next year, we believe our return on equity is sustainable in a low to mid 20% range.
I will now review highlights of our financial performance for the 2021 third quarter, discuss our current outlook for the fourth quarter and summarize expected improvements in several 2022 metrics.
In the third quarter, we produced measurable year-over-year improvements in nearly all our key metrics, including a 49% increase in housing revenues that drove a 93% expansion in our earnings per diluted share.
We also made substantial investments in land and land development to support continued growth and completed a significant share repurchase that among other things will enhance future returns and per share earnings.
Our housing revenues grew to $1.46 billion for the quarter from $979 million for the prior year period.
This improvement reflected a 35% increase in the number of homes delivered and an 11% rise in our overall average selling price.
As Jeff discussed, our current quarter deliveries were tampered by industry wide building material shortages and labor constraints that extended build times in most of our served markets.
We anticipate similar challenges will apply to our fourth quarter and have considered these factors in our outlook.
Our ending backlog value expanded 89% to over $4.8 billion, driven by strong increases in each of our four regions.
Considering our quarter-end backlog, the status of our homes under construction and expected construction cycle times, we anticipate our fourth quarter housing revenues will be in the range of $1.65 billion to $1.75 billion.
In the third quarter, our overall average selling price of homes delivered rose to approximately $427,000 from approximately $385,000, reflecting the strength of the housing market.
For the fourth quarter, we are projecting an overall average selling price of approximately $450,000, which would represent a year-over-year increase of 9%.
Our third quarter homebuilding operating income improved to $169.9 million as compared to $88.9 million in the year-earlier quarter.
Operating income margin increased 270 basis points to 11.6% due to improvements in both our gross profit margin and SG&A expense ratio.
Excluding inventory related charges of $6.7 million in the current quarter and $6.9 million in the year-earlier quarter, our operating margin was up 250 basis points year-over-year to 12.1%.
For the fourth quarter, we expect our homebuilding operating income margin, excluding the impact of any inventory related charges, will be approximately 11.8% compared to 10.7% in the year-earlier quarter.
Our housing gross profit margin for the quarter was 21.5%, up 160 basis points from 19.9% for the prior year period.
This margin expansion mainly reflecting a favorable selling price environment supported by healthy housing market dynamics and lower amortization of capitalized interest.
Excluding inventory related charges, our margin for the quarter was up 140 basis points year-over-year to 22%.
Our adjusted housing gross profit margin, which excludes inventory related charges, as well as the amortization of previously capitalized interest was 24.5% for the third quarter compared to 23.7% for the same 2020 period.
Assuming no inventory related charges, we believe our fourth quarter housing gross profit margins will be in the range of 21.6% to 22%, reflecting the impact of peak lumber prices when our forecasted fourth quarter whole deliveries were started.
Our selling, general and administrative expense ratio of 9.9% for the quarter improved by 110 basis points as compared to 11% for the 2020 third quarter, primarily due to increased operating leverage, partly offset by higher costs associated with performance-based employee compensation plans and additional resources to support growth.
As we position our business for growth in 2022 housing revenues, we believe that our fourth quarter SG&A expense ratio will remain roughly the same as the second and third quarters of this year or approximately 10%.
This would represent an improvement from 10.3% in the 2020 fourth quarter.
Our effective tax rate for the quarter was approximately 14%, reflecting $24.1 million of income tax expense, net of $21.5 million of federal energy tax credits.
We expect our effective tax rate for the fourth quarter to be approximately 24% including a small favorable impact from energy tax credits compared to approximately 16% for the year-earlier period.
Overall, we reported net income for the third quarter of $150.1 million or $1.60 per diluted share, compared to $78.4 million or $0.83 per diluted share for the prior year period.
Turning now to community count, our third quarter average of 205 decreased 14% from the year-earlier quarter.
We ended the quarter with 210 communities open for sales, as compared to 232 communities at the end of the 2020 third quarter.
On a sequential basis, as anticipated, we were up 10 communities from the end of the second quarter.
We are planning to achieve continued sequential quarterly increases in our community count through 2022.
We believe our 2021 year-end community count will be up slightly from the third quarter, resulting in a high single-digit decrease in the average fourth quarter count as compared to the prior year.
We invested $779 million in land, land development and fees during the third quarter with $467 million or 60% of the total representing new land acquisitions.
In the first three quarters of this year, we invested $1 billion to acquire over 16,000 lots.
We ended the quarter with a strong supply of nearly 81,000 lots owned and controlled, then we expect to drive a significant number of new community openings and steady growth in community count.
At quarter end, we had total liquidity of over $1.1 billion, including $350 million of cash and $791 million available under our unsecured revolving credit facility.
In early June, we issued $390 million of 4.00% 10-year senior notes and used a portion of the net proceeds to redeem approximately $270 million of tendered 7.00% senior notes due December 15, 2021.
We recognized a $5.1 million loss on this early redemption of debt in the third quarter.
The remaining $180 million of the 7% senior notes, we redeemed as senior notes, partially offset by the new issuance, will result in annualized interest savings of nearly $16 million, contributing to our continued trend of lowering the interest amortization included in our housing gross profit margins.
In addition, we see the $350 million maturity in September 2022 of 7.5% senior notes as an another opportunity to reduce incurred interest and enhance future gross margins.
During the third quarter, we repurchased approximately 4.7 million shares of common stock at a total cost of $188.2 million.
The shares repurchased represented approximately 5% of total outstanding shares and will drive an incremental improvement in our earnings per share and return on equity going forward.
For purchases of calculating diluted earnings per share, we estimate a weighted average share count of $91 million for the 2021 fourth quarter and $93.5 million for the full year.
For 2022, we are forecasting housing revenues of over $7 billion, supported by our anticipated 2021 year-end backlog, community count growth and an ongoing strong demand environment throughout next year.
