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Just after the close of regular trading, Edwards released fourth quarter 2021 financial results.
These statements include, but aren't limited to: financial guidance and expectations for longer-term growth opportunities; regulatory approvals; clinical trials; litigation; reimbursement; competitive matters; and foreign currency fluctuations.
Finally, a quick reminder that when using the terms underlying and adjusted, management is referring to non-GAAP financial measures.
Otherwise, they are referring to GAAP results.
We're proud of our performance in 2021.
Although hospitals continue to be impacted by COVID, it was a year of significant milestones and investment for Edwards and our teams were relentless.
In TAVR, we made important strides in executing our long-term strategy.
In particular, we invested in increasing awareness, pursued further therapy expansion and advance new technologies.
We completed enrollment of the EARLY-TAVR trial, an important pivotal study studying the treatment of severe aortic stenosis patients before their symptoms develop.
Separately, we initiated enrollment in our PROGRESS trial for moderate AS patients, and we received FDA approval for our ALLIANCE pivotal trial to start our next-generation TAVR technology, SAPIEN X4.
In TMTT, we achieved our significant 2021 milestones as we continue to make meaningful progress on advancing our three key value drivers: a portfolio of pioneering therapies for patients; positive pivotal trial results to support approvals and adoption; and favorable real-world clinical outcomes.
We are pleased to have treated over 3,000 patients in 2021 with our differentiated portfolio of TMTT therapies, gaining valuable learnings through both our clinical and commercial experiences.
Each of our platforms demonstrated promising outcomes and clinical performance.
I'm also pleased to announce that we completed enrollment of our CLASP IID pivotal trial in 2021, an important milestone that keeps us on track for U.S. approval late this year.
In Surgical Structural Heart, we extended our leadership position through the adoption of our premium technologies.
We also implemented valuable additions to our smart monitoring advancements in critical care.
Most importantly, in 2021, even more patients benefited from Edwards' life-saving technologies than ever before.
I'm also proud to say that throughout the year, our employees remain dedicated to keeping our commitments to patients and to one another.
Despite the ongoing pandemic that fueled global challenges, our employees found innovative ways to support hospital procedures and to ensure our ability to supply our life-saving therapies was not impacted.
And through their efforts, we were able to get our technologies into the hands of our trusted partners around the world so they could serve their patients.
Now I'd like to cover several 2021 financial highlights before I get into the quarterly details.
In 2021, we are pleased to achieve all of our key financial expectations.
Underlying sales increased 18% to $5.2 billion, driven by balanced organic sales growth in each region.
We achieved 19% growth in adjusted earnings per share, while also increasing R&D, 19%.
The significant increase in R&D and infrastructure investments this year helped strengthen our long-term outlook.
And as you heard at our investor conference last month, we are as convinced as ever about the tremendous opportunity we have to enhance patients' lives and bring significant value to the healthcare system.
Turning to our financial results.
Fourth quarter sales of $1.3 billion increased 13% on a constant currency basis versus the year ago period.
Growth was driven by our portfolio of innovative technologies, although at the lower end of our October expectations due to the pronounced impact of Omicron on hospital resources in December, especially in the U.S. Full year 2021 global TAVR sales of $3.4 billion increased 18% on an underlying basis versus the prior year.
Despite intermittent challenges associated with the pandemic throughout the year, sales were in line with our original guidance of 3.2 to 3.6 billion and were driven by increased awareness of the benefits of TAVR therapy with our SAPIEN platform.
In the fourth quarter, our global TAVR sales were $872 million, an increase of 13% on an underlying basis, with impressive strength outside the U.S.
We estimate global TAVR procedure growth was comparable with our growth.
And globally, average selling prices were stable as we maintained our disciplined pricing strategy.
In the U.S., our TAVR sales grew 10% year over year in the fourth quarter, and we estimate that our share of procedures was stable.
As previously mentioned, the Omicron variant had a noticeable impact on hospital resources in December as cases were postponed or limited in a number of hospitals.
Growth in the U.S. was highest in small- to mid-volume centers, which are helping provide access to a broader population of aortic stenosis patients.
Outside the U.S., in the fourth quarter, our sales grew approximately 20% year over year on an underlying basis, and we estimate total TAVR procedure growth was comparable.
We continue to be encouraged by the strong international adoption of TAVR broadly in all regions.
In Europe, Edwards' growth was in the mid-teens, and we estimate that our competitive position was stable.
Growth was broad-based across the region.
It's worth noting that a recent cost-effectiveness study demonstrated that TAVR with SAPIEN 3 was economically dominant when compared to surgical aortic valve replacement in treating French patients with severe symptomatic aortic stenosis who are at low surgical mortality -- who are at low risk of surgical mortality.
We're also encouraged by the recently published guidelines from the European Association of Cardiothoracic Surgery, which now definitively recommend TAVR for patients over 75.
We believe both of these developments represents an important long-term opportunity to bring TAVR therapy to even more patients in need.
Sales growth in Japan was also strong, where therapy adoption is still relatively low.
Several important milestones were achieved in Q4.
For the first time, the number of TAVR procedures performed in Japan was comparable with the surgical aortic valve replacements.
Furthermore, in each prefecture in Japan, there is now at least one hospital offering SAPIEN.
Following the recent reimbursement approval for the treatment of patients at low surgical risk, we remain focused on expanding the availability of TAVR therapy throughout the country.
Longer term, we see excellent opportunities for continued OUS growth as we believe global adoption of TAVR therapy remains quite low.
In addition to our geographic expansion of our TAVR therapies, we remain focused on indication expansion.
In Q4, we completed enrollment of our EARLY-TAVR pivotal trial, which is focused on the treatment of asymptomatic AS patients.
Separately, we initiated enrollment in PROGRESS, an important pivotal trial for moderate aortic stenosis to determine the optimal time to treat patients who have this progressive disease.
We believe that some patients may benefit from earlier treatment before they have symptoms or before their AS becomes severe, rather than risking irreversible damage to their heart as the disease progresses.
We also took steps to advance our innovative product portfolio.
In Q4, we received FDA approval for our ALLIANCE pivotal trial to study our next-generation TAVR device, SAPIEN X4.
Additionally, in Q4, we received FDA approval to use SAPIEN 3 with our Alterra adaptive pre-stent for congenital heart patients.
This should result in a quality of life improvement and a reduction in the number of procedures that these younger patients will require over their lifetime.
In summary, despite a slower-than-expected start to the year, we continue to anticipate 2022 underlying TAVR sales growth of 12 to 15%, consistent with the range we shared at our December investor conference.
Our outlook assumes COVID-related challenges early in 2022, turning to more normalized growth environment as headwinds from Omicron subside and hospital resource constraints stabilize.
We remain confident in this large global opportunity will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range.
As I mentioned, in the fourth quarter, we completed enrollment of our CLASP IID pivotal trial, and we remain on track to present data in the second half of 2022.
This important milestone keeps us on track for U.S. approval late this year of PASCAL for patients with degenerative mitral regurgitation.
We also continue to expect European approval of our next-generation PASCAL Precision System later this year.
At the PCR London Valves conference in Q4, PASCAL 30-day outcomes from our MiCLASP post-market approval study of more than 250 patients in Europe were presented.
The data highlighted safe and effective MR reduction in a post-market setting.
We also progressed on the enrollment of our CLASP IIF pivotal trial for patients with functional mitral disease.
In mitral replacement, we continue to expand our experience with both our transcatheter mitral replacement therapies through the ENCIRCLE pivotal trial for SAPIEN M3 and the MISCEND study for EVOQUE Eos.
Early experience with these sub-French transfemoral therapies increase our confidence in both platforms.
Turning to transcatheter tricuspid therapies, results from the TRISCEND study were presented at the Annual TCT Conference in November and demonstrated that early patient outcomes with the EVOQUE tricuspid were favorable and sustained at six months.
We are encouraged by the procedural success rates and also the significant TR reduction and sustained improvements in quality of life measures experienced by these patients.
We continue to make meaningful progress in enrolling our two tricuspid pivotal trials the tri cusp -- the TRISCEND II pivotal trial for the EVOQUE system and the CLASP IITR pivotal trial with PASCAL in patients with symptomatic severe tricuspid regurgitation.
We anticipate a late 2022 approval of EVOQUE tricuspid in Europe and remain committed to providing solutions for these patients that have very poor prognosis and few treatment options today.
Turning to the sales performance of TMTT.
Fourth quarter revenue of $25 million grew sequentially from the third quarter as we saw increased adoption of the PASCAL system despite the negative COVID impact in December.
Full year 2021 global sales more than doubled to $86 million.
As we continue to expand the availability of PASCAL to more centers in Europe, we are pleased with the excellent outcomes for patients supported by our high-touch model.
We look forward to continuing our progress toward advancing our vision to transform the lives of patients with mitral and tricuspid valve disease in 2022 with the milestones that we outlined in our recent investor conference.
Despite the COVID impact so far this year, we continue to expect TMTT sales of 140 to $170 million for 2022.
We estimate the global TMTT opportunity will grow to approximately $5 billion by 2028, and we remain committed to bringing our groundbreaking portfolio of therapies to patients with these life-threatening diseases.
We are confident our portfolio strategy positions us well for leadership.
In Surgical Structural Heart, full year global sales were $889 million, up 15% on an underlying basis versus the prior year.
Fourth quarter 2021 global sales of $221 million increased 9% on an underlying basis over the prior year.
Although we saw that hospital staffing shortages continued to worsen throughout the quarter, especially in the U.S., life-saving surgical therapies continue to be prioritized over elective procedures.
We're excited about the continued global adoption of INSPIRIS RESILIA aortic surgical valve, the KONECT RESILIA aortic tissue valve conduit and our MITRIS RESILIA valve.
We remain encouraged by the growing evidence that supports Edwards RESILIA tissue valves, including two studies being presented at the Society of Thoracic Surgeons Conference this weekend.
The COMMENCE study demonstrates excellent hemodynamics of this tissue technology across all aortic valve sizes at five years, while a European economic value study shows a cost reduction with the use of INSPIRIS versus mechanical valves.
In summary, we continue to expect that our full year 2022 underlying sales growth will be in the mid-single-digit range for Surgical Structural Heart, driven by adoption of our premium technologies and procedure growth.
Even as TAVR adoption expands, we're excited about our ability to provide innovative surgical treatment options for patients, extend our global leadership, and be the partner of choice for cardiac surgeons.
Turning to Critical Care.
Full year global sales of $835 million increased 14% on an underlying basis versus the prior year.
2021 growth was driven by balanced contributions from all product lines led by HemoSphere sales as capital spending resumed.
Our TruWave disposable pressure monitoring devices used in the ICU also remained in high demand due to the elevated COVID hospitalizations in both the U.S. and Europe.
Fourth quarter Critical Care sales of $212 million increased 8% on an underlying basis, driven by strong demand for HemoSphere.
Demand for our broad portfolio of smart recovery sensors also remained robust in the fourth quarter, including ClearSight, our noninvasive finger cuff, which achieved sustained performance at or above pre-COVID levels.
As discussed at our recent investor conference, the integration of a full range of technologies creates a unique offering of enhanced recovery tools and predictive analytics capabilities to further strengthen our leadership in hemodynamic monitoring.
In summary, we continue to expect mid-single-digit underlying sales growth for 2022, and we remain excited about our pipeline of innovative critical care products.
Today, I'll provide a wrap-up of 2021, including detailed results from the fourth quarter, as well as provide an update on guidance for the first quarter and full year of this year.
Sales in the fourth quarter increased 12.6% on an underlying basis.
Adjusted earnings per share was $0.51, and GAAP earnings per share was $0.53.
Our fourth quarter sales were negatively impacted by the wave of COVID that began late in the quarter, especially in the U.S. Earnings per share in the quarter was below our expectations as it was impacted by weaker-than-expected sales and we accelerated certain spending into the fourth quarter of 2021 that we had planned to incur during 2022, including preparation for TMTT product launches.
For the full year 2021, we are pleased with our performance as sales increased 18% on an underlying basis to $5.2 billion and adjusted earnings per share grew 19% to $2.22.
I'll now cover the details of our results and then discuss guidance for 2022.
For the fourth quarter, our adjusted gross profit margin was 76.8%, compared to 75.3% in the same period last year.
This increase was primarily driven by a favorable impact from foreign exchange.
We continue to expect our full year 2022 adjusted gross profit margin to be between 78 and 79%.
This year, our rate should be lifted by a favorable impact from foreign exchange and an improved product mix, partially offset by investments in our manufacturing capacity.
Selling, general and administrative expenses in the fourth quarter were $424 million or 31.9% of sales, compared to $339 million in the prior year.
This increase was driven by the resumption of medical congresses and commercial activities compared to the COVID impacted prior year, as well as the addition of personnel in preparation for new product launches.
We continue to expect full year 2022 SG&A as a percent of sales, excluding special items, to be between 28 and 30%.
Research and development expenses in the quarter grew 19% to $233 million or 17.5% of sales.
This increase was primarily the result of continued investments in our transcatheter innovations, including increased TMTT clinical trial activity.
For the full year 2022, we continue to expect R&D as a percentage of sales to be in the 17 to 18% range as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth.
During the fourth quarter, we recorded an $18 million net reduction in the fair value of our contingent consideration liabilities, which benefited earnings per share by $0.03.
This gain was excluded from the adjusted earnings per share of $0.51 I mentioned earlier.
This reduction reflects an accounting adjustment associated with reduced expectations of making a future milestone payment for a previous acquisition.
Our reported tax rate this quarter was 10.9% or 12.7%, excluding the impact of special items.
This rate included an approximate 3 percentage point benefit from the accounting for stock-based compensation.
Our full year 2021 tax rate, excluding special items, was 12.6%.
We continue to expect our full year rate in 2022 to be between 11 and 15%, which includes an estimated benefit of 3 percentage points from stock-based compensation accounting.
Foreign exchange rates decreased fourth quarter reported sales by approximately 1% or $10 million compared to the prior year.
At current rates, we now expect an approximate $100 million negative impact or about 2% to full year 2022 sales as compared to 2021.
Foreign exchange rates positively impacted our fourth quarter gross profit margin by 140 basis points compared to the prior year.
Free cash flow for the fourth quarter was $284 million, defined as cash flow from operating activities of $374 million, less capital spending of $90 million.
Full year 2021 free cash flow was $1.4 billion, up from $734 million in 2020.
We continue to expect full year 2022 free cash flow to be between 1.2 and $1.5 billion.
In 2022, we expect our cash flow will be reduced by approximately $200 million due to a change in tax regulations involving the timing of the deductions for research and development expenses.
Turning to the balance sheet.
We have a strong balance sheet, with approximately $1.5 billion in cash, cash equivalents, and short-term investments at the end of the year.
Consistent with our practice of opportunistically repurchasing shares, we purchased approximately $100 million during the fourth quarter.
We still have remaining share repurchase authorization of $1.1 billion.
Average shares outstanding during the fourth quarter were $632 million, relatively consistent with the prior quarter.
We continue to expect average diluted shares outstanding for 2022 to be between 630 and $635 million.
Before turning the call back over to Mike, I'll finish with financial guidance for 2022.
Despite a slow start to the year associated with Omicron's impact on hospital resources, we are planning for conditions to gradually improve and therefore, are maintaining all of our previous sales guidance ranges for 2022.
For total Edwards, we continue to expect sales to grow at a low double-digit rate to 5.5 billion to $6 billion.
For TAVR, we expect sales of 3.7 to $4 billion.
And for TMTT, we expect sales of 140 to $170 million.
We expect Surgical Structural Heart sales of 870 to $950 million and Critical Care sales of 820 to $900 million.
For full year 2022, we continue to expect adjusted earnings per share of $2.50 to $2.65.
For the first quarter of 2022, we project total sales to be between 1.27 and $1.35 billion and adjusted earnings per share of $0.54 to $0.62.
And with that, I'll pass it back to Mike.
So in conclusion, we're proud of the significant progress we made in 2021, advancing new transformational therapies and delivering strong financial performance.
We expect continued growth and progress in 2022.
We are enthusiastic about the continued expansion of catheter-based therapies for the many structural heart patients still in need, which positions us well long-term success.
As the global population ages and cardiovascular disease remains the No.
1 largest health burden, we believe the opportunity to serve our patients will nearly double between now and 2028.
We are confident that our patient-focused innovation strategy can transform care and bring value to patients and the healthcare system.
| compname says q4 sales grew 12% to $1.33 billion, up 13% on an underlying basis.
q4 sales grew 12% to $1.33 billion, up 13% on an underlying basis.
fy 2022 financial guidance unchanged.
q4 earnings per share was $0.53; q4 adjusted earnings per share was $0.51.
qtrly tavr sales of $872 million, up 12%.
tavr sales negatively impacted in last several weeks of q4 due to impact omicron had on hospital resources in u.s.
co is reaffirming 2022 sales guidance for all product groups.
sees q1 total sales between $1.27 and $1.35 billion, and q1 adjusted earnings per share of $0.54 to $0.62.
believe that opportunity to serve our patients will nearly double between now and 2028.
|
I appreciate you joining us today to discuss our fourth quarter and full-year fiscal 2021 results.
Before I comment on the results, I would like to take a moment to reflect on the last fiscal year.
The reduction of commercial passenger air travel to nearly zero shortly before our fiscal year began and the persistently depressed levels of commercial traffic throughout the year tested our industry and our company to agree that was previously hard to imagine.
At AAR, we have a strong set of values, one of them is to Every Day, Find a Way.
That has never been more important than it has been over the last 16 months, and I'm proud of the results we have delivered.
And I'm pleased to be able to say that we are now emerging from this crisis an even stronger, more focused company.
Turning to our results.
Sales for the year decreased 20% from $2.07 billion to $1.65 billion, and our adjusted diluted earnings per share from continuing operations decreased 39% from $2.15 per share to $1.31 per share.
These results reflect the impact of COVID-19 on the demand for commercial air travel, but also our team's ability to reduce costs and increase efficiency to mitigate that impact.
As you may recall, our Q4 of last year was only partially impacted by COVID as our hangars completed work on aircraft that were already in the hangar when the pandemic began.
As such, I'm particularly pleased to report that sales for the fourth quarter were up 5% from $417 million to $438 million, and I'm even more pleased to report that adjusted diluted earnings per share from continuing operations were up 81% from $0.26 per share to $0.47 per share.
Our sales to commercial customers increased 3%, and our sales to government and defense customers increased 7%.
Sequentially, our total sales growth was 7% and our adjusted diluted earnings per share growth was 27%.
The earnings per share growth was driven by our operating margin, which was 5.2% for the quarter on an adjusted basis, up from 3.2% last year and 5% in the third quarter.
We saw strong performance in our MRO operations as airlines performed maintenance in advance of the anticipated return to summer leisure travel as well as the strong performance in our government programs' contracts.
Notably, we have not seen much of a recovery in our commercial parts supply businesses as operators continue to consume their existing inventory.
Parts supply is one of our higher margin activities, and the performance in the quarter did not yet reflect the recovery of that business.
It was another strong quarter, as we generated $23.5 million from operating activities from continuing operations.
We also continue to reduce the usage of our accounts receivable financing program.
Excluding the impact of that AR program, our cash flow from operating activities from continuing operations was $33.3 million.
The results for the year reflect our accomplishments in three key areas.
First, we moved quickly at the outset of the pandemic to reduce costs and optimize our portfolio for efficiency.
We did this by consolidating multiple facilities, making permanent reductions to our fixed and variable costs, exiting or restructuring several underperforming commercial programs' contracts and completing the divestiture of our Composites business, which had been unprofitable in recent quarters.
Second, we continued to win important new business.
In particular, we created a partnership with Fortress to supply used serviceable material on the CFM56-5B and -7B engine types.
We were awarded a follow-on contract from the Navy that extended and expanded our support of its C-40 fleet.
We expanded our distribution relationship with GE subsidiary Unison.
We entered into a 10-year agreement with Honeywell to be an exclusive repair provider for certain 737 MAX components.
And most recently, we signed a multi-year agreement with United to provide 737 heavy maintenance in our Rockford facility.
Finally, we focused on our balance sheet and working capital management, which allowed us to generate over $100 million of cash from operating activities from continuing operations, notwithstanding the investments that we made to support new business growth.
We demonstrated that we can generate cash even in a downmarket.
And as a result, we are now well under one times levered and exceptionally well positioned to fund our growth going forward.
There are very few companies in commercial aviation that are emerging from the pandemic with a debt level that is actually lower than when they entered.
Our sales in the quarter of $437.6 million were up 5% or $21.1 million year-over-year.
Sales in our Aviation Services segment were up 6.5%, driven by continued strong performance in government, as well as the recovery in commercial.
Sales in our Expeditionary Services segment were down slightly, reflecting the divestiture of our Composites business.
Gross profit margin in the quarter was 16.4% versus 8.7% in the prior year quarter.
And adjusted gross profit margin was 16.5% versus 13.6% in the prior year quarter.
Aviation Services gross profit increased $32.9 million, and Expeditionary Services gross profit increased $2.5 million.
Gross profit margin in our commercial activities was 13.4%.
This reflects the relative strength in MRO where we've been able to drive margin improvement through the efficiency actions we have taken.
As the commercial market continues to recover, we would expect higher overall commercial gross margins.
Gross profit margin in our government activities was 19.7%, which was driven by continued strong performance as well as certain events that occurred during the quarter.
The adjustments in the quarter include $2.1 million related to the closure of our Goldsboro facility, which had supported our Mobility business within Expeditionary Services.
We have completed our consolidation of those operations into Mobility's Cadillac, Michigan facility, and the adjustment reflects our current estimate of sale proceeds from the building.
Looking forward, subsequent to the end of Q4, one of our commercial programs' contracts was terminated.
As a result, we expect to recognize impairment charge of between $5 million and $10 million in the first quarter of fiscal '22.
This contract had been underperforming for us in recent quarters.
And with this termination, our restructuring actions in commercial programs are largely complete.
As John described, we have taken steps over the last year to rationalize certain underperforming operations, including the divestiture of our Composites business, the closure of our Duluth heavy maintenance facility and the exit or restructuring of certain contracts.
These activities, along with the terminated contracts I just described, collectively contributed approximately $140 million of annualized pre-COVID sales, which will not return as commercial markets recover.
However, the absence of these operations is now part of what's driving our increasing profitability.
SG&A expenses in the quarter were $48.8 million.
On an adjusted basis, SG&A was $46.7 million, up only $0.2 million from the prior year quarter despite the increase in sales.
As a reminder, SG&A in the prior year quarter already reflected our cost reduction actions.
For fiscal year '22, we would expect a modest increase in SG&A compared to FY '21 as we invest in certain initiatives such as digital that will drive improved performance in future years.
We continue to focus on driving SG&A as a percent of sales to 10% or lower as our top line recovers.
As John indicated, we generated cash flow from our operating activities from continuing operations of $23.5 million as we continued to reduce our inventory balance.
In addition, we reduced our accounts receivable financing program by $9.8 million in the quarter from $48.4 million to $38.6 million.
As a result, our balance sheet remains exceptionally strong with net debt of $83.4 million versus $197.3 million at the end of last year.
And our net leverage as of year-end was only 0.7 times.
Looking forward, we are optimistic that the significant recent increase in US domestic leisure flying is both enduring and a leading indicator of return to business in international travel.
We've seen a nice recovery in heavy maintenance and expect that performance to continue.
On that note, while we are aware of the tight labor market, we believe that the labor-related programs that we have established to recruit, train and retain skilled technicians will continue to serve us well, particularly when those programs are coupled with our ongoing investment in innovation to drive efficiency and differentiation inside of our hangars.
Also, although the commercial parts supply business has lagged behind the recovery, we have recently seen some early and modest signs of a rebound in that market as well, both in our USM and new parts activities.
On the government side, which has been very strong for us, we do expect a moderation in the pace of growth as buying under previous administration normalizes and some of our programs come to a natural completion, such as the C-40 aircraft procurement program for the Marine Corps, but the valuable past performance that we have continued to build and the cost reduction actions that we've taken put us in a strong position to continue to take market share, and our government pipeline remains strong.
The path and pace of the commercial air travel recovery continue to remain uncertain, which is underscored by the emergence of the delta variants.
As such, we are not issuing full-year guidance.
However, in the immediate term, we expect to see performance in Q1 that is similar to or modestly better than Q4.
As you know, Q1 is typically our slowest quarter, whereas Q4 is typically our strongest quarter.
So normally, you would see a decline from Q4 to Q1.
However, this year's expectation of similar performance reflects our belief that our commercial markets will continue their recovery.
Over the medium and longer term, we are exceptionally well positioned, we are stronger today than where we were when we entered the pandemic, and we are excited to leverage our efficiency gains, optimize portfolio and strong balance sheet to continue to drive growth and margin expansion going forward.
| q4 adjusted earnings per share $0.47 from continuing operations.
q4 sales $438 million versus refinitiv ibes estimate of $422.6 million.
|
With me on the call today is Mimi Vaughn, our board chair, president, and chief executive officer.
These statements reflect the participants' expectations as of today, but actual results could be different.
Participants also expect to refer to certain adjusted financial measures during the call.
We hope you're all staying safe and healthy.
As we announced earlier this week, we are pleased to report that Tom George has been appointed interim chief financial officer of Genesco, replacing Mel Tucker, who stepped down last month.
Tom has almost 30 years of CFO experience and deep roots in brands and retail, most recently in footwear at Deckers brands.
We look forward to adding Tom's valuable expertise to support the continued growth of our business and very much look forward to Tom joining our leadership team.
Tom's appointment is effective December 14, and in the interim, I have assumed the responsibilities of chief financial officer, working closely with Dave, Brent Baxter, our chief accounting officer; and Matt Johnson, our treasurer, who together have formed the office of the CFO.
These leaders and the rest of our talented finance team are ensuring that the transition will be seamless.
Dave will return later in the call to review the financials.
I'm incredibly pleased with how well our organization performed during the third quarter as we navigated through a back-to-school season like none other.
It's a privilege to lead a team that is facing the challenges brought by COVID-19 head on, serving our consumers extremely well through digital and omnichannel, making progress on our strategic initiatives and quickly returning the company to profitability.
Through all this, we continue to operate with protocols to ensure our highest priority, the health and safety of our people and customers.
As you'll hear today, Journeys and Schuh are businesses serving teens and young adults that represent the large majority of our revenue, have both performed well under recent pressure.
This speaks to the strong strategic market positions, both concepts have built over time and their ability to capitalize on the accelerated shift to online spending.
In todays channel less world, where there are no barriers to shopping anywhere the consumer wants, Journeys' and Schuh's recent performance underscores the tremendous loyalty they've developed with their customers and the compelling proposition they offer to new customers.
Johnston & Murphy enjoys a strong strategic position with great heritage as well.
However, the pandemic has hit J&M's dressier competitive space harder, extending the time frame for turning this business around.
All in all, our teams executed with excellence, managing their businesses well as they reacted to rapidly changing dynamics during the quarter.
In the U.S., there was nothing normal about the cadence of back to school.
The selling season that's usually marked by a sharp acceleration in weekly sales starting in late July and running through Labor Day did not pack the punch that it usually does as school districts across the country delayed or suspended the return to in-person learning.
As we expected, we did see an extension of the selling season through September and into October.
However, in total, back to school was down year over year and more heavily tilted to online.
Meanwhile, back-to-school timing in the U.K. was consistent with historical patterns but far more consumers shopped online for their school needs than ever before.
Stores were open for about 95% of the possible days in the quarter compared to about 70% during the second quarter.
While we continue to face traffic levels that are down well into the double digits, our store teams are driving record levels of consumer conversion that helps to materially offset this headwind.
Our businesses online, on the other hand, experienced strong gains in both traffic and conversion.
We've said before, our e-commerce sales were nicely profitable prior to the pandemic and as we reap the benefits of the many investments we've made, e-comm is driving even greater profitability.
New customers continued to deliver increased volumes as new website visitors were up almost 40%, driving an almost 60% in new customer purchases.
The combination of these drivers led to a total revenue decrease of 11% year over year.
This result was better than we expected due mainly to stronger sales at Journeys and represents a meaningful improvement from last quarter's 20% decline.
The drop in-store volume was partially offset by another strong quarter of digital growth with comps up over 60%.
While gross margins were down compared to last year, due primarily to lower margins at J&M and a mix shift among our businesses, the drop improved sequentially from the second quarter as less promotional activity as Schuh was necessary and Journeys' gross margins increased.
With sales and gross margin improving over last quarter combined with increased profitability in our e-comm channel, our bottom line swung solidly back into positive territory.
The return to profitability yielded positive operating cash generation in the quarter.
Equally encouraging was the health of our inventories which were down more than 20%, allowing for fresh receipts of holiday merchandise.
In addition, the significant effort we invested with our landlord partners seeking rent abatements during the time our stores were closed, paid dividends and will bring even greater benefit next quarter.