We expect approximately 200 new community openings over the next five quarters to drive sequential increases in ending community count.
Consistent with the forecasted double-digit growth that we have discussed during the past two quarters, we believe our 2022 year-end community count will be up about 20% year-over-year and the full year average count will be about 10% higher as compared to 2021.
We also believe that gross margin expansion to a level above our guidance for next quarter, along with improvement in the SG&A expense ratio, will result in a measurable year-over-year increase in operating margin.
Further, the anticipated increase in scale combined with a higher operating margin and the benefit of the recent share repurchase, should drive a meaningful improvement in return on equity relative to be approximately 20% expected for 2021.
In summary, we believe we are well positioned to achieve our targets for the both 2021 fourth quarter and 2022 fiscal year.
Our forecasted 2021 full year results represent significant improvements across virtually all our key metrics with notable increases in our scale, absorption pace, housing gross margin and operating margin.
In addition, we are particularly pleased with the forecast expansion in our full year return on equity and our anticipated further improvement in 2022.
We believe our ongoing focus on accelerating profitable growth and expanding our returns by leveraging our larger scale, attractive inventory profile and uniquely compelling built-to-order business model, will produce measurable enhancements in both book and stockholder value in future periods.
Alex, please open the lines.
 Assistant:

Chosen response:
compname reports q3 earnings per share of $1.60.
q3 earnings per share $1.60.
q3 revenue $1.47 billion versus refinitiv ibes estimate of $1.57 billion.
qtrly homes delivered increased 35% to 3,425.
qtrly net order value up 22% to $2.01 billion.
co's ending backlog value increased 89% to $4.84 billion at quarter end.
looking ahead to 2022, anticipate another year of profitable growth.
qtrly net orders 4,085 versus 4,214.


Prompt:
Human: Joining us today are Stuart Bradie, President and Chief Executive Officer; and Mark Sopp, Executive Vice President and Chief Financial Officer.
Stuart and Mark will provide highlights from the quarter and then open the call for your question.
These risks are discussed in our most recent Form 10-K available on our website.
I will start on slide four.
Now you should all be very familiar with those Zero Harm sustainability program by now under 10 pillars that fit within it across the ESG spectrum.
At our recent Investor Day, we highlighted that being a good corporate citizen was the floor and not the ceiling at KBR, and I wanted to prove on that side a little bit more today.
The symbiotic relationship between shareholder value and KBR helping our clients achieve their sustainability goals is an absolutely key differentiator for KBR.
And we wanted to build on that just a little on to slide five.
KBR has a suite of recycling technologies that enable secular processing and the broader secular economy.
At the Investor Day, Dow introduced Mura'srevolutionaryHydroPRS technology that closes the loop on the secular plastics economy.
This is very exciting on its own right and this excitement I think was compounded with the recent announcement that Dow is also investing unimportantly committing to off-take.
This obviously is a huge endorsement on the sustainability aspects and of course, a huge endorsement on the technology itself and is an important step forward.
But at KBR, we have many recycling technologies as outlined on the slide.
All are proprietary, differentiated, disruptive and market-leading.
And we could spend the entire call and I don't plan to do that talking about these technologies.
But today I'll highlight just one example to give you a flavor and that's on sustainable fibers.
Our global retailer from Scandinavia came to a few years ago to help them solve a big problem.
How to recover valuable chemicals and water from what would have been a waste stream at the end of their process to produce manmade fibers.
Our sustainable technology team applied our proven of operation on crystallization technology to essentially recover and purify critical ingredients and water such that they can be reintroduced right at the front of the process.
Closing the loop on the secular processing.
And this solution has many benefits as I'm sure you can appreciate, it reduces processing cost, it saves finite elemental resources and water, and it eliminates a wasting.
So overall it's great value for the client.
Obviously for KBR and our shareholders and of course the planet.
So like you've heard me say before, advancing our clients' ESG objectives, its core to KBR strategy and this example is just one of the many that demonstrates that tenant.
So on to slide and some key highlights from the quarter.
The key takeaway here is overall revenue, EBITDA margin, adjusted earnings per share and cash were all in line with full-year guidance, and I'd say a little bit above our expectations for Q1.
You'll recall that we stated that first half versus second half would be circa 40-60 split at the earnings per share level.
That has now shifted to the circa 45-55 split with a couple of things happening in Q1, that were expected to happen in Q2 and Q3.
And this was especially the case in Sustainable Tech and Mark will give you some more details on this later.
Margins were bang on at the Group level with some discrete items some puts and takes that Mark will cover later within the segments.
But to be clear, full-year margin guidance at the Group and within the individual segments is not changing and I'll say that again the Q1 puts and takes do not change full-year margin guidance.
Free cash conversion at over 100% was again strong and importantly the team brought and over $1.6 billion in backlog and options during the quarter in high-end technical top market areas increasing our total backlog with options to $90.3 billion more on some of these wins in a moment, but super exciting.
So, Q1 was a relatively clean quarter at the group level.
As the overall business continued its momentum from 2020 and 2021 guidance remains unchanged.
So, on to slide seven.
The market outlook in GS was dominated by the release of the President's proposed 2022 budgets.
The DoD budget was aligned with what we presented at Investor Day.
So no surprises there.
And KBR was very well positioned opposite national security and DoD strategic priorities.
A few of the areas are highlighted on the slide.
Artificial intelligence and machine learning, cyber, trusted microelectronics and directed energy.
And you can see on the right hand side, prove the site.
We're especially excited this quarter by the trusted microelectronics win to conduct advanced R&D, prototyping, laboratory testing and supply chain verification on critical Microchip's and components.