We appreciate our landlord partners' willingness to find mutually beneficial solutions and hope to expeditiously reach conclusion with those discussions we have not yet concluded.
So turning now to discuss each business in more detail.
Journeys' third-quarter results are influenced heavily by back to school with more than two-thirds of elementary, middle and high school students attending school only virtually to begin the year, the quarter got off to a difficult start.
Same-store sales were down double digits in August, although e-commerce remains strong.
The business had an inflection point in early September as comparisons began to ease, accelerated significantly over the remainder of the month and remain strong in October as we captured our fair share of late back-to-school demand.
While we were not able to fully make up for the lost volume in August, we were encouraged that store comps were nicely positive in both September and October, and e-commerce growth was even stronger than earlier in the quarter.
Comfort continued to be the fashion choice of the pandemic and Journeys' offering of casual product resonated strongly with consumers.
While teens always have a big complement of fashion athletic footwear in their closets, when fashion swings toward nonathletic or what we call casual footwear, Journeys is especially well-positioned among its competition to deliver this assortment.
This spring a range of comfortable sandals and other casual products sold through well.
This fall, our consumers' appetite for boots began early and more robustly in the season than we have seen in many years.
While the casual part of Journeys' assortment has been gaining ground over fashion athletic all year, Q3 delivered the largest quarterly growth so far.
These gains have been especially pronounced in women's and kids' as we've seen throughout the year.
On the other side of the Atlantic, back to school at Schuh unfolded similarly to previous years with schools starting on time and most students returning to in-person learning.
With its best-in-class digital capabilities, Schuh was ideally positioned to capitalize on this digital shift and capture the vast majority of lost store volume through digital sales.
E-commerce generated almost 45% of Schuh's sales in the quarter, even with most stores being opened.
While store traffic was still down considerably, back to school gave consumers a reason to shop and helped drive traffic increases -- decreases to less negative levels.
The blend of better store and much better online sales allowed Schuh to gain market share during the quarter.
With positive comps in total and only a slight decline in year-over-year revenue from closed stores, coupled with cost savings, Schuh delivered a solid year-over-year operating profit increase.
A noteworthy achievement under difficult conditions.
With less competitive discounting pressure and more scarcity in supply of the brands itself, Schuh pull back significantly on promotional activity versus the second quarter which helped performance as well.
Like Journeys, Schuh's casual assortment gain ground over its fashion athletic assortment with boot sales driving a good portion of the pickup.
While performance improved from the second to the third quarter with the introduction of its fall assortment, Johnston & Murphy continues to find itself in a tough environment.
Its customer has fewer reasons to shop with many continuing to work from home and most large social gatherings and events postponed or canceled.
In addition to store traffic being down over 50% for the quarter, some of J&M's airport and street locations have yet to reopen which further impacted retail sales.
A bright spot was boot sales which began selling earlier in the season this year.
While J&M historically has been known for its dressier product, the team initiated work years ago to evolve Johnston & Murphy into a full lifestyle brand with a range of footwear and apparel offerings from dressier to more casual.
Highlighting the traction we've already made, casual and casual athletic represented about 60% of footwear during our last fiscal year and apparel and accessories drove 40% of total sales.
Looking forward to the coming year, J&M has focused 90% of new product development on the expansion of its casual offering to include casual athletic, leisure, rugged outdoor and performance which follows upon its highly successful reentry into Gulf this spring.
Leading these efforts is a new Head of Product Development, who joined J&M earlier this year and brings a successful track record developing casual brands.
As the J&M customer returns to work and socializing which we hope with the recent medical advances will be sooner than later, J&M's assortment will be ready for the post pandemic lifestyle.
So turning now to the current quarter.
We believe we have the right assortments and are ready for this holiday season.
That said, consumer demand has been very different this year due to the pandemic and its impact on consumer behavior and the economy which has caused us to take a conservative approach to our outlook.
In November, we faced headwinds from the reclosure of stores in North America and the U.K. as we carefully monitor and adhere to each country's and region's health requirements.
And as a result, we're closed for more than 10% of the possible operating days in the month.
The biggest impact was in England and Ireland, where we had the best potential to make up some of these sales online and most stores have reopened at this time.
Following strong gains in September and October, sales moderated and November got off to a slower start against robust comparisons a year ago.
We were encouraged to see trends improve quite a bit around mid-month, providing the business with good momentum heading into Black Friday.
For the Black Friday weekend itself, as expected, traffic was more subdued than usual.
In spite of the choppiness, November sales were in line with our expectations with an even heavier mix of digital versus store sales.
The lion's share of the holiday season remains ahead of us.
Outside of Cyber Week, digital sales were normally strongest during the earlier part of December.
With recent investments across mobile, our platforms, our websites and our distribution centers, we're prepared to handle what we anticipate will be record holiday digital volumes.
We've helped the customer adjust to the pandemic online by introducing services like Klarna at Journeys this summer which is a pay in four installment option that is driving much larger transaction size and offering technology on our website that helps customers determine what size is best to order.
With the ability to fulfill online orders via our distribution centers or from any of our almost 1,500 store locations, we're well-positioned to meet the surge in demand.
Earlier this year, we upgraded our inventory locating an order brokering system to provide greater inventory accuracy which is critical during this peak sales period.
This system also allows functionality such as tiering stores to protect inventory in our highest volume stores, enabling us to better optimize sales across our network.
Even with the acceleration in online demand, the majority of holiday sales will still take place in our physical locations.
Our stores become even greater strategic assets as we get closer to Christmas and customers don't want to risk online orders not arriving in time.
This is the first year we'll have holiday comparison data in our workforce management system since we implemented it last year.
This technology proved invaluable in managing the unusual traffic patterns during back to school and will enable us to rapidly add or remove labor to optimize store staffing levels during this unusual holiday season.
This holiday will be about execution, something we do well that will differentiate us among others.
We've also developed some terrific marketing campaigns, adjusted for what we learned during the pandemic to drive traffic and sales in this important holiday selling season.
We've increased digital marketing spend substantially and are leveraging our CRM systems to inform our digital, social and other advertising efforts.
As conditions normalize and we make further progress on our strategic initiatives, I am confident we'll emerge strong and be well-positioned with more than enough liquidity to take advantage of the many opportunities the pandemic has presented.
We appreciate your efforts all year round, but really especially in this busy holiday season in the midst of the pandemic.
When I'm certain you'll go the extra mile to delight our customers.
I'm also so proud of the work our teams are doing in the communities we serve including donating shoes and masks and supporting our diversity and inclusion initiatives.
Finally, we wish you and your family's happiness and good health this holiday season.
And with that, I'll pass the call back over to Dave.
We were very pleased under the circumstances with our performance in Q3 and the return to profitability against the backdrop of the pandemic.
In Q3 sequential improvement compared to the prior two quarters in both revenue and gross margin, along with a lower tax rate and a small pickup in SG&A drove results back to nicely positive levels with adjusted earnings per share of $0.85 compared to $1.33 last year.
For the third quarter, ending cash was $115 million, with borrowings of $33 million for a net cash position of $82 million.
Just a little below second-quarter's levels.
We entered the quarter with $299 million of cash.
And during the quarter, operations generated $5 million while we spent $8 million on capital projects and paid down $178 million in borrowings using $184 million in total.
In addition, we continue to have outstanding rent payables as we remain in active negotiations with a number of our landlords.
While the business environment continues to be fluid, we are confident we have adequate liquidity to navigate these challenging times and decided to pay down the majority of our revolver balances in both North America and U.K. during the quarter.
As a reminder, early this year, we increased our North American ABL borrowing capacity to $350 million.
facility replacing an expiring one.
Turning to the specifics of the quarter.
Consolidated revenue was $479 million, down 11% compared to last year driven by a lower back-to-school revenue, continued pressure at J&M and the impact from store closures during the quarter.
Robust e-commerce comp of 62% was offset by a decline in-store revenue of 22% driven by a comp decline of 18%, while our stores were closed for 5% of the possible operating days during the quarter.
Digital sales increased to 21% of retail business from 11% last year.
Our comp policy removes any stores that are closed for seven consecutive days.
And therefore, we are providing both overall and comp sales by business to give better insight into performance.
Overall, sales were down 10% for Journeys with comp sales down 6% while store traffic was down well into double digits, much higher conversion and transaction size lifted Journeys' comps.
At Schuh, overall sales were down 3%, while sales were up 1%.
At J&M, overall sales were down 45%, and comp sales were down 43%.
Our licensed brands, overall sales were up 91% due to Togast acquisition.
Consolidated gross margin was 47.1%, down 210 basis points from last year, 100 basis points of which was related to J&M.
Consistent with last quarter, increased shipping to fulfill direct sales pressured the gross margin rate in all of our businesses, totaling 50 basis points of the total overall decline.
Journeys' gross margin increased 110 basis points driven by lower markdowns.
Schuh's gross margin decreased 320 basis points, more than half of which was due to increased e-comm shipping expense with the balance due to higher penetration of sale products.
J&M's gross margin decrease of 1,370 basis points was due to more close outs at wholesale, incremental inventory reserves and higher markdowns at retail.
Finally, the combination of lower revenue at J&M, typically our highest gross margin rate of our businesses and the revenue growth of licensed brands, typically our lowest gross margin rate negatively impacted the overall rate mix.
Adjusted SG&A expenses were down 11%.
And as a percentage of sales, leveraged 10 basis points to 44.1% as we realized the collective benefits of our organization's disciplined actions to manage expenses and relief from government programs.
government programs which provides property tax relief.
The next largest areas of savings came from bonus expense and the reduction in store selling salaries.
Compensation expense benefited from reduced operating hours and government salary relief provided in Canada and the U.K. Given the added cost of driving customer traffic to our stores and websites, our organization is intently focused on the strategic initiative of reshaping the cost structure.
One of the most impactful areas has been a multiyear effort centered around occupancy costs, and we have achieved even greater traction this year with the pandemic.
In addition to the rent abatement savings, we have negotiated 58 renewals year-to-date and achieved a 28% reduction in cash rent or 27% on a straight-line basis in the U.S., this was on top of an 11% cash rent reduction or 8% on a straight-line basis or 160 renewals last year.
These renewals are for an even shorter-term, averaging approximately one and a half years compared to the three year average we saw last year, with almost a third of our fleet coming up for renewal in the next 24 months, we should make substantial progress here.
In summary, the third-quarter's adjusted operating income was $13.9 million versus last year's adjusted operating income of $26.7 million.
Both Schuh and licensed brands generated operating income increases over last year, while Journeys was lower and J&M saw the largest year-over-year decline.
Our adjusted non-GAAP tax rate for the third quarter was 4% reflecting the impact of foreign jurisdictions for which no income taxes were recorded.
Turning now to the balance sheet.
Q3 total inventory was down 22% on sales that were down 11%.
Journeys' inventory was down 28% on sales that were down 10%.
Schuh's inventory was down 22% with sales that were down 8% on a constant currency basis.
Both Journeys and Schuh will continue to chase inventory during Q4, adding fresh merchandise to increase these levels.
J&M's inventory was down 3% on sales that were down 45% reflecting the pack-and-hold inventory and the level of reserves we believe will be adequate to better rightsize the current inventory levels.
Capital expenditures were $8 million as we -- as our spend remains focused on digital and omnichannel and depreciation and amortization was $11 million.
We closed seven stores and opened seven during the quarter.
Given the continued uncertainty due to the pandemic, we are not providing guidance this quarter, but we'll share some current thoughts on the business going forward.
Q4 revenue usually is dependent upon performing well during what are traditionally, the peak volume times of the holiday season.
This year, we are more conservative about those consumer peaks materializing.
Therefore, thinking about revenue, the year-over-year percentage decline in overall sales in the fourth quarter could be just a little bit more than the decline in the third quarter as a result of this.
That said, if consumer demand is stronger during the peaks, we believe we are well-positioned to capture our fair share which would result in us exceeding these levels.
This does not contemplate any additional store closures or restrictions beyond what we know today which could be a bigger headwind.
For the month of November, stores were open for about 88% of the possible operating days and currently, 97% of our stores are open.
Stores have also been operating on more limited hours.
Gross margin rates versus last year for Q4 should be in the range of the decrease we saw in Q3.
The Q3 headwinds of higher e-commerce penetration, J&M gross margin pressure and the negative impact from the mix of businesses we expect will persist into Q4.
We expect SG&A in Q4 to leverage quite a bit from last year's levels, as we continue to benefit from ongoing cost reduction efforts and get some substantial help from rent abatements.
While the annual tax rate is expected to be approximately 18%.
I'd like to highlight that in the fourth quarter, we expect it to be approximately 40%.
In conclusion, I would like to echo Mimi's comments on our amazing teams, who have executed so admirably throughout this entire year.
From store closings and reopenings through an unprecedented back-to-school season and now in the middle of the most important holiday season, the talent and perseverance shown during this challenging year leaves me with much to be admired and appreciated.
| compname reports q3 adjusted earnings per share $0.85.
q3 non-gaap earnings per share $0.85 from continuing operations.
q3 sales $479 million versus refinitiv ibes estimate of $457.2 million.
co is not providing guidance at this time.
|
With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our safe harbor statement.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
We had another quarter of record revenue and bookings, along with strong EBITDA margin performance and free cash flow, positioning us well for a strong finish to the year.
I'd like to begin by reviewing our operational highlights for the third quarter.
The robust demand for aftermarket parts and a high level of capital project activity in the third quarter led to an all-time high for revenue and bookings.
Our aftermarket parts and consumable business was exceptionally strong in most regions of the world, and new order activity was driven by solid demand across all of our operating segments.
In the third quarter, we announced the closing of two acquisitions, one in our Flow Control segment and another in our Material Handling segment.
The integration of these businesses is going well and their financial results contributed to our third quarter performance.
Just after the third quarter closed, we completed an acquisition of a small manufacturing business in India.
It is a well-established manufacturer of engineered stock preparation and equipment used to process recycle and virgin fiber for paper packaging and tissue production.
Our acquisition of this business will create a new manufacturing base for us in India, where we have leading market position and have been active for more than 20 years.
It also provides a strategic platform to accelerate new business opportunities in the fast-growing and in packaging petition markets.
Before moving on to our Q3 financial performance, I want to comment on the global supply chain and how we are managing in this complex environment.
The headwinds found within the global supply chain continued to be a challenge, pushing out expected deliveries and materials and creating a significant amount of work, to keep our delivery promises to our customers.
I'm pleased to say it is a challenge that our operations teams around the globe are managing successfully.