This is really important work done by top tier scientists and PhDs to ensure major military systems and platforms operate as intended and have not been compromised.
We also won new work with the U.S. Space Force Rapid Capabilities Office or RCO to support the development and acquisition of new space capabilities and the modernization of the military space infrastructure.
Again this is highly advanced work centered around technical R&D and critical military space domain.
Shifting a little bit over to the civil space side.
The NASA budget request was also released and shows a marked increase and continue to support for the return to main and beyond.
And of course increased funding across a range of Fed spend activities focused, as you would expect initially on COVID, climate change an area of differentiation as you know for KBR and social justice.
The proposed infrastructure plan was also released and was very R&D heavy, very technology-driven on climate focused lining up well with KBR's R&D capability and technology portfolio.
This quarter we saw some great wins also in the international government business.
As you can see on the right hand side of the slide both in the U.K. and in Australia.
And there was also good news from a budget perspective in the U.K. and this follows on from Australia increasing its defense budget last year.
As an aside, and his team in Australia are off to another good start, posting top organic growth rates again at over 30% year-on-year this quarter.
And this is a nice example of a great team doing things that matter within a healthy budget environment.
One aspect not on the slide, but worth mentioning was the announcement on troop withdrawal from Afghanistan.
As most of you are aware, we took a very conservative view in this area, which has proven to be prudent.
So in short, no red flags coming from recent announcements, no red flags from the budget priorities, in fact very much aligned to what we presented in Investor Day, so very much aligned with our expectations.
The market and our strategic positioning reaffirm our ongoing momentum.
Now on to slide eight on sustainable technology.
The market and key strategic themes shown on the slide continue to gather momentum.
It's a hot market.
The recent announcement from the Biden administration are fully aligned with these themes as we discussed at Investor Day.
Our suite of technologies remains in high demand and I'm also pleased to announce a disruptive PDH technology K-PRO that was actually launched last year has secured its first commercial scale order.
There are details on this on the right hand side of the slide, but to put it simply, this technology takes low value propane and converts it into high value propylene and it does so in a more sustainable and more cost effective manner than the competition.
It is worth noting that the book-to-bill of heritage technology was 1.5 in the quarter.
Led by important sales of exciting new disruptive technologies K-PRO, K-COT and K-SAAT.
And bookings of these technologies dominated the tech book-to-bill as clients look to meet growing demand for propylene and high value clean refining solutions with our disruptive differentiated and in our view, often superior technologies.
Now we've talked a lot about K-SAAT technology in the past and obviously I've just covered K-PRO.
But I'd be remiss if I did not touch on K-COT and the K-COT win in the quarter which was a substantial booking by the team.
Now K-COT is KBR catalytic olefins technology, it is the only and I repeat only technology of its kind in the market.
Now this technology is unique and that it produces meaningfully higher volumes of propylene versus fastest competing technologies and as you know, propylene is in very, very high demand.
Additionally K-COT is the only commercially proven continuous operating process on the market, which means the both capex and opex costs are substantially lower and the energy consumption and thus environmental impact are also greatly reduced.
So in other words, it's highly monetizable at lower investment and operating costs translating into a higher ROI for our clients and at the same time advancing their sustainability agenda altogether very compelling.
So staying on the right hand side of the slide, as you would expect the cadence of awards and our energy transition advisory business also increased and is a great early indicator of activity in that market.
But it's clearly a step change in this activity and the cadence of new opportunities and awards has actually been above our expectation.
Technology led industrial solutions also had a fantastic start to the year and the pipeline for our digital solutions that leverages our IP and our domain expertise and helps our customers reduce cost, enhance throughput, increasing efficiency while also advancing their own sustainability goals is resonating.
As Mark will show you in a moment sustainable technology has come out of the gate strong in Q1, and we remain confident in delivering our 2021 guide that they will be a business that do sucker $1 billion in revenue, likely a bit more and with EBITDA margins in the mid teens, the high-end government business is a sustainable tech kicker.
So on to slide nine on the pipeline.
In Q1, we had some really nice wins and strategic areas as we just touched on so really following through on winning the right work.
It starts on the right you will be familiar with you know the stellar recompete win rate, the balanced portfolio of opportunities over $1 billion and multiple sizable opportunities over $100 million showing both the overall scale of opportunity, but also a minimal concentration risk.
The team has done a nice job across the customer set picking over $1.6 billion in awards and options in the quarter, a pleasing result and a typically like bookings quarter.
The key message here is that the recent budget announcements we expect to see our pipeline remain robust.
And the momentum we have is expected to continue.
Now I'll remind you we have a low recompete year in 2021 and in 2022 and you can probably see why we're so bullish on the outlook.
Now, when we announced guidance in late February, we stated that we had already secured over 70% seven zero percent of the work required to deliver the 2021 plan.
In Q1, we had excellent execution, especially in sustainable technology and this combined with Q1 bookings has driven the level of secured revenue closer to 80% eight zero percent.
So in short the markets and budgets remain very favorable.
We continue to deliver while also and on that I'd just like to have big shout to our people who do an incredible job and do things that really matter.
We are winning work and the differentiated areas we set out to do.
Our ESG commitment and direct linked to shareholder value is super exciting and compelling and Q1 was a great start to what is shaping up to be a great 2021 and beyond.
I now will hand over to Mark, who will give you some more color on the segments.
I will pick up on Slide 11.
So as you just heard, Q1 performance was generally in line with our 2021 guidance expectations and also our long range targets that we presented to you last month in our Investor Day.
Revenues of $1.5 billion and $135 million of adjusted EBITDA are right in line with our fiscal 2021 guide of $6 billion top-line and 9% EBITDA margin.
Cash was once again very strong out of the gate with free cash flow conversion coming in at 109% for the quarter.
Stuart also said it was particularly encouraging is the quality of the work that's coming in, in new orders.
We are winning high technology content defense, research and development and modernization contracts in line with our upmarket strategy.
Trusted microelectronics, rapid research and development and prototyping and others that Stuart cited earlier and also in our release are really good examples.
These programs are high priority high barrier to entry and in some cases leverageable to greater opportunities in the future.
The same is true in sustainable tech a stellar quarter in bookings for proprietary process technologies, including strong bookings across our new disruptive sustainability focus technologies like you heard from Stuart K-COT, K-PRO and K-SAAT and measured progress on energy transition advisory and smart operations and maintenance awards.
As I'll cover later, we did have some acceleration of profit in the first quarter, which were modestly relate our first half to second half earnings more toward the 45%, 55% mix versus our initial guide of 40%, 60%, but the bottom line here is, we are on track on all measures and thus reaffirming our guidance for the year.
On to Slide 12.
First as planned, we have collapsed into two segments Government Solutions, GS and Sustainable Technology Solutions STS.
Highlights on the GS side include 19% top-line growth, 5% of which was organic.
We absorbed a headwind from reduced of Middle East activity compared to last year with new growth areas, predominantly in sustaining and doing programs.
We have underscored to reduce dependency on the Middle East contingency work and the 15% growth in Readiness & Sustainment highlights the enormous success of our team in driving growth from new more recurring sources that will carry forward.
15% net organic growth in light of the reduced of Middle East activity is one of the top success stories this quarter and hats off to Ella Studer and her team for delivering not only excellent service in the Middle East through all the transitions going on and through a global pandemic, but also at the same time amazingly capturing and realizing tremendous growth and baseline recurring programs elsewhere in the world truly remarkable.
Growth came from sustaining O&M funded areas such as the important work our team does to plan, schedule and support training rotations at the National Training Center.
We were pleased with a really nice new award that the team, one in the U.K. Stuart also mentioned that earlier and that will start contributing to earnings later this year.
I'll also point out the nice balance of top-line contribution across all four business areas within GS, which is consistent with our strategic intentions of having low concentration risk, access to multiple funding channels and access to faster streams of funding growth as national priorities change.
GS margins were a percentage point off of our long-term guide and this is primarily driven by timing items and provisions that we took for a legal matter.
We do expect to achieve 10% EBITDA margins for the full year with strong contributions in the back half of the year driving that home.
Now for STS, we're off to a great start in Q1 and are on track to meet the full year guide of $1 billion plus of revenue at mid-teen margins.
As planned margins are vastly improved over last year, mostly from the fundamental improvement in business mix toward higher margin offerings and also the cost reductions we made last year in the overhead structure of that area.
As Stuart mentioned profit was amplified in the first quarter by several percentage points on the favorable delivery of a sustainable technology project as well as an R&D investment recovery.
These results were originally planned over several quarters this year, but due to good execution, early closeout and also accelerated cash collection of those items we recognized all of it in Q1, which is still be a great result from the team.
Overall, while we likely had some margin variability this year due to timing and mix.
We're confident as I said earlier, our full year guide of revenue and $1 billion plus zip code and margins in the mid-teens will be attained.
Now on to Slide 13.
Just a brief update here, there is no real change to our capital structure and deployment strategy, which we fully covered in the Investor Day just a few weeks ago.
Net leverage edged down just one tick driven from growth in EBITDA to 2.3 and in case you missed it we bumped up our dividend for the second year in a row now at $0.11 per quarter, up 10% from the 2020 dividend level.
And finishing up on Slide 14.
As stated, we are reaffirming guidance on all measures for the full year 2021, the guide reflects a repositioned revenue profile in both our Government and Sustainable Tech businesses.
On the government side, the guide reflects essentially an immaterial amount of Middle East contingency operations contribution replaced by upmarket advanced technology work and defense modernization, military and civil space, cyber security and a surge in growth from sustaining readiness and sustainment programs.
On the STS side, the guide reflects lower overall revenues, but much higher barrier work areas with stronger margin attributes particularly fueled by our proprietary sustainable process technologies.
These technologies R&D benefiting from much more commitment to greater energy efficiency and improved environmental outcomes across our entire contract base.
This is now complemented with an attractive front end advisory offering which is gaining traction and a recurring smart operations and maintenance offering which leverages the large installed base of industrial and government customers we have worldwide.
Altogether, the changes have produced a higher margin, strong cash flow business with well-established and reliable solutions in attractive end-markets.
And on to our final slide, Slide 15.
Our people continue to deliver, they really do an execution was again exemplary and we started 2021 well, a super strong performance across the entire business.
Cash conversion, really important was again terrific and our balance sheet and liquidity position as Mark demonstrated our both healthy.
The circa 80% eight zero percent of the work secured to deliver our 2021 guide under the strong Q1 now behind us, we are very confident of delivering 2021 and we reaffirm that guidance today.
Now remember that guidance reflects a 20% plus increase in adjusted earnings per share from a very, very resilient 20 actual.
As we reiterated at Investor Day, we continually endeavor to do that simple thing doing what we said we would do.
 Assistant:

Chosen response:
compname announces q1 revenue of $1.5 bln.
q1 revenue $1.5 billion.
reaffirming fy 2021 guidance.


Prompt:
Human: Joining me on the call today are Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer.
I'm now turning to Slide 3.
Our first quarter was a strong start to the year as we executed our strategy and delivered positive operating leverage relative to the year-ago period.
We continued to grow the number of clients across our franchise.
In the first quarter, we experienced the strongest growth in consumer households in five years.
Additionally, we continue to add commercial clients and deepen existing relationships.
We leverage the strength of our business model by raising over $13 billion for our commercial clients of which we retained approximately 19% on our balance sheet.