Our employees are doing a great job in navigating through a highly dynamic and uncertain environment that looks to be with us for some time.
While there is little expectation for a sudden return to normalcy, I am confident we will work through these immediate supply chain challenges and continue to meet our customers' needs.
Turning now to slide six and our Q3 financial performance.
You can see we had significant increases across all of these financial metrics compared to Q3 of last year.
Q3 revenue was up 29% compared to the third quarter of 2020 to a record $200 million.
Excluding acquisitions and the favorable impact of FX, revenue was up 18% compared to the same period last year.
Our aftermarket parts consumables revenue was up 28% to a record $131 million in Q3.
The consistently high operating rates of our customers and strong end-market demand contributed to our record aftermarket performance.
Solid execution contributed to boosting our adjusted EBITDA margin to 20.5%, which led to our excellent operating cash flow of $38 million in Q3.
All of our operating segments delivered excellent adjusted EBITDA margin performance despite the continuing inflationary pressures for materials and the ongoing supply chain constraints.
Bookings were exceptional in the quarter, up 71% to a record $245 million.
Excluding acquisitions and FX, bookings were up 57%, with contributions from all three of our operating segments.
I'll review the performance of these segments next, beginning with our Flow Control Group.
Flow Control segment achieved its fifth consecutive increase in quarterly revenue, reaching a record $76 million in the third quarter, up 34% compared to Q3 of last year.
Aftermarket parts revenue was exceptionally strong and made up 72% of total Q3 revenue.
Bookings were also a record at $77 million, up 55% compared to last year.
Organic bookings, which excludes acquisitions and FX, were up 32% compared to the same period.
Strong performance in Europe and North America led our bookings growth in Q3.
Improved operating leverage led to record adjusted our adjusted EBITDA margin of 29.1%.
While our recent acquisition at Clouth contributed to our overall performance, organic growth within our Flow Control Group continued to demonstrate the strength of this segment.
Our Industrial Processing segment continued to experience strong demand with bookings nearly doubling from the same period last year to a record $119 million.
New orders for our fiber processing systems in the U.S. and Europe led this increase in the third quarter.
Overall demand for housing and wood products remained high, and our wood processing product line capitalized on strong end market demand.
Revenue in this segment increased 31% to $82 million with strong performance in aftermarket parts and capital business.
Adjusted EBITDA was up 24%, while adjusted EBITDA margin declined compared to Q3 of last year when we received employee retention benefits related to the pandemic.
As you may have read in the press, China is experiencing power supply issues.
This has created a challenge for us with production schedules, and it is uncertain how long this will impact our operations.
We are also seeing an increasing number of requests from our customers to delay shipments as they manage supply chain constraints.
In spite of these headwinds, we entered the quarter with another record backlog that positions us well for the remainder of the year.
Moving to our material handling segment, we experienced healthy demand for our capital equipment and aftermarket parts.
Revenue was up 17% to $42 million with parts revenue, making up 59% of total revenue in the quarter.
Bookings in this segment were up compared to same period last year to a record $49 million in Q3.
We saw increased order activity and strong demand for high-performance pillars, which contributed to our record bookings in the third quarter.
Our recent acquisition, Balemaster, is also experiencing record demand and the integration of that business and the cadence is proceeding well.
Solid execution of our buying businesses, including our recent acquisition, helped boost adjusted EBITDA by 26% and adjusted EBITDA margin by 120 basis points compared to the same period last year.
Despite the supply chain issues I mentioned earlier, we remain optimistic for improved capital investment environment as infrastructure spending and industrial demand for raw bulk materials grow.
As we look ahead to the remainder of 2021, we continue to see signs of healthy project activity.
Our decentralized structure continues to serve us well during these rapidly evolving times, allowing us to respond quickly to local and regional developments.
Our record backlog has us well positioned for the remainder of the year.
However, delays in shipments and the timing of orders have shifted some expected revenue bookings from Q4 into 2022, which Mike will comment on in his remarks.
With that, I'd like to pass the call over to Mike to review our Q4 -- Q3 performance.
I'll start with some key financial metrics from our third quarter.
Consolidated gross margins were 44.9% in the third quarter of 2021 compared to 44.2% in the third quarter 2020.
Our consolidated gross margins in the third quarter of 2021 were negatively affected by the amortization of acquired profit and inventory related to the Clouth and Balemaster acquisitions, which lowered consolidated gross margins by 110 basis points.
In the third quarter of 2020, government assistance benefits increased consolidated gross margins by 110 basis points.
Excluding the impact from both of these consolidated gross margins were approximately 43% in both periods.
Our parts and consumables revenue represented 66% of revenue in both periods.
SG&A expenses were $52.3 million in the third quarter of 2021, an increase of $8.5 million compared to $43.9 million in the third quarter 2020.
Third quarter of 2021 SG&A includes $3.4 million in SG&A from our acquisitions.
There was an unfavorable foreign currency translation effect of $0.9 million in the quarter and a reduction in government assistance benefits of $0.7 million.
We also incurred acquisition-related costs of $1.3 million in the third quarter of 2021 compared to $0.4 million in the third quarter 2020.
The remaining increase in SG&A expenses is primarily associated with increased incentive compensation and travel-related costs due to improved business conditions.
As a percentage of revenue, SG&A expenses decreased to 26.2% in the third quarter of 2021 compared to 28.4% in the prior year period.
Our effective tax rate was 24.6% in the third quarter of 2021, lower than we anticipated, primarily due to tax benefits from acquisition-related expenses, employee equity awards and the reversal of tax reserves associated with uncertain tax positions.
Our GAAP diluted earnings per share was $1.75 in the third quarter, up 37% compared to $1.28 in the third quarter 2020, and our adjusted diluted earnings per share increased 50% to $1.97.
Adjusted EBITDA increased 36% to $40.9 million or 20.5% of revenue compared to $30 million or 19.4% of revenue in the third quarter of 2020 due to strong performance in our Flow Control segment, which was up 42% with a large portion attributable to organic growth.
This is the second quarter in a row that our consolidated adjusted EBITDA, as a percentage of revenue, has exceeded 20% and we expect to also achieve this for full year 2021.
Operating cash flow increased 56% to $37.9 million in the third quarter of 2021 compared to $24.4 million in the third quarter 2020.
Free cash flow increased 53% to $34.6 million in the third quarter of 2021 compared to $22.6 million in the third quarter of 2020.
We had several notable nonoperating sources and uses of cash in the third quarter of 2021.
We paid $141.4 million for the acquisitions of Clouth and Balemaster and we borrowed $63.1 million related to these acquisitions.
Despite the significant acquisition activity in the quarter, we were able to utilize our strong cash flows to pay down our debt by $26 million.
We also paid $3.4 million for capital expenditures and paid a $2.9 million dividend on our common stock.
Let me turn next to our earnings per share results for the quarter.
In the third quarter of 2021, our GAAP diluted earnings per share was $1.75.
And after adding back acquisition-related costs of $0.22, our adjusted diluted earnings per share was $1.97.
In the third quarter of 2020, our GAAP diluted earnings per share was $1.28, and our adjusted diluted earnings per share was $1.31.
As shown in the chart, the increase of $0.66 in adjusted diluted earnings per share in the third quarter of 2021 compared to the third quarter 2020 consists of the following: $0.90 due to higher revenue; $0.09 from acquisitions, net of interest expense and acquisition borrowings; and $0.05 due to lower interest expense.
These increases were partially offset by $0.21 due to higher operating expenses, $0.15 due to a decrease in the amounts received from government assistance programs.
$0.01 from higher noncontrolling interest expense and $0.01 due to higher weighted average shares outstanding.
Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.07 in the third quarter of 2021 compared to the third quarter of last year due to the weakening of the U.S. dollar.
Looking at our liquidity metrics on slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, decreased to 113 at the end of the third quarter of 2021 compared to 140 at the end of the third quarter of 2020.
This decrease was primarily driven by a lower number of days in inventory.
Working capital, as a percentage of revenue, was 13.5% in the third quarter of 2021 compared to 15.6% in the third quarter 2020.
Our net debt, that is debt less cash, increased $115 million sequentially to $231 million at the end of the third quarter of 2021.
We borrowed $63 million in the quarter to fund our acquisitions, and we were able to pay down $26 million of debt in the quarter.
Our leverage ratio, calculated in accordance with our credit agreement, was 1.69 at the end of the third quarter 2021 compared to 1.71 at the end of the second quarter of 2021.
Our net interest expense decreased $0.3 million to $1.3 million in the third quarter of 2021 compared to $1.6 million in the third quarter of 2020.
At the end of the third quarter of 2021, we had $105 million of borrowing capacity available under our revolving credit facility, which matures in December of 2023.
I would like to update our revenue range for the fourth quarter and full year 2021.
Although we had record bookings of $245 million in the third quarter, which is the fourth record quarter in a row.
We ended the third quarter with a record backlog of $299 million, the current headwinds from supply chain and logistical constraints have caused us to reduce our revenue expectations for the fourth quarter.
We now anticipate revenue of $210 million to $215 million, down from $220 million to $225 million that we noted in the July call.
For the full year 2021, we now anticipate revenue of $778 million to $783 million revised from $783 million to $793 million.
This change in the revenue range includes $13 million of revenue that has been moved into 2022 and as a result of supply chain issues or customer requested changes to the shipping dates.
In addition, the timing of capital orders also had an impact.
As Jeff mentioned, the China power supply issue, which came to light during September, has also had an impact on our production schedule.
The Chinese government has imposed varying power restrictions from time to time, which are outside of our control.
Our current revenue expectation is based on the current power use guidelines we have been given holding throughout the quarter.
Our guideline and gross margins essentially remains the same.
We anticipate fourth quarter gross margins will be 42%, which includes the impact of amortizing the acquired profit and inventory.
Our current estimate for the amortization of acquired profit and inventory in the fourth quarter is $2.1 million or $0.13.
We anticipate SG&A expenses will be approximately $55 million to $56 million, and R&D will be a little over $3 million in the fourth quarter.
The SG&A expense includes backlog amortization of approximately $600,000 or $0.04.
We anticipate our net interest expense will be approximately $1.4 million in the fourth quarter of 2021, and we anticipate the tax rate for the quarter will be 27% to 28%.
We hope these directional comments are helpful.
| q3 adjusted earnings per share $1.97.
q3 gaap earnings per share $1.75.
q3 revenue rose 29 percent to $200 million.
quarter end backlog was a record $299 million.
qtrly bookings increased 71% to a record $245 million.
sees fy 2021 revenue $778 million to $783 million.
|
We'll also post our Regulation G disclosures when applicable on our website at www.
So, with that behind us, let's begin, and I'll follow a similar format, I'm going to start by spending a few minutes briefly sharing a few numbers from our quarter with you, and I'll also discuss our balance sheet liquidity.
You've seen the numbers, essentially 100% of our theaters were closed for the first two months of the quarter and the 80% that we reopened for the final month of the quarter, we're only operating with a limited number of new films.
As a result, after adjusting for non-recurring items, including an impairment charge, our operating income and adjusted EBITDA from this division was pretty much equal to our second quarter results, when we were completely closed.
In Hotels & Resorts segment, we had four hotels opened in the entire third quarter and three hotels reopened during portions of the quarter, all as significantly reduced occupancies.
While the numbers from this division weren't great, they were much better than the second quarter when we were essentially completely closed and they were overall better than we'd expected.
We incurred approximately $1.6 million of additional property closure and subsequent reopening expenses with the majority of the expenses in our Theater division.
The reopening expenses this quarter related to extensive cleaning costs, supply purchases and employee training, among other items related to the reopening of selected Theater & Hotel properties and implementing new operating protocols.
We also incurred an impairment charge of nearly $800,000 this quarter related to several theater properties and an impairment charge of another $800,000 related to an investment in hotel joint venture.
Our effective income tax rate was 26.9% during the third quarter and 37.3% for the first three quarters of the year.
As we discussed last quarter, our year-to-date fiscal 2020 income tax benefit was favorably impacted by an adjustment of approximately $17.4 million resulting from several accounting method changes and the March 27, 2020 signing of the CARES Act.
One of the provisions of the CARES Act specifically designed to help otherwise healthy tax paying companies like us that were significantly impacted by the COVDI-19 pandemic, allows our 2019 and 2020 taxable losses to be carried back to prior fiscal years, during which our federal income tax rate was 35% compared to the current statutory federal income tax rate of 21%.
Excluding this favorable adjustment to income tax benefit, our effective income tax rate for the first three quarters of fiscal 2020 was 24.5%.
We anticipate that our effective income tax rate for the remaining quarter fiscal 2020 may be in the 28%, 29% range due to an expected taxable loss during fiscal 2020 that will continue to allow us to carry back a portion of the loss for years that had a 35% federal income tax rate.
Of course, our actual fiscal 2020 effective income tax rate may be different from our estimated quarterly rates depending upon actual facts and circumstances.
Shifting gears away from the earnings statement just for a moment, our total cash capital expenditures during the first three quarters of fiscal 2020 totaled approximately $19 million compared to approximately $80 million last year, which included the cash component of the Movie Tavern acquisition.
Most of this year's dollars were spent in the Theater division on several projects that we started during the first quarter.
We only spent about $2.8 million during the third quarter.
We continue to have most future capital expenditures on hold for the time being.
Now since the majority of our Theater & Hotel properties were open for at least a portions of the reported quarter, I'm going to provide some financial comments on our operations for the third quarter and first three quarters beginning with theaters.
Now our overall attendance was down over 95% compared to the prior year third quarter because we were closed for two of the three months, attendance at comparable theaters, same theaters opened and same weeks opened, was down approximately 85%.
Our average admission price at our comparable theaters during the weeks we were opened increased 0.6% during the third quarter and 2% for the first three quarters of fiscal 2020 compared to the prior year period.
Our average admission price was unfavorably impacted by the fact that we continue to charge only $5 for older library film product and we only apply our regular pricing to new films.
We are very pleased to report an increase in our average concession and food and beverage revenues per person at our comparable theaters of 28% for the third quarter, and 7.2% for the first three quarters of fiscal 2020.
Now our investments in non-traditional food and beverage outlets continue to contribute to higher per capita spending, but there were other factors in the play this quarter that likely contributed to the large percentage increase.
We've always believed that long lines at the concession stand can result in some customers choosing the skip the lines and that by concessions.
The reality is that with reduced attendance lines are not long, and that has likely contributed to our higher per capita revenues.