And let me just say that's exactly the way our model is designed to work, taking advantage of attractive markets for the benefit of our clients while maintaining our credit discipline with that which we place on our balance sheet.
We also launched our National Digital Bank, Laurel Road for doctors at the end of March.
I will comment more on that shortly.
In addition, we announced the acquisition of AQN Strategies, a client-focused analytics firm with deep expertise in the financial services industry.
The acquisition aligns to Key's relationship strategy and underscores our commitment to a data-driven approach to grow our business.
We also identified 70 branches for consolidation representing approximately 7% of our network.
We continue to lean into digital.
Most of these closures will take place in the second quarter.
Moving to our financial results for the quarter.
We reported net income of $591 million or $0.61 per share for the first quarter.
On a per share basis, this is an increase of 9% from the fourth-quarter results and up significantly from the year-ago period.
We generated record first-quarter revenue, which reflected broad-based growth across our company, driven by our fee-based businesses.
Our investment banking business achieved record first-quarter revenues with growth across the platform.
This is an area where we have invested in our teammates and made targeted acquisitions to enhance our capabilities, including such areas as healthcare and technology.
We have grown this business in eight of the last nine years, including having a record year in 2020, and we expect to grow this business again in 2021.
We reached a new milestone in our consumer mortgage business with record loan originations of $3 billion for the quarter.
In addition to adding high-quality loans to our balance sheet, consumer mortgage fees were up 135% from the year-ago period.
Our outlook for this business remains positive as we continue to grow and take market share.
We reported a record $8.3 billion of originations in 2020, and we expect to eclipse that level this year.
Other contributors to fee income this quarter were trust and investment services and cards and payments income.
Credit quality remains strong.
Non-performing loans, net charge-offs and criticized loans were all down from the prior quarter.
We continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through the business cycle.
Finally, we have maintained our strong capital position while continuing to return capital to our shareholders.
Our common equity Tier 1 ratio ended the quarter at 9.8%, which is above our targeted range of nine to nine and a half percent.
Our strong capital position enables us to execute against our capital priorities, organic growth, dividends and share repurchases.
This quarter, we repurchased $135 million of common shares.
Our board of directors also approved our first-quarter common stock dividend of 18 and half cents a share.
Now turning to Slide 4.
We acquired Laurel Road, a born digital company in April of 2019.
The acquisition has exceeded all of our expectations.
It has accelerated our digital transformation and has been a great complement to our existing healthcare platform.
Since our acquisition, Laurel Road has generated over $4.6 billion in high-quality loan originations adding high-value digital relationships with healthcare professionals.
We also have the opportunity to continue to scale this business.
At the end of March, we took the next step on this journey with the launch of our Digital Bank, Laurel Road for Doctors, serving the healthcare segment and expanding our consumer franchise nationally.
Importantly, our approach to our Digital Bank is differentiated.
Historically, many offerings have been product-centric or focused on deposit gathering.
Ours is a fully -- is fully aligned with our relationship strategy.
The launch broadened our offering for Laurel Road clients to include deposits, additional lending products and other value-added services created to meet the unique financial needs of healthcare professionals.
The launch was an important milestone in our digital journey, which brings together critical elements of our strategy, targeted scale, digital, healthcare and primacy.
Right now, we are focused on physicians and dentists, but soon, we will expand to other medical professionals.
Importantly, this launch is not the end goal but rather just the beginning.
I will close my remarks by restating that I am pleased with our results for the quarter and our strong start for 2021.
I am proud of what we have achieved as a team and remain optimistic about the future as we emerge from the pandemic and the economy continues to recover.
Key is well positioned to grow and deliver on our commitments for all of our stakeholders.
I'm now on Slide 6.
As Chris said, it was a strong start to the year with net income from continuing operations of $0.61 per common share, up 9% from the prior quarter and over four times from the year-ago period.
The quarter reflected a net benefit from our provision for credit losses.
The reserve release was largely driven by expected improvement in the economic environment.
Importantly, we generated a record first-quarter revenue, driven by the strength in our fee-based businesses.
Turning to Slide 7.
Total average loans were $101 billion, up 5% from the first quarter of last year, driven by growth in both commercial and consumer loans.
Commercial loans reflected Key's participation in PPP, partially offset by decreased utilization.
PPP loans had an impact of $7 billion in the first quarter of 2021 average balances.
Consumer loans benefited from the continued growth from Laurel Road and as Chris mentioned, record performance from our consumer mortgage business with $3 billion of consumer mortgage loans this quarter.
The investments we have made in these areas continue to drive results and importantly, add high-quality loans and relationships.
Linked quarter average loan balances were down 1%, reflecting lower commercial utilization rates and a reduction in average PPP balances.
We had just under $1 billion of PPP forgiveness in the current quarter.
Consumer loans were up 1% from the prior quarter, again related to continued production from consumer mortgage and Laurel Road.
Continuing on to Slide 8.
Average deposits totaled $138 billion for the first quarter of 2021, up $28 billion or 25% compared to the year-ago period and up 1.5% from the prior quarter.
The linked quarter and year-ago comparisons reflect growth in both commercial and consumer balances, which benefited from government stimulus.
The growth was offset by continued and expected decline in time deposits.
The interest-bearing deposit costs came down another 3 basis points from the fourth quarter of 2020, following an 8-basis-point decline last quarter.
We continue to have a strong, stable core deposit base with consumer deposits accounting for over 60% of our total deposit mix.
Turning to Slide 9.
Taxable equivalent net interest income was $1.012 billion for the first quarter of 2021 compared to $989 million a year ago and $1.043 billion for the prior quarter.
Our net interest margin was 2.61% for the first quarter of 2021 compared to 3.01% for the same period last year and 2.7% from the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by significant growth in our balance sheet compared to the year-ago period.
The larger balance sheet benefited net interest income but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter, net interest income decreased $31 million and the margin declined 9 basis points.
The decrease in net interest income was caused by the day count of approximately $14 million, lower loan fees of $8 million and lower loan balances resulting in an additional $8 million reduction to NII.
Net interest margin also reflected a 4-basis-point reduction due to the increases in our liquidity position.
Moving on to Slide 10.
We have continued to see growth in our fee-based businesses.
Non-interest income was $738 million for the first quarter of 2021 compared to $477 million for the year-ago period and $802 million in the fourth quarter.
Compared to the year-ago period, non-interest income increased 55%.
We had a record first quarter for investment banking and debt placement fees, which reached $162 million driven by broad-based strength across the platform.
This quarter, both debt and equity markets were especially strong.
Record mortgage originations drove mortgage -- consumer mortgage fees this quarter, which were up $27 million or 135% from the first quarter of '20.
Cards and payments income also increased $39 million related to higher prepaid card activity from state government support programs as well as the growth in the core platform.
Other income in the year-ago period included $92 million of market-related valuation adjustments.
Compared to the fourth quarter, non-interest income decreased by $64 million.
Largest driver of the quarterly decrease was seasonality in our investment banking line coming off an all-time high record quarter.
This was partially offset by the strength in trust and investment services income and cards and payments income.
I'm now on Slide 11.
Total non-interest expense for the quarter was $1.071 billion compared to $931 million last year and $1.1 billion in the prior quarter.
The increase from the prior year is primarily in personnel expense related to higher production-related incentive compensation, which increased $58 million and the increase in our stock price resulting in a $36 million increase compared to last year.
Employee benefit costs also increased $15 million.
Year over year, payments-related costs reported in other expense were $32 million higher, driven by higher prepaid activity.
Computer processing expense this quarter was elevated related to software investments across the platform, accounting changes and timing differences.
Compared to the prior quarter, non-interest expense decreased $57 million.
The decline was largely due to lower production-related incentives and severance costs.
Moving now to Slide 12.
Overall, credit quality continues to outperform expectations.
For the first quarter, net charge-offs were $114 million or 46 basis points of average loans.
Our provision for credit losses was a net benefit of $93 million.
This was determined based on our continued strong credit metrics as well as our outlook for the overall economy and loan production.
Non-performing loans were $728 million this quarter or 72 basis points of period-end loans, a decline of almost $60 million from the prior quarter.
Additionally, criticized loans declined and the 30- to 90-day delinquencies also improved again quarter over quarter with a 5-basis-point decrease, while the 90-day plus category remain relatively flat.
Now on to Slide 13.
Key's capital position remains an area of strength.
We ended the first quarter with a common equity Tier 1 ratio of 9.8%, which places us above our targeted range of nine to nine and a half perccent.
This provides us with sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, we continue to return capital to our shareholders in accordance with our capital priorities.
Our board of directors approved a first-quarter dividend of $0.185 per common share.
We also repurchased $135 million of common shares under the share repurchase authorization we announced in January of up to $900 million.
This leaves us with a capacity of up to $765 million for the next two quarters.
On Slide 14, we provide our full-year 2021 outlook, which we've adjusted to reflect our strong start to the year, positive momentum in our business and more favorable revenue outlook.
Consistent with our prior guidance, we expect to deliver positive operating leverage for the year.
Average loans are expected to be relatively stable, reflecting continued momentum in our consumer areas, the impact of PPP and stronger commercial growth in the second half of the year.
The first quarter should be the low point of the year with expected growth from here.
We expect deposits to be up mid-single digits and that we will continue to benefit from our low-cost deposit base.
Net interest income should be up low single digits.
Our net interest income will benefit from higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity, offset by the ongoing impact of low rates.
non-interest income should be up mid-single digits, reflecting the growth in most of our core fee-based businesses.
Non-interest expense should be relatively stable, reflecting higher production-based incentives related to our improved revenue outlook.
Our continuous improvement efforts and branch consolidation plans remain on track and will help support our ongoing investments in talent and to stay at the forefront of our digital offerings.
Moving on to credit quality.
We have reduced our net charge-off guidance, which is now expected to be in the 35 to 45-basis-point range for the year.
This reflects the quality of our portfolio and our current outlook.
And our guidance for our GAAP tax rate remains unchanged at around 19% for the year.
Finally, shown at the bottom of the slide are our long-term targets, which remain unchanged.
We expect to continue to make progress on these targets by maintaining our moderate risk profile and improving our productivity and efficiency, which will drive returns.
Overall, it was a good start to the year, and we remain confident in our ability to deliver on our commitments to all of our stakeholders.
 Assistant:

Chosen response:
compname reports record q1 2021 net income of $591 million, or $.61 per diluted common share.
compname reports record first quarter 2021 net income of $591 million, or $0.61 per diluted common share.
taxable-equivalent net interest income was $1.0 billion for q1 versus taxable-equivalent net interest income of $989 million.
average loans were $100.7 billion for q1 of 2021, an increase of $4.6 billion compared to q1 of 2020.
qtrly net loan charge-offs $114 million versus $84 million.
qtrly provision for credit losses was net benefit of $93 million versus an expense of $359 million in q1 2020.


Prompt:
Human: I'm pleased to report that Korn Ferry once again achieved all-time financial performance highs.
Revenue was up 47% and our diluted and adjusted diluted earnings per share were $1.38 and $1.53, respectively.
And our adjusted EBITDA margin was 21.1%.
I think our performance over recent quarters has reached a new level of scale and it speaks to the resiliency and agility of our colleagues, as well as our operational excellence, amid a time of enormous transition and secular change.
And this aligns with our businesses.