We also believe that the emphasis we are placing an encouraging guests to purchase their concessions and food and beverage ahead of time either online or using our mobile app is also contributing to our increased per capita revenues.
While the first reason will eventually go away as attendance increases.
The second reason is the potential will be long lasting, which is very encouraging.
Finally, I'll point out that we were not able to compare our box office revenues limited as they were to the industry this quarter as data provided to Rentrak, the box office reporting service was also very limited, and not useful for accurate comparisons.
Shifting to our Hotels & Resorts division, our total revenue per available room or RevPAR for our seven comparable owned hotels for the third quarter and first three quarters decreased 58.2% during the third quarter and 44.3% during the first three quarters of fiscal 2020 compared to the last year's same periods.
Now to be clear, this math only includes the weeks that the various hotels were opened because as I mentioned three of our hotels were reopened for only portions of fiscal 2020 third quarter.
The Saint Kate was not opened during the third quarter at all and thus was not included in these results.
Now according the data received from Smith Travel Research and compiled by us in order to compare our fiscal quarter results, comparable upper upscale hotels throughout the United States experienced a decrease in RevPar of 67.1% during our fiscal 2020 third quarter and were down 59.7% year-to-date.
Meanwhile, competitive hotels in our collective markets experienced a decrease in RevPar of 71.4% and 68%, respectively, during our third quarter and first three quarters.
Thus our hotels outperformed both the industry and our competitive sets during both the third quarter and first three quarters of fiscal 2020.
Breaking out the numbers for all seven of our open hotels more specifically, our fiscal 2020 third quarter overall RevPAR decreased was due to an overall occupancy rate decrease of 46.4 percentage points, and a 5.3% decrease in our average daily rate or ADR. Year-to-date, our fiscal 2020 first three quarters overall RevPAR increase -- or decrease was due to an overall occupancy rate decrease of 28.6% -- 28.6 percentage points and a 10.2% decrease in our ADR. Our third quarter occupancy rate for our seven comparable hotels for the weeks that they were opened was 36.6%.
I will remind you once again that we entered this crisis from a position of strength.
Our debt-to-capitalization ratio at the end of 2019 was a very modest 26%.
Even after reporting the two worst quarters we've ever experienced in our 85-year history, our net debt-to-capitalization ratio at the end of the third quarter was still a very low 35%.
Of course, we also own the underlying real estate for seven of our company-owned hotels in the majority of our theaters, representing over 60% of our screens and even larger percentage of our revenues and cash flow, thereby reducing our monthly fixed lease payments.
This is a significant advantage for our company relative to our peers, as it keeps our monthly fixed lease payments relatively low and provide significant underlying credit support for our balance sheet.
We also shared with you last quarter that we filed our income tax refunds of $37.4 million in early August, with the primary benefit derived from the accounting method changes, I referenced earlier.
And the new rules for qualified improvement property and net operating loss carry bags that came out of the CARES Act.
I'm pleased to tell you that we've received approximately $31 million of those refunds in October after the end of the third quarter, with an additional $6 million expected soon.
We also expect to apply a significant portion of our anticipated tax loss to be incurred in fiscal 2020 to prior year income, which may also result in a refund that we expect may approximate $21 million in fiscal 2021, when our fiscal 2020 tax return is filed, with possible tax loss carry-forwards that may be used in future years as well.
You'll also note that we begun reporting assets held for sale on our balance sheet, primarily -- related primarily to the book value of surplus real estate that we believe will monetized during the next 12 months now.
Now we actually have significantly more real estate that we have the potential to monetize in the next 12 months to 18 months.
But our accounting policy is to only classify as assets for sale, the book value of assets that we actually have letters of intent or contracts to sell in place.
We'll continue to update this number in our balance sheet in future quarters as we make additional progress in our efforts to monetize surplus real estate.
We're not going to speculate on what the possible sale proceeds might end up being, but as the potential to be in the tens of millions of dollars, depending upon the strength of the real estate market and how active we might choose to be.
As we have previously reported in light of the COVID-19 pandemic, we've been working to preserve cash and ensure sufficient liquidity to endure the impacts of the global crisis even if prolonged.
As you know, on April 29, 2020 we amended our existing credit agreement and issued a new $90.8 million, 364-day senior term loan A to further support our already strong balance sheet.
On September 22, we extended the maturity date of the term loan to September in 2021 amended our debt covenants and issued $100.05 million in convertible senior notes.
We used a portion of the proceeds from this issuance to purchase capped call transactions that effectively increase the conversion rate of the convertible senior notes from 22.5% to 100%, significantly reducing potential dilution related to the convertibles.
Thus, after deducting cost of the debt issuance, we added an additional $78.6 million in liquidity to our balance sheet.
We use the net proceeds from the convertible issuance to pay down revolver borrowings under our credit agreement.
As a result, as of September 24, 2020, we had cash and revolving credit availability of over $218 million and that's not counting the $31 million of income tax refunds received in October.
So you can do the math.
Our adjusted EBITDA during the second quarter when we were essentially completely closed was a negative $30 million and our adjusted EBITDA during the third quarter was a negative $26 million.
Even when you add interest expense to that number, with a combined nearly $250 million in cash and revolving credit availability when you add in the October income tax refunds received, plus future income tax refunds remaining in 2020 and future potential income tax refunds in 2021, you can see why we indicate that we believe the additional financing positions us to continue to sustain our operations throughout fiscal 2021, even if our properties continue to generate significantly reduced revenues or have to reclose for a period due to the effects of the COVID-19 pandemic.
And we'll continue to pursue additional opportunities to fortify our balance sheet and reinforce our liquidity in the future, that will include seeking additional government support as appropriate.
For example, we're very pleased to see the States of Wisconsin and Nebraska recently recognized the need to support those businesses, most impacted by the pandemic and introduced grant programs that include the theater and hotel industries.
Our trade groups will continue to lobby for additional support at the federal level as well.
I'm going to begin my remarks where Doug left off.
Discussing our balance sheet.
This is my first chance to comment on the actions we took in late September to further strengthen our balance sheet and liquidity and I think it would be helpful to explain our thinking.
We have an 85-year history of prudently managing our balance sheet.
As Doug shared earlier, we entered this crisis from a position of strength with a debt to capitalization ratio of 26%.
That conservative approach to our balance sheet has proved to be particularly important during this current environment.
We always have been and will continue to be thoughtful and opportunistic when managing our balance sheet.
Immediately upon the onset of the pandemic, we went to our banks and increased our liquidity via a 364-day term loan, closing on that financing in April 2020.
With a significant number of unknowns in those first months of the pandemic, we believe adding this short-term borrowing was the prudent thing to do.
But we now have the majority of our theaters and hotels opened, there remains uncertainty regarding the pace of the recovery.
We continue to be confident that both our businesses will recover.
But our thinking always has been and always will be long-term, focused.
With that long-term focus in mind, we also have always had the philosophy with our debt portfolio should match our asset base.
Our assets consist primarily of fixed and long-lived assets.
And thus, we've always tried to have a significant portion of our debt fixed and long as well.
With the 364-day term loan scheduled to mature in April 21, we are presented with an opportunity to amend our current bank agreements, extend our term loan by another five months and adjust our covenants to provide for future near-term and medium-term uncertainty in our businesses.
A key component of amending our bank agreements was opportunistically raising attractive capital that would ultimately replace the short-term term loan.
With that in mind, we believe the issuance of convertible unsecured notes was the most attractive capital raising alternative at that time and had the following advantages.
We can effectively replace short-term borrowings with five-year junior capital.
Five years is a long time and with minimal debt maturities before 2025, it has given us a lot of flexibility and time for the recovery to take hold.
Cash interest payments will be significantly lower than other long-term options.
We were able to size the issuance appropriately, particularly for a company our size.
As an example, high yield debt, another long-term option many borrowers, including some of our peers have availed themselves of typically requires a minimum sizing $300 million range.
But purchasing the cap call in conjunction with our issuance, we were able to effectively increase the strike price of the convertible from 22.5% of our closing stock price to 100% of our closing stock price, significantly reducing any dilution concerns that would typically arise from a convertible issuance.
In addition, we have the option to settle these notes at maturity with cash, equity or a combination thereof, providing the further ability to reduce any actual dilution of maturity.
I think those last two points are particularly important and may not have been completely understood by the market.
While we have the option of settling the convertible notes at maturity in any combination of cash and/or stock.
It is our stated intend to settle the principal amount of the convertible notes in cash and only settle any of the in-the-money portion of the notes with stock.
Our capped call transactions effectively increased the strike price of the convertible notes to $17.98 -- $18 almost which significantly reduces the potential dilution arising from these notes.
For example, at a $20 future stock price dilution is estimated to be only approximately 3% and a $25 future price dilution claims to a very modest 8.2% level.
And if the price is higher than that, while the dilution would increase.
I think we would all agree that everyone would be pretty happy.
You can be confident that we will continue to prudently manage our balance sheet in the future in order that not only will we come out of this current environment in a strong position, but that we will also be in a position to grow and thrive once more in the years ahead.
With that, I'll turn my attention to our operating businesses, focusing my remarks and where we are today.
What we have done to date and are continuing to do to manage through this crisis and what some of our plans are for the future.
As you can imagine, there are a lot of unknowns yet about what the future months will look like.
So our plans will continue to evolve as the situation unfolds.
I said this last quarter, but it is worth repeating in this rapidly changing truly unprecedented environment there was one thing that is not changed and will not change.
Our priority as it has been throughout our history is the safety and well-being of our associates, customers, and communities.
This is guided everything we've done so far and will guide us in the weeks and months ahead as well.
They continue to work day and night developing and executing strategies that we believe will get us through this crisis and put us in a strong position for continued growth over the long term.
And as we have brought, many of our associates back they too have worked extremely hard under very difficult circumstances in order to continue to provide an outstanding experience for our guests.
I am so proud of each and every one of our associates.
So let's start with our hotels, since they are further along in the reopening process.
Doug shared some of the numbers with you, including the fact that the data suggests, we outperformed both the industry and our competitive sets this quarter.
It certainly wasn't a good quarter from any historical sense, but frankly, it was better than we expected when we first started reopening our hotels with very little advanced bookings in place.
It wasn't that we didn't have any group business.
As the summer unfolded, we did have weddings at several locations and return of Major League Baseball helped our Pfister hotel.
But the majority of our customers were transient leisure customers, who were just looking to get away and change their scenary after months of staying home.
As a result, not surprising, week end business was the strongest and properties like the Geneva Resort & Spa and Timber Ridge Lodge performed the best among our hotels, as they are well suited for families looking to get away.
Golf revenues at the Grand Geneva for example were actually higher than they were last year.
And overall, 37% occupancy rate is nothing to get too excited about compared to what we are used to during our third quarter.
But it's certainly justified our decision to reopen our hotels.
As we shared with you last quarter in many ways reopening our hotels was a mathematical exercise.
We made the bet, we'd be better off opened and closed and proved to be a good bet.
We were particularly pleased that our ADR held relatively strong during the quarter.
Admittedly, it's hard not to wonder what the quarter might have been like in non-COVID world with the Democratic National Convention in the Ryder Cup, but it was not to be.
It also is important to note that the customer response to our new operating protocols has been very positive.
We're also particularly pleased with our recent announcement that Saint Kate-The Arts Hotel is reopening this week.
We reopened the first floor common areas including the bar and Pizza restaurant in late July and now we're reopening the rooms.
This amazing hotel is earned an incredible number of awards since it opened last summer, including most recently being named the number six top hotel in the Midwest and the top hotel in Milwaukee, by Conde Nast Readers.
It's fair to say, it is Milwaukee's most recognized hotel, with the Saint Kate reopening all eight of our company-owned hotels will be opened.
Looking to future periods, overall occupancy in the US has slowed -- has slowly increased since the initial onset of the COVID-19 pandemic in March.
Higher and hotels, like the ones we generally operate have been impacted more than lower-end hotels.
Most current demand continues to come from the drive to leisure segment, most organizations implement to travel bans at the onset of the pandemic, and are currently only allowing the essential travel, which will likely limit business travel in the near term.
Our company-owned hotels have experienced a significant decrease in group bookings for the remainder of fiscal 2020 compared to the same period last year.
As of the date of this report, our group room revenue bookings for fiscal 2021 commonly referred to in the Hotels & Resorts industry as group pace is running significantly behind where we were last year at this time for fiscal 2020.
And a large portion of that decline is because last year's group bookings included bookings in anticipation of Milwaukee hosting the DNC, Democratic National Convention in July 2020.
Banquet and catering revenue pace for fiscal 2021 is also running behind where we were last year at this time for fiscal 2020, but not as much as group room revenue is due in part to increases in weeding bookings.
Many of our canceled group bookings due to COVID-19 are rebookings for future dates.
Excluding one-time events that could not rebooked for future dates, such as those connected to the DNC.
However, some group bookings for the first half of fiscal 2021 have subsequently canceled or postponed their event and we cannot predict to what extent any of our hotel bookings will be canceled or rescheduled due to COVID-19 or otherwise.
We were pleased to see the Ryder Cup rescheduled for 2021 and it is contributing to our 2021 group pace.
Looking further out, the Wisconsin district just approved financing for the expansion of its convention center here in Milwaukee.
The expansion is currently expected to be completed in late 23 -- 2023 or early 2024.
Forecasting what future RevPAR growth or decline will be during the next 18 months to 24 months is very difficult at this time.
The non-group booking arrival is very short, with most bookings occurring within three days of arrival, making even short-term forecast of future RevPAR growth very difficult.
Hotel revenues have historically tracked very closely with traditional macroeconomic statistics, such as the gross domestic product.
So we will be monitoring the economic environment very closely.
After past shocks to the system, such as 9/11 and the 2008 financial crisis, hotel demand took longer to recover than other components of the economy.
Conversely, we now anticipate that hotel supply growth will be limited for the foreseeable future, which can be beneficial for our existing hotels.
Most industry experts believe the pace of recovery will be steady, but relatively slow.
We continue to believe it will be very important to have our marketing message focus on the health and safety of our associates and guests.
Overall, we generally expect our revenue trends to track or exceed the overall industry trends for our segment of the industry, particularly in our respective markets.
Regardless of how this unfolds, I am confident that Hotel division President, Michael Evans and his outstanding team will effectively manage our hotel operations during these turbulent times.
Our associates are working tirelessly so that every guest can rest easy knowing that they are receiving the highest standards of service and cleanliness, while still enjoying the best our award winning hotels and resorts have to offer.
So let's shift to our Theater division.
Doug went over the numbers with you.
And since we were closed for the majority of the quarter, the numbers are pretty similar to the second quarter obviously challenging.
In the midst of this unique time, however, there were some encouraging signs during the quarter that bode well for us in future periods.
First off, we're thrilled with our customer reaction to the new protocols we put in place.
To get 96% of a group of people to agree on anything is virtually impossible these days.
If that is what percentage of our first loyalty members told us, they had a safe and comfortable experience at our theaters.
All the credit goes to our leadership team for developing smart and effective new operating protocols and to our managers and theater associates for executing on them and providing a great experience for our guests.
We expect policies and guidelines will continue to evolve the time and will be assessed and updated on an ongoing basis.
Our goal continues to be to build consumer confidence and trust as quickly as possible.
We know it is a process, but word-of-mouth will help and we're off to a good start.
We also didn't know for sure what customers' behavior -- what customer behavior would be once they arrived, would they adapt to the new protocols, would they use our industry-leading technology to order more of their concessions and food and beverage online, would they even by concessions?
The answer to these questions was a resounding, yes.
And we were very pleased with the increases we experienced in our concession revenues per person.
Unfortunately, with restriction still in place in New York and California, in particular, not long afterwards studios started changing the new release schedule once again.
Thus like I mentioned in my hotel remarks, it once again became a little bit of a math exercise.
We want to be open.
But being open has a certain level of fixed costs associated with it.
So we also don't want to lose more money being opened and closed.
As a result, we made the difficult decision to reclose 17 theaters in early October and reduced our operating hours and operating days at our remaining open theaters.
Right now, our theaters are open on Tuesdays, Fridays, Saturdays and Sundays which better aligns with current demand.
The industry received some good news a couple of weeks ago when it was announced the New York State would begin reopening theaters, that allowed us to reopen our movie theater -- our Movie Tavern locations in Syracuse.
And as an indication of pent-up demand that location was the number one theater in the country for the new film Honest Thief when it first reopened.
We've since reopened three theaters in Nebraska as well meaning that as I speak to you today, 59 theaters opened representing approximately 66% of our circuit.
So now it really comes down to two interrelated topics, both necessary to increase customer demand for going to the movies.
First and foremost, we need new films to be released.
We've seen first-hand that when new films come out our attendance increases.
And in fact, when we pulled our guests, our loyalty club 60% of them said the reason they weren't coming because there was, there were no movies to see.
Attendance in the last couple of weeks has been the best we've experienced since the first two weeks of reopening and is not a coincidence that they coincide with the fact that we are showing an increased number of new films, as well as an increased variety of films shown.
We do best when all the film genres are represented.
We continue to have regular conversations with all our studio partners regarding the need for them to commit to film release dates and continue to release new films theatrically.
Having said that, we also need the country on an incremental basis to get the pandemic under control, not only will that increase consumer willingness to go to the movies, but it will further encourage the studios to follow through and release their films with confidence that there will be a willing audience ready to attend and see their content, the way it was meant to be seen.
It is particularly heartening to take a look at what is going on in Asia.
The Chinese box office is coming back.
And a recent new release in Japan just shattered the record for the biggest opening in Japanese history after initially struggling to attract audiences.
It was an anime film.
It did $44 million in its first weekend that compared to give you an idea of the relative performance to Frozen 2, which did $30 million.
So it was a significant outperformance.
There are multiple films still scheduled to be released during the remaining two months of the year that may generate substantial box office interest.
The anticipated film slate for 2021, which will also now include multiple films originally scheduled for 2020 is currently expected to be very strong.
And despite some continued experimentation with alternative releasing strategies, which we believe are generally directly -- are generally directly related to the current COVID-19 environment, the fact remains, the vast majority of films have been delayed to future periods.
Clear indication in our view of the importance of the theatrical experience for the studios they seek to monetize their content.
Just as we've had to adapt our plans in the recent months, we recognized that we will need to be prepared for new challenges and opportunities in the weeks and months ahead.
Well, I won't share the exact numbers, when we first began reopening theaters, we did the math and we believed -- we needed a certain attendance level in order to perform better than being closed.
As we manage through the past few months, we found additional ways to reduce fixed cost and operate at lower levels of attendance.
In other words, our math has improved and we have 66% of our theaters opened today because we think it is better to be open, better for the customer sake, better for the associates sake and better for the overall business sake.
And of course, we have an advantage that Doug alluded to earlier, we own the majority of our theaters, reducing our monthly fixed costs and making it easier for us to stay opened.
There is always the possibility of the film's schedule could change again or that we could see renewed restrictions from select local or state jurisdictions.
But I am certain that Rolando Rodriguez and his incredibly talented team will be prepared to adapt and manage us through this reopening process and ultimately position us to once again lead the industry into what we believe will be a very bright future.
And while I'm on it, I want to publicly congratulate Rolando on recently being elected, Chairman of the Board for our industry trade group, the National Association of Theater Owners or NATO.
It is a tremendous honor for Rolando and a recognition for his leadership, not only for us, but for the entire industry.
In conclusion, in this continually changing environment you can rest assured that we are constantly reviewing the situation in both our businesses and making changes to our plans as warranted.
A company is built for challenging times like this.
Our leadership team, managers and associates are stepped up to the challenge in ways that go way above and beyond and for that we are most grateful.
We also continue to appreciate the confidence and support of our lenders in the investment community during this challenging time and always.
With that, at this time, Doug and I will be happy to open the call up for any questions you may have.
| marcus theatres temporarily closed 17 previously reopened theatres in early october due to lack of new film releases.
|
With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our safe harbor statement.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
I'll begin by reviewing our operational highlights for the second quarter, and I'm pleased to report that we had our best quarter ever with strong demand and excellent execution across all of our operating segments.
Widespread business reopenings and pent-up demand led to a high level of economic activity and our record financial performance in the second quarter.
Our aftermarket parts and consumables business was exceptional in the second quarter and capital project activity was also moving at a record-setting pace.
Our new order activity was driven by strong demand for our stock preparation and wood processing product lines, both of which are included in our Industrial Processing segment.
And this led to another great quarterly performance for this segment.
I'll provide more details on this when I review our operating segments.
They've done a superb job.
Before moving on to review our second quarter financial performance, I wanted to update you on the progress of our recent acquisition of Clouth that was announced in June.
I am pleased to tell you that last week, we completed the acquisition of Clouth and most of its related companies and are moving forward with integrating this business into Kadant.
Clouth's first-class management team has built a solid reputation in its core markets.
And their quality products complement and extend our doctor blade offerings.
Turning now to slide six and our Q2 financial performance.
You can see we had significant increases across all of these financial metrics compared to Q2 of last year.
Our bookings were up 60% compared to Q2 2020 and were a new record for the third consecutive quarter.
Q2 revenue was up 28% compared to the second quarter of 2020 and up 14% sequentially and to a record $196 million.
Our aftermarket parts and consumables revenue was also up 28% compared to the same period last year and up 6% sequentially to a record $125 million in Q2.
The consistently high operating rates of our customers, combined with lower store room inventory, a part contributed to this record aftermarket performance.
Solid execution contributed to boosting our adjusted EBITDA margin to 21% which led to a record operating cash flows of $44 million in Q2.
We continue to benefit from strengthening industrial activity in Q2, especially in North America and Europe.
Our businesses executed well and our global workforce continue to safely meet our customers' needs, despite challenging circumstances in many areas of the world.
All three of our operating segments experienced an improved adjusted EBITDA margin performance despite the growing inflationary pressures for materials and supply chain constraints.
Next, I'd like to discuss our three operating segments, beginning with our Flow Control segment.
Our Flow Control segment had record revenue and strong bookings in the second quarter with a solid revenue contribution in the capital projects.
Bookings and revenue were up 45% and 38%, respectively, compared to the same period last year and parts made up 65% of total revenue in the second quarter.
Improved operating leverage led to a record adjusted EBITDA and an adjusted EBITDA margin of nearly 30%.
Our Flow Control segment's strong start to the first half of the year is expected to moderate somewhat in the second half.
However, the record backlog and strong bookings heading into Q3, we still expect a strong second half of the year.
Our recent acquisition of Clouth will further add to our overall performance and will be included in this segment going forward.
Our Industrial Processing segment continued to experience strong demand with bookings in this segment up 92% to a record $102 million.
New orders for our fiber processing systems in China led this increase in bookings in the second quarter.
Strong end market demand for wood products continued throughout the quarter as U.S. housing starts increased 23% in June 2021 compared to June 2020.
Although housing starts were down 5% from May to June of this year, overall demand for housing and wood products is high and is expected to remain strong throughout the second half of 2021.
Revenue in this segment increased 26% to $83 million with parts and consumables leading to growth, up 32% compared to the same period last year and 11% sequentially.
A favorable product mix and good execution led to a 340 basis point improvement in our adjusted EBITDA margin.
We ended the quarter with another record backlog and this positions us well for the remainder of the year.
In our Material Handling segment, we had strong demand for aftermarket parts and saw a strong uptick in orders for our high-performance balers that prepare materials for secondary processing and transport.
European markets led the way to our record revenue performance in Q2.
Revenue in the second quarter was up 18% to $42 million and parts and consumables revenue was strong, making up 60% of total revenue.
Capital bookings in our Material Handling segment were up compared to the same period last year and are back to pre-pandemic levels.
Although not a record, total bookings were up 29% at the top end of our historical bookings.
Solid execution by our businesses in this segment helped boost our EBITDA by 30% and adjusted EBITDA margin by 180 basis points to its highest level since Q4 of 2019.
Capital project activity remains at a good level, and we expect capital projects in the second half of 2021 to be similar to the strong performance in the first half of the year.
As we look ahead to the second half of 2021, we continue to see signs of healthy project activity and an optimism in our customers as the economic recovery takes hold.
As more regions of the world begin to experience an improved economic outlook, we expect to see strong demand for our products and technologies.
With the extent of the spread of COVID-19 Delta variant still a big unknown, our record backlog has us well positioned as we look ahead to the second half of the year.
I'd like to pass the call now over to Mike to review our Q2 performance.
I'll start with some key financial metrics from our second quarter.
Consolidated gross margins were 43.6% in the second quarter of 2021 compared to 43.5% in the second quarter of 2020.
Our parts and consumables revenue represented 64% of revenue in both periods.
SG&A expenses were $49.3 million and 25.2% of revenue in the second quarter of 2021 compared to $45.1 million and 29.5% of revenue in the second quarter 2020.
The $4.2 million increase in SG&A expenses includes a $2.6 million unfavorable foreign currency translation effect and increases in incentive compensation outside labor and travel-related costs due to improved business conditions.
We received $1 million from the government assistance programs in the second quarter of 2021 compared to $0.8 million in the second quarter of 2020.
I would like to note for guidance purposes, that we do not expect to receive any meaningful government assistance payments going forward.
Our GAAP diluted earnings per share was a record $1.96 in the second quarter, up 96% compared to $1 in the second quarter of 2020.
Adjusted EBITDA increased 56% to $41.3 million or 21.1% of revenue compared to $26.6 million or 17.4% of revenue in the second quarter of 2020 due to strong performance in our Flow Control and Industrial Processing segments.
I would like to note that both adjusted EBITDA of $41.3 million and the 21.1% of revenue were records.
Adjusted EBITDA is an important metric for us as we assess the returns achieved on our business initiatives.
Operating cash flow increased 101% to a record $44.4 million in the second quarter of 2021 compared to $22 million in the second quarter of 2020.
Free cash flow was also a record at $42.3 million in the second quarter of 2021 compared to $21.1 million in the second quarter of 2020.
During the quarter, we were able to utilize our strong cash flows to pay down our existing debt by $27 million.
We had several other notable nonoperating sources and uses of cash in the second quarter of 2021.
We borrowed $78.7 million at the end of the second quarter to fund the third quarter acquisition of Clouth.
We also paid $2.1 million for capital expenditures and paid a $2.9 million dividend on our common stock.
Let me turn to our earnings per share results for the quarter.
In the second quarter of 2021, our GAAP diluted earnings per share was $1.96, and after adding back acquisition costs of $0.05 our adjusted diluted earnings per share was $2.01.
In the second quarter of 2020, our GAAP diluted earnings per share was $1, and our adjusted diluted earnings per share was $1.06.
The $0.06 difference includes restructuring costs of $0.03 and acquisition costs of $0.03.
As shown in the chart, the increase of $0.95 in adjusted diluted earnings per share in the second quarter of 2021 compared to the second quarter of 2020 consists of the following: $1.15 due to higher revenue, $0.08 due to higher gross margin percentage and $0.05 due to lower interest expense.
These increases were partially offset by $0.27 due to higher operating expenses, $0.04 due to a decrease in the amounts received from government assistance programs and $0.02 due to higher weighted average shares outstanding.
Collectively, included in all the categories I just mentioned, was a favorable foreign currency translation effect of $0.16 in the second quarter of 2021 compared to the second quarter of last year due to the weakening of the U.S. dollar.
Looking at our liquidity metrics on slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory subtracting days in accounts payable decreased to 109 at the end of the second quarter of 2021 and compared to 128 at the end of the second quarter of 2020.
This decrease was primarily driven by a lower number of days in inventory.
Working capital as a percentage of revenue was 12.7% in the second quarter of 2021 compared to 14.8% in the second quarter of 2020.
Our net debt, that is debtless cash, decreased $40 million or 26% sequentially to $116 million at the end of the second quarter 2021.
We paid down $27 million of our debt in the quarter.
And as previously mentioned, we also borrowed $79 million of debt at the end of the second quarter to fund our acquisition of Clouth, which was largely completed in mid-July.
The closing in mid-July relates to the majority of the Clouth's entities that we are acquiring.
We borrowed an additional $4 million at the end of July associated with the acquisition of the remaining legal entity, which we expect will be completed in mid-August.
Our leverage ratio calculated in accordance with our credit agreement increased to 1.71% at the end of the second quarter of 2021 compared to 1.5% at the end of the first quarter of '21.
Our net interest expense decreased $0.9 million or 47% to $1 million in the second quarter of 2021, compared to $1.9 million in the second quarter of 2020.
At the end of the second quarter of 2021, we had $141 million of borrowing capacity available on our revolving credit facility which matures in December of 2023.
Our record bookings activity in the second quarter of 2021 has resulted in an increase in our revenue expectations for the year.
While we have had record booking results over the last three quarters, we remain cautious about the future potential impact on our business of increasing COVID cases in certain regions of the world and supply chain disruptions, which could impact the timing of delivery on projects.
Travel and visitation restrictions have continued to impact our ability to timely execute some projects in certain parts of the world, especially where COVID travel restrictions are still in place.