Today, wherever and whenever strategy meets talent, Korn Ferry is at that cross section, enabling agility in a world that will undoubtedly be in transition for the next several years.
Our strategy in the New Year will be to continue to innovate, replicate, and scale, allowing people and organizations to exceed their potential in this rapidly changing world.
Elements of our strategy will include driving a top-down go-to-market strategy, through our Marquee and Regional Accounts, which represent about 36% of our portfolio and that not only facilitates growth and enduring partnerships, but is also key to more scalable and durable revenues.
For example, in the quarter, about 30% of our revenue was driven by cross referrals within our firm, demonstrating the effectiveness of our go-to-market strategy.
Although our search businesses, both Pro Search and Executive Search combined represent about 45% of our revenue, we believe there is still substantial market opportunity ahead, given the acceleration of an increasingly nomadic labor market.
It's one of the reasons we acquired the Lucas Group during the quarter, a move that adds breadth and depth to Korn Ferry's search portfolio.
Looking at our digital and consulting businesses, we will continue to innovate, marrying Korn Ferry's capabilities with tomorrow's opportunities.
From ESG to DE&I to M&A services and we're also going to further push the monetization of our IP and move more of our digital business to a subscription offering.
We're going to also scale our learning development outsourcing or LDO capabilities, leveraging our Korn Ferry Advance platform, in which we now have completed 50,000 development and coaching sessions.
And lastly, we're going to deploy a balanced capital allocation strategy, including a disciplined approach to M&A.
Looking ahead, I truly feel we have the strategy, the people, the diversity of solutions and expertise to help our clients drive performance in this new world and our results clearly reflect this reality.
We look forward to keeping up the momentum in the New Year ahead.
And with that, I am joined by Bob Rozek and Gregg Kvochak.
Let me start with a few comments before I jump into the second quarter results.
So, I've always felt that the best way to measure success is through performance and if you look at our performance coming out of the COVID recession, it's really been and continued to be exceptional and that's reflected in our Q2 results.
There's no doubt that the world we live in has changed for good.
Today, more than ever, our clients are facing unprecedented organizational and human capital challenges as workforces are transformed and digitized, as corporations are called upon to have greater environmental, social and governance responsibilities, as organization strive to have work environments that are inclusive and free from bias, so even as companies are challenged to grow in a post-COVID environment.
These are real secular changes, creating real and challenging business issues for companies across the globe and it's a fact that no business issue has ever been solved without the involvement of people and that's really where Korn Ferry comes in.
I mean that's our sweet spot, right.
Our core and integrated solutions line up perfectly with the secular changes that companies across the globe are wrestling with today, whether it's finding the right talent in a dislocated labor market to accelerating the top line growth or to even keeping employees engaged, motivated, appropriately rewarded and retained in this new and evolving work and social environment.
As these forces continue to shape the workplace, our clients, in growing numbers, continue to recognize the role that our people and our solutions play in helping them solve their most pressing business issues through their most precious asset, their people.
I would also say that this is not our 15 minutes of fame.
I mean these secular changes that we're all feeling are real and they are here to stay.
In my view, I think, I really believe that we're in the first inning of a long ball game.
Now just as market demand has been strong, our execution has been stronger, driving our fee revenue, earnings and profitability to new all-time highs.
Now I'm going to turn to Q2 results.
So as Gary mentioned, fee revenue in the second quarter grew $204 million or 47% year-over-year and $54 million or 9% sequentially, reaching an all-time high of $639 million.
Fee revenue growth in the quarter for our consolidated Executive Search business was up 59% year-over-year and up 9% sequentially while our RPO and Professional Search business was up 76% year-over-year and 8% sequentially.
Growth for our Consulting and Digital businesses was also very strong.
Consulting grew 30% year-over-year and 11% sequentially, while Digital was up 18% year-over-year and 10% sequentially.
Turning to earnings and profitability, they also grew to new highs in the quarter.
Our adjusted EBITDA grew $69 million year-over-year and $13.5 million or 11% sequentially to $135 million with an adjusted EBITDA margin of 21.1%, both are new quarterly highs.
Our earnings and profitability continue to benefit from both higher consultant and execution staff productivity and lower G&A spend.
Adjusted fully diluted earnings per share also advanced to a new high in the quarter, improving to a $1.53, which was up $0.99 compared to adjusted fully diluted earnings per share in the second quarter of fiscal '21 and actually up $0.16 or 12% sequentially.
When you compare our business today through the first six months to the same period in fiscal year '20 and that's the pre-pandemic period just two years ago, both our scale and our profitability are up dramatically.
Our firm's fee revenue for the fiscal year '22 Q2 year-to-date period is up 25% with double-digit growth in every line of business.
Our adjusted EBITDA over the same comparison period is up 67%, that's nearly 3 times greater than fee revenue growth and our adjusted EBITDA margin is up 530 basis points to nearly 21%.
Our earnings power has never been higher.
As I look at new business, that also accelerated in the quarter, reaching new highs for each of our lines of business.
On a consolidated basis, new business awards, excluding RPO, were up 40% year-over-year and up approximately 8% sequentially.
RPO new business was also extremely strong with a record $136 million of total contract awards.
This consolidated record level of new business across the -- all of our business lines in the second quarter really provides us with a very solid backlog, entering the fiscal third quarter.
Our investable cash position also remained strong.
At October 31, the end of the second quarter, cash and marketable securities totaled $997 million.
Now, when you exclude amounts reserved for deferred compensation arrangements and accrued bonuses, our global investable cash balance at the end of the second quarter was approximately $591 million and that's up about $133 million or 29% year-over-year.
It should be noted that this investable cash position includes approximately $90 million that was used to acquire the Lucas Group on November 1.