In addition to an increase in our revenue expectation due to continued strength in the market and the record bookings in the second quarter, our 2021 estimates now include the acquisition of Clouth.
As a result, we are updating our revenue range for the year to an increase over 2020 of approximately 23% to 25% and or $783 million to $793 million, up from our previous estimated range of $710 million to $730 million.
The majority of this increase is organic with approximately 1/3 of the revenue range increase related to the addition of Clouth.
We anticipate that revenue in the fourth quarter will be the strongest for the year due to both strong capital project activity and our recent acquisition.
For the third quarter, we anticipate revenue between $195 million to $200 million and for the fourth quarter revenue of $220 million to $225 million.
For the third quarter, if we exclude the additional revenue from Clouth, we anticipate revenue will be down compared to the second quarter of 2021 due to the projected timing of revenue recognition on capital projects.
As mentioned earlier, this guidance is, of course, predicated on the pandemic and supply chain issues having little impact on our customers' activities or the delivery of shipments to them.
We now anticipate gross margins for the year will come in at approximately 42.5%, down from our prior estimate of 43%, principally, as a result of including the amortization of the acquired profit and inventory related to our Clouth acquisition.
As I have noted on the last two calls, the mix will be more weighted toward capital in the second half of the year, especially in the fourth quarter.
As a result, we anticipate gross margins will be 42% in the second half of the year, which includes the impact of amortization of the acquired profit and inventory.
Our current estimate for the inventory write-up is approximately $3.5 million with $1.4 million or $0.09 turning in the third quarter and the remaining $2.1 million or $0.12 turning in the fourth quarter.
We anticipate SG&A expenses will be a little over $54 million per quarter in the third and fourth quarter.
We now anticipate that SG&A expenses as a percentage of revenue will be lower than we projected at the beginning of the year and will be approximately 26% of revenue for the full year 2021.
This includes backlog amortization expense of approximately $400,000 or $0.03 in the third quarter.
Our interest expense will be approximately $1.3 million per quarter in the second half of 2021 due to the incremental borrowings related to our recent acquisition.
We anticipate the tax rate for the year will be approximately 28% and the third and fourth quarter of '21, approximately 28.5% to 29%.
We anticipate that our adjusted earnings per share will be lower in the third quarter compared to the second quarter of 2021 due to several factors, including a lower anticipated gross margin percentage versus the second quarter and the lack of payments received from government programs that contributed $0.10 to the second quarter results.
I hope these directional comments will help provide insight into how we see our current business environment.
Before concluding my remarks, I wanted to comment on our first quarter 2021 results.
We have recast our first quarter 2021 non-GAAP financial metrics to reflect that our SG&A expense included $1.3 million of acquisition costs related to our acquisition of Clouth, which was announced in June.
We reported diluted earnings per share of $1.43 in the first quarter of 2021.
With these acquisition costs added back, our adjusted diluted earnings per share was $1.53 in the first quarter of 2021.
Also, we reported adjusted EBITDA of $31.1 million or 18% of revenue in the first quarter of 2021.
With the addition of these acquisition costs, our adjusted EBITDA was $32.4 million or 18.8% of revenue.
| compname reports q2 adjusted earnings per share of $2.01.
q2 adjusted earnings per share $2.01.
q2 gaap earnings per share $1.96.
q2 revenue $196 million versus refinitiv ibes estimate of $178.1 million.
sees fy 2021 revenue $783 million to $793 million.
|
On the call today we will discuss non-GAAP financial measures, including adjusted EBITDA and free cash flow.
Some of you may know her from her IR role with tech-driven companies like Groupon, and Lawson Software, and from Buffalo Wild Wings.
Keith, Jane, and I look forward to working with her.
We're pleased to have delivered improved third quarter results despite continued pandemic-related economic pressures, including nearly 300 basis point improvement in adjusted EBITDA margin.
We continue to make meaningful progress on executing our overall transformation to One Deluxe.
As discussed last quarter, we began to see an improvement in the latter part of our second quarter, which continued into the third quarter.
We see our sequential improvement in topline revenue, GAAP and adjusted EBITDA margins as clear evidence of our continued momentum.
By our estimates, we delivered sales driven growth, excluding COVID-related impacts, for the third consecutive quarter.
We continue to win new business at an accelerated rate, and we're successfully cross-selling our products and services.
We're pleased to have the financial strength and flexibility to support the long-term growth potential of the business.
We've restored some of our investments in the company's overall infrastructure, including technology upgrades, continued real estate consolidations, streamlined organization design, talent enhancements and more, after slowing a bit in Q2.
Importantly, we remain confident in our financial strength, as demonstrated by declaring our regular quarterly dividend.
Our net debt is now at its lowest in more than two years.
I continue to believe this is all compelling evidence our One Deluxe strategy is working.
Here are some specifics.
We delivered 23.3% adjusted EBITDA margins.
A 290 basis point sequential improvement from last quarter, better improvement than we expected.
We reported revenue of $439 million, improving over 600 basis points sequentially over second quarter with revenue down 11% or $54 million versus last year -- also better improvement than we expected.
Our sales-driven performance continues.
We've built cash reserves from operations.
Our Q3 net debt is now at the lowest level in more than two years.
We fully repaid our COVID-related draw on the revolver in October, demonstrating the strength of our business.
Over the last seven months of the pandemic, we continued to generate cash from operations, naturally improving our liquidity and eliminating the need for any additional cushion.
Our financial position continues to serve as a competitive advantage, helping us win across all our segments.
Adjusting for decisions we made to slow progress of the pandemic, we're on path and on budget in our technology infrastructure upgrade and renewal.
We closed nearly 50 of more than 80 sites, representing nearly a 60% reduction in the number of our locations over the last 18 months, including seven additional site closures in Q3.
We're particularly pleased with the future operating savings and significant capital avoidance we're going to achieve by relocating both our Minneapolis headquarters and Atlanta technology facilities to more efficient spaces.
Now, on to sales.
We continue to make progress in becoming a sales-driven revenue growth company.
Everyone sells at Deluxe.
Our One Deluxe approach works, bringing the best of Deluxe to our customers to solve their problems rather than simply pedaling one solution at a time.
We continue to outperform our pre-pandemic sales plan, and of course over a thousand deals with multi-year contracts year-to-date, including six of our top-25 targets.
We signed significant wins in each of our four businesses during the third quarter.
It will take time to onboard these wins and the pandemic environment lengthens implementation timelines as our clients work through sequencing their own priorities.
However, we're very proud to be expanding our pipeline and closing new business at record rates, giving us confidence that we'll exit 2020 with a strong backlog for us to focus our efforts on converting to revenue.
Some of our key wins for the quarter include securing a contract with M&T Bank for our treasury management services.
We expanded our relationship with RE/MAX to provide national marketing, branded print and promotional solutions to their 65,000 agents.
This is an excellent example of us growing share and moving from a transactional vendor to a recurring revenue managed services partner.
And our MPX and DPX solutions added Delta Dental and Albertsons as customers too.
Our telesales centers continued to cross-sell, delivering record average order value.
Combined with our enterprise efforts, we've signed more than a 175 cross-sell deals totaling $11 million in total contract value.
The results are clear even amid the COVID fog.
We're winning new business across all our decisions, delivering record cross-sell performance selling our existing solutions to existing customers while adding new customers and distribution partners.
This continued success gives us confidence that we'll be able to deliver sales-driven revenue growth in the low- to- mid-single digits with adjusted EBITDA margins of 20% or more over the long-term.
Now, onto some segment details.
Our Payments business continues to perform well and delivered 15.6% revenue growth over prior year.
We are well positioned in our receivables, payables and SMB cash management businesses, where we're winning new clients and market share and benefiting from positive secular outsourcing trends as firms focus on speed and efficiency in accounts receivables.
We continue to see new and long-standing customers shifting volume to the safety of Deluxe due to our strong balance sheet and trusted service levels.
Our cloud and promotional solutions divisions continued to experience the greatest COVID-related impacts, and accordingly we expect revenue and profit growth to lag the recovery due to reduced discretionary spending.
In cloud, this impact is visible in data-driven marketing revenue, where mainly financial institutions have deferred campaign spend.
We believe the financial institution spend will return and, in fact, we saw increased demand in Q3 versus last year's quarter.
We've also signed new financial institution customers as well.
While our incorporation and website services have experienced weakened demand, we continue to focus on adding new relationships to deliver our incorporation and website services, including The Hartford and NFIB.
Our Promotional Solutions delivered sequential quarterly improvement in revenue while driving significant benefit to adjusted EBITDA margins.
While we did not repeat the benefit we saw from PPE in Q3, we did experience positive sequential growth in what we call our business essentials product area, forms and more that business use to operate.
We also signed several new customers focused on our managed brand services program, giving us more confidence in our future profitable growth.
As anticipated, the secular decline in the Checks business sequentially improved during the third quarter, consistent with the pattern of previous economic downturns.
We continue to see an increase in new Check customers resulting from new business start-up.
We're encouraged to see self-service and digital order volume acceleration in the third quarter, proving our digital strategy works.
Competitively, we're winning new Check customers at a rate faster than before and we renewed a top-five Check customer.
Our financial strength is a key factor here too, just like in Payments.
The uncertainty of the pandemic continues.
And as such, we will not provide detailed outlook for the fourth quarter or full-year 2021 today.
Keith will provide some detail on our future expectations, which reflect today's environment.
The macro environment remains challenged as we're in the midst of a second wave of COVID.
Most importantly, given the work we've accomplished, the results we've delivered despite the ongoing challenges, I feel good about our relative position in the market and we continue to believe total company adjusted EBITDA margins will remain at our long-term target of 20% or better.
Lastly, I want to emphasize our team has delivered better than expected performance again, despite the pandemic.
Deluxe remains financially sound.
We expanded margins almost 300 basis points, paid our dividend, paid our revolver down to the pre-COVID level, have the lowest net debt in more than two years, and our sales engine is working.
As Barry noted, our strategy is working, and we are seeing the results.
We delivered strong sequential performance in the third quarter despite the continued challenging environment.
We've strengthened our financial position, while simultaneously advancing our business transformation.
Q3 total revenue declined 11% or $54.1 million to $439.5 million as compared to the same period last year.
This is a sequential improvement of 600 basis points from the Q2 decline rate.
While we did benefit from sales-driven growth, it wasn't sufficient to overcome the impacts of the pandemic.
Importantly and similarly to last quarter, we took assertive actions in the quarter to address the loss of revenue and change in mix.
These expense actions improved adjusted EBITDA margins by 290 basis points sequentially to 23.3%.
Some of this improvement will not repeat in Q4, but we do expect margins to remain in our long-term range of greater than 20%.
The third quarter revenue decline was partially offset by new and cross-sell wins.
The reduction in revenue and the change in mix did affect our results.
Gross profit margin for the quarter improved 160 basis points from the prior year with the loss of lower margin revenue in our promotional and cloud segments.
SG&A expense declined $14.4 million due primarily to lower commissions, personnel exits, 401(k) match suspensions and restructuring actions.
Interest expense declined $3.6 million due to lower interest rates on higher borrowing levels compared to last year.
All this together, increased operating income to $44.4 million, net income of $29.4 million, increased from a net loss of $318.5 million in Q3 2019.
Last year's net income included non-cash asset impairment charges for goodwill and certain intangibles totaling $391 million.
Our adjusted EBITDA for the period was $102.5 million, $16.8 million lower than the same period last year.
The adjusted EBITDA margin declined 90 basis points to 23.3% on a year-over-year basis, but sequentially increased by 290 basis points compared to the second quarter.
Now, on to segment details.
Payments revenue grew compared to last year by 15.6% to $74.7 million, with Treasury Management revenue leading the growth in the quarter.
As expected, we continued to experience softness in our Payroll business because of elevated unemployment levels.
We expect Q4 revenue to grow sequentially and be single digit on a year-over-year basis.
Adjusted EBITDA margin decreased to 22.4%, primarily due to increased costs related to last year's large client win.
We anticipate adjusted EBITDA margin pressure to continue into Q4 due to lapping of one-time hardware sales and outsource deals in Q4 2019, as well as expected COVID-related client implementation delays.
Cloud Solutions revenue declined 20.3% to $63.8 million from last year.
Data-driven marketing solutions revenue sequentially improved from last quarter, as financial institutions slowly reactivated their marketing campaign.
Web and hosted solutions experienced declines related to the loss of customers discussed last year, expected attrition from our decision to stop investing in certain product lines, plus the economic impact of the macro environment.
Adjusted EBITDA margin increased to 25.7% as we benefited from mix shift in cost reductions.
We expect the loss of revenue associated with Q4 2020 product exits will continue to impact the business into 2021, but we anticipate cloud margins to remain healthy in the low-to-mid 20s range.
Promotional Solutions revenue declined 20.3% to $124.9 million from last year.
Compared to prior quarter, revenue grew about 6% and adjusted EBITDA margin expanded 260 basis points, as the mix shifted and costs were removed.
In the case of Promotional Solutions, we see the pullback most acutely in marketing and promotional solutions, where revenues are tied to events and branded merchandise.
We believe the business will continue to improve, but we are not expecting a rapid recovery until COVID-19 impacts abate.
Check revenue declined 8.4% from last year to $176.1 million due to the secular decline, combined with the pandemic.
Adjusted EBITDA margin decreased to 48.3% as a result of higher commissions on referrals and technology investments in support of our One Deluxe strategy.
Check recovery rates in Q3 likely benefited from some delayed Q2 volume and we expect revenue recovery to be slightly lower in Q4 compared to Q3, as general economic activity continues to improve.
This performance is consistent with the recovery from previous economic slowdowns.
Year-to-date, cash from operating activities was $166.8 million and capital expenditures were $42.7 million.
Free cash flow, defined as cash provided by operating activities, less capital expenditures, was $124.1 million, a decline of $34.2 million.
The primary drivers of decline were COVID-related revenue decline, cloud business losses described last year and expected secular Check declines.
These were partially offset by lower taxes, integration and legal settlements.
We did not repurchase common stock in Q3 and we expect to repurchase less in 2020 than previous years.
We ended the quarter with strong liquidity of $413 million and our cash balance was $310.4 million.
In October, we paid down another $140 million of the revolving credit facility, repaying 100% of our COVID-related March draw.
This repayment is not reflected in our reported credit facility balance of $1.04 billion or cash balance at the quarter-end.
I think it's important to note that we have consistently built liquidity throughout the year.