We continue to take our balanced approach to allocation of capital.
In addition to the Lucas Group and investing in the hiring of additional fee earners and execution staff, year-to-date, we've repurchased approximately $14 million of our stock and have paid cash dividends of approximately $14 million as well.
With that -- excuse me.
I'm going to start with KF Digital.
Global fee revenue for KF Digital was $88.6 million in the second quarter, which was up 18% year-over-year and up 10% sequentially.
The subscription and licensing component of KF Digital fee revenue grew to $26 million in the second quarter, which was up 16% year-over-year and up 7% sequentially.
Additionally, global new business for KF Digital in the second quarter grew 29% year-over-year to a new high of $114 million with $44 million or 39% related to subscription and license services.
Earnings and profitability also continued to grow for KF Digital in the second quarter with adjusted EBITDA of $28.6 million and a 32.2% adjusted EBITDA margin.
Now turning to Consulting.
In the second quarter, Consulting generated $164.9 million of fee revenue, which was up approximately $38 million or 30% year-over-year and $16 million or 11% sequentially.
Fee revenue growth continued to be broad-based across all solution areas and strongest regionally in North America, which was up over 43% year-over-year.
Consulting new business also reached a record high in the second quarter, growing approximately 17% year-over-year and 2% sequentially.
Regionally, new business growth was also broad-based in the second quarter with continued strength in North America and improving trends in EMEA and APAC.
Adjusted EBITDA for Consulting in the second quarter improved to $30.1 million with an adjusted EBITDA margin of 18.2%.
Growth for RPO and Professional Search continued to improve in the second quarter.
Globally, fee revenues grew $150.4 million, which was up 76% year-over-year and up approximately $11 million or 8% sequentially.
Both RPO and Professional Search continued to take advantage of post-recession dislocation in the labor market for skilled professionals.
RPO fee revenue grew approximately 69% year-over-year and 10% sequentially, while Professional Search fee revenue was up approximately 88% year-over-year and 5% sequentially.
Sequentially, both the number of new search assignments and the average fee per assignment were up double digits for Professional Search.
New business wins for both RPO and Professional Search were also extremely strong in the second quarter, reaching new all-time highs.
Professional Search new business was up 13% sequentially and RPO was awarded a record $136 million of new contracts, consisting of $28 million of renewals and extensions and $108 million of new logo work.
Adjusted EBITDA for RPO and Professional Search continued to scale with revenue improving to $36.3 million with an adjusted EBITDA margin of 24.1%.
Finally, in the second quarter, global fee revenue for Executive Search reached another new all-time high of $235 million, which was up 59% year-over-year and up 9% sequentially.
Growth was also broad-based and led by North America, which grew 74% year-over-year and over 14% sequentially.
Fee revenue in our international regions remained steady in the second quarter.
EMEA and APAC were up approximately 34% and 36%, respectively, measured year-over-year, and essentially flat sequentially.
We continue to invest in expanding our team of consultants in the second quarter.
The total number of dedicated Executive Search consultants worldwide at the end of the second quarter was 570, up 58% year-over-year and up 5%, sequentially.
Annualized fee revenue production per consultant in the second quarter improved to a record $1.66 million and the number of new search assignments opened worldwide in the second quarter was up 37% year-over-year and 5% sequentially to a new all-time high of 1,830.
In the second quarter, global Executive Search adjusted EBITDA grew to approximately $66 million, which was up $38 million year-over-year and up $4.5 million or 7% sequentially.
Adjusted EBITDA margin in the second quarter was 28.1%.
As I mentioned earlier, new business in the second quarter grew to a new all-time high and it actually accelerated each consecutive month in the quarter and that positions us with a very strong backlog entering our third fiscal quarter.
In fact, as we ended the quarter, October and September were our first and second highest new business months ever.
While our third quarter is usually our most seasonal quarter as both our clients and colleagues take time off during the year and holiday seasons.
However, November was also an excellent month for new business, actually eclipsing September as the second highest month ever, and that was up 37% year-over-year.
Now if monthly trends in each of our lines of business are consistent with our historical patterns and the market conditions remain strong, we would expect December to be seasonally slower than November with demand accelerating and peaking at a quarter high in January.
Additionally, we will continue to make investments in consultants and execution staff to fuel future growth, and we expect employee productivity to remain strong and G&A spend to remain at current levels in the third quarter, keeping both earnings and profitability strong.
Now assuming no new major pandemic-related lockdowns or changes in worldwide economic conditions, financial markets, and foreign exchange rates, and including fee from the Lucas Group, we expect our consolidated fee revenue in the third quarter of fiscal '22 to range from $640 million to $660 million and our consolidated adjusted diluted earnings per share to range from $1.42 to $1.58 while our GAAP diluted earnings per share should range from $1.38 to $1.56.
As we look ahead to the New Year, we see a great opportunity to continue to build on our strong financial performance.
Based on the strength or I should say the continuing strength of our new business trends, it is evident to us that our portfolio of solutions will have a continuing relevance as companies address the secular changes I previously discussed.
We will continue to execute at a high level and there is little doubt that we are well positioned to take more than our fair share of the growing market.
Korn Ferry has never been better positioned to serve all of its constituencies; colleagues, clients, candidates and shareholders for years to come.
With that, we would be glad to answer any questions you may have.
 Assistant:

Chosen response:
q2 earnings per share $1.38.
fee revenue of $639.4 million in q2 fy'22, an increase of 47%.
q3 fy'22 fee revenue is expected to be in range of $640 million and $660 million.
qtrly adjusted diluted earnings per share was $1.53.
q3 fy'22 diluted earnings per share is expected to range between $1.38 to $1.56.
q3 fy'22 adjusted diluted earnings per share is expected to be in range from $1.42 to $1.58.