In addition, net debt has continued to decrease, and in the quarter at $730 million, the lowest level in more than two years for the second consecutive quarter during a pandemic.
I want to pause here.
The pandemic has challenged us.
But this new management team is delivering.
In Q3, we expanded margins sequentially.
Our year-to-date adjusted EBITDA margin is at 20.2%, within our long-term target range.
As Barry noted, we remain cautious about the pace of the recovery, given the uncertainties ahead and the COVID resurgence.
We expect the revenue decline to worsen on a percentage basis in Q4 versus Q3 due to COVID-related customer implementation and program delays, combined with the impacts of product exits in cloud.
However, we do expect to maintain adjusted EBITDA margins within our long-term target of 20% or better.
Our bold actions and winning strategy maintain the company's financial strength and position us for long-term growth.
Our team and business model are highly durable, giving us the runway to complete our historic transformation.
As further evidence of our strength, our Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares.
The dividend will be payable on December 7, 2020 to all shareholders of record on November 23, 2020.
I am proud of our financial performance in light of the pandemic.
Our financial position is strong, our strategy is working.
We are well positioned to accelerate our transformation and deliver long-term shareholder returns.
Now, back to Barry.
I want to build on your comments and reiterate our remarkable Q3 achievements.
We increased margin sequentially, almost 300 basis points.
Net debt declined to the lowest level in more than two years.
We expanded liquidity with cash from operations, while fully repaying our COVID-related draw on our revolver.
We declared our regular dividend.
Our Payments business grew 16% and we're confident we'll be a double-digit grower over the long term.
Our One Deluxe sales strategy is working.
By our estimates, we've been a sales-driven growth company for three consecutive quarter.
The strength of our balance sheet and fiscal responsibility is helping us win new business and positions us well for the future.
COVID may have temporarily slowed our progress, but we still believe Deluxe will be a low- to- mid-single digit revenue growth company with margins in the low- to- mid-20s over the long term.
We're proud of our progress to the absolute and especially in light of COVID.
Finally, I want to recognize the extraordinary contribution of my follow Deluxers.
The team has risen to the unprecedented challenges of COVID and continued to deliver for our clients.
Our team went to work and got the job done.
We're a team living our purpose, values and ownership culture, because we are all shareholders too.
Now, we'll take questions.
| deluxe corp qtrly revenue $439.5 million versus $493.6 million.
|
I'm joined by our Chairman and CEO, Scott Santi; and Senior Vice President and CFO, Michael Larsen.
During today's call, we will discuss ITW's third quarter financial results and update our guidance for full year 2021.
In the third quarter, we saw continued strong growth momentum in six of our seven segments and delivered excellent operational execution and financial results.
Revenue grew 8% with organic growth of 6% and earnings per share of $2.02 was up 10%.
At the segment level, organic growth was led by welding at plus 22%; food equipment at plus 19%; Test & Measurement and Electronics at plus 12% and specialty products at plus 8%.
Our automotive OE segment continued to be impacted in the near term by auto production cutbacks associated with the well-publicized supply chain challenges affecting our auto customers.
In Q3, auto production cutbacks ended up being significantly larger than what was projected heading into the quarter.
And as a result, our auto OEM segment revenues were down 11% in Q3 versus the minus 2% we were expecting as of the end of June.
In a very challenging environment, our teams around the world continue to do an exceptional job of executing for our customers and for the company.
In Q3, our people leveraged the combination of ITW's robust and highly flexible 80/20 front-to-back operating system.
The company is close to the customer manufacturing and supply chain capabilities and systems and our decision to stay fully staffed and invested through the pandemic to sustain world-class service levels for our customers.
They also executed appropriate and timely price adjustments in response to rapidly rising raw material costs.
And as a result, we were able to fully offset input cost increases on a dollar-for-dollar basis in Q3, resulting in 0 earnings per share impact from price cost in the quarter.
And, by the way, our teams also managed to continue to drive progress on our long-term strategy, execute on our Win the Recovery positioning initiative and deliver another 100 basis points of margin improvement benefit from enterprise initiatives.
Moving forward, we remain very focused on sustaining our growth momentum and on fully leveraging the competitive strength of the ITW business model and the investments we have made and continue to make in support of the execution of our enterprise strategy.
Michael, over to you.
As Scott said, demand remained strong in Q3 with total revenue of $3.6 billion an increase of 8% with organic growth of 6%.
Growth was positive in six or seven segments, ranging from 3% to 22% and in all geographic regions, led by North America, up 9%; Europe, up 1% and; Asia, up 5%.
China was up 2% versus prior year and up 6% sequentially.
GAAP earnings per share of $2.02 was up 10% and included a onetime tax benefit of $0.06.
Operating income increased 7% and operating margin was flat at 23.8% despite significant price cost headwinds.
Enterprise Initiatives were real positive again this quarter at 100 basis points, as was volume leverage, which contributed more than 100 basis points.
Throughout 2021, our businesses have quickly and decisively responded to raw material and logistics cost inflation with pricing actions in alignment with our policy to fully offset these cost increases with price on a dollar-for-dollar basis.
And we've talked about this before, but given the current environment, I'll remind you that we don't hedge.
So current cost inflation is always moving through our businesses in real time.
After-tax return on invested capital was 28.5% and free cash flow was $548 million.
Free cash flow conversion was 86% as our businesses have been very intentional about adding inventory to both support our growth and to mitigate supply chain risk and sustained world-class service levels for our customers.
Overall, for the quarter, then strong growth in six of seven segments and excellent operational and financial execution across the board.
Let's go to slide four for segment results.
And before we get to the segment detail, the data on the left side of the slide illustrates our strong Q3 results with and without automotive OEM.
I wanted to highlight two key points.
The first is the benefit we derive from our high-quality diversified business portfolio in terms of the strength, resilience and consistency of ITW's financial performance.
which is enabling us, in this case, to power through significant near-term headwinds in our largest segment and still deliver top-tier overall performance.
The second is the accelerating growth momentum with strong core earnings leverage we're generating across the company.
Excluding our auto OEM segment, given the issues affecting that market right now, the rest of the company collectively delivered organic growth of 11%.
Operating income growth of 14% and an operating margin of 25% plus in Q3.
As you can see on this slide, if you eliminate the price/cost impact, our core incrementals were a very strong 52% in the third quarter, which points to the quality of growth and profitability leverage that define the core focus of our business model and strategy.
Now let's take a closer look at our segment performance in Q3, beginning with automotive OEM on the right side of this page.
Organic revenue was down 11%, with North America down 12%, Europe, down 18%; and China, up 2%.
And as Scott mentioned, supply chain-related production cutbacks were much larger in Q3 than what we and most, if not all, external auto industry forecasters were expecting heading into the quarter.
While conditions in the auto market are obviously very challenging in the near term, but really good news from our standpoint is that the eventual and inevitable recovery of the auto market will be a major source of growth for ITW over an extended period of time once the current supply chain issues begin to improve and ultimately get resolved.
Between now and whenever that is, we will remain fully invested and strongly positioned to support our customers and seize incremental share gain opportunities as production accelerates coming out the other side of this situation.
Turning to slide five for Food Equipment, and organic revenue growth was very strong at 19% and the Food Equipment recovery that began in Q2 continues to gain strength.
North America was up 18% with equipment up 20% and service up 14%.
Institutional revenue, which is about 1/3 of our revenue, increased more than 20%, with strength in education, up over 40% and healthcare and lodging growth of around 20%.
Restaurants were up almost 50% with strength across the board.
Strong demand is evident internationally as well with Europe up 20% and Asia Pacific, up 23%.
Equipment sales led the way up 26% with service growth of 8%.
In our view, this segment is in the early stages of recovery as evidenced by revenues that are still below pre-COVID levels.
Test & Measurement and Electronics organic revenue was strong with growth of 12%.
Test & Measurement was up 15%, driven by continued strength in customer capex spend and in our businesses that serve the semiconductor space.
Electronics grew 8% and operating margin was 26.8%.
So moving to slide six.
Welding demand continued to be very strong with organic revenue growth of 22%.
Equipment revenue was up 25% and consumables grew 18%.
Our industrial businesses increased 32% in the commercial business, which sells to small businesses and individual users grew 18%.
North America was up 24% and international growth was 12% with continued recovery in oil and gas, which was up 9%.
Welding had an operating margin of 30% in the quarter.
Polymers & Fluids organic growth was 3%, with demand holding steady at the elevated levels that began in Q3 of last year.
And as such, had a tough comp of plus 6% a year ago.
In Q3, growth was led by the Polymers business, up 8% with continued strength in MRO and heavy industry applications.
Automotive aftermarket grew 4% with sustained strength in the retail channel.
And Fluids was down 5% due mostly to a decline in pandemic-related hygiene products versus prior year.
Margins were 24.2% with more than 250 basis points of negative margin impact from price cost driven by significantly higher costs for resins and silicone.
Moving to slide seven.
And a similar situation with construction, where organic growth was also up 3% and also on top of a strong year-ago growth rate of plus 8%.
All three regions delivered growth with North America up 2%, with residential renovation up 1%, on top of a plus 14% comp a year ago and commercial was up 10%.
Europe was up 8% and Australia and New Zealand was up 2%.
Specialty organic revenue was up 8%, driven by continued recovery in North America, which was up 15%, and international was down 4%.
Equipment sales were up 10% with consumables up almost 8%.
Let's move on to slide eight for an update on our full year 2021 guidance.
We now expect the Automotive OEM segment revenue to be down about 15% in the second half, including being down 20% in Q4 versus the forecast of roughly flat second half auto OEM revenues that was embedded in our previous guidance.
All other segments remain on track or better versus our previous guidance.
Our $8.40 midpoint equates to earnings growth of 27% for the full year.
We now expect full year revenue to be in the range of $14.2 billion to $14.3 billion, which is up 13% at the midpoint, with organic growth in the range of 11% to 12%.
Of that organic growth rate of 11% to 12% volume growth, including share gains are 8% with price of 3% to 4%.
For the full year, we expect operating margin of approximately 24%, which is up 100 basis points versus last year.
And the fact that we're expanding margins at all in this environment is pretty strong performance, considering that we now expect raw material costs to be up 9% or more than $400 million year-over-year, which is more than four times our expectation coming into this year.
Our businesses are on track to offset raw material cost increases with pricing actions on a dollar-per-dollar basis, which, as you know, is earnings per share neutral but margin dilutive.
As raw material costs and consequently, price have gone up more than what we predicted in our previous guidance, we now estimate margin dilution percentage impact from price cost for the full year at about 150 basis points versus our previous expectation of 100 basis points.
These margin headwinds though, will be offset by strong volume leverage of about 250 basis points and another solid contribution from enterprise initiatives of more than 100 basis points.
Free cash flow is expected to be approximately 90% of net income as we continue to prioritize sustaining our world-class service levels for our customers in this challenging environment, and as such, we will continue to invest in additional working capital to support our growth and mitigate supply chain risks.
And as per usual process, our guidance excludes any impact from the previously announced acquisition of the MTS Test and Simulation business.
We are awaiting one final regulatory approval and expect to receive that and close the transaction in Q4.
So in summary, this will be a record year for ITW with double-digit organic growth, margin expansion, strong cash flow and earnings per share growth of 25% plus.
We expect this strong demand momentum to continue in Q4 and well into next year with an additional boost from automotive OEM likely at some point in 2022 as the supply chain issues there begin to improve.
ITW remains very well positioned to continue to deliver differentiated best-in-class performance as we leverage our diversified high-quality business portfolio, the competitive strength of ITW's proprietary business model and our team's proven ability to execute at a very high level in any environment.
| q3 gaap earnings per share $2.02.
q3 revenue rose 8 percent to $3.6 billion.
sees fy2021 total revenue growth of 13% to 14% and organic growth in range of 11% to 12%.
fy2021 guidance excludes any impact from acquisition of mts test & simulation business.
|
I'm going to give an overview of our fourth quarter and year-end results.
Afterward, I'll pass the call to George for his comments.
We reported funds from operations or FFO of $17.5 million or $0.16 per share for the fourth quarter of 2020 and $79.4 million or $0.74 for the year ended December 31, 2020.
During the fourth quarter, we worked with tenants that were impacted by the pandemic and had a significant write-off of one large tenant that filed for bankruptcy in late December that resulted in a $3.1 million charge against our revenue.
As part of making decisions on write-offs, we determine whether a lease is collectible or not.
If we determine it's not collectible, we write off the receivables and don't report any current rents, unless they're paid in cash.
So, part of the loss we wrote-off is from receivables, which is more of a one-time charge and part of the loss are current rents that we didn't collect.
These write-offs reduced revenue on the income statement.
During Q4, we had write-offs and lost rent of about $3.1 million which is primarily from a tenant bankruptcy that I noted and on a year-to-date basis, the total write-offs were about $3.8 million or about 1.5% of our annual rental income.
Going forward, the amount of lost rents from tenants we wrote off would be reduced by any cash rents we receive from them.
We also reached agreements with a number of tenants on rent deferrals using lease amendments, modifications and other tenant agreements.
The total of rents deferred by us during Q4 were about $300,000 and for the year totaled about $1.75.
These agreements generally result in us being repaid or made whole -- with the whole -- as part of the $1.75 million we did occur about $200,000 of GAAP and FFO impact from them this year.
We're working with other tenants that are having issues and we'll provide updates periodically like we have here.
Turning to our balance sheet at December 31, '20, we had $923.5 million of unsecured debt, excluding [Phonetic] $3.5 million drawn on our line of credit.
In December, we sold a property in North Carolina for $89.7 million and applied $87.3 million of the proceeds against debt.
We will be providing more color on that transaction later.
With the proceeds from the sale, we applied $50 million against $150 million term loan that matures in November and the remainder one against the drawn balance of our line of credit.
At year-end, between cash on hand and availability on our line, we had total liquidity of about $601 million.
We disclosed some ratios in our supplemental filing that were impacted by the $3.1 million write-off we incurred in late December.
Our net debt to EBITDA ratio was impacted because the charge reduces EBITDA and we then annualize that for the fourth quarter for this measure.
Excluding this charge, our net debt-to-EBITDA ratio would have been 7.8 times compared to 8.5 times at September 30 and that decrease would be primarily a result of the debt reduction.
Our interest and debt service coverage ratios were also impacted and would have been 3.26 times.
We disclose our calculations of ratios in our supplemental filing and the calculations I'm referring to are in the footnotes on Pages 4 and 10 in case you're interested in looking at them.
As a reminder, all of our debt is unsecured and we have no debt maturities until November when $155 million of term loans will be due.
Our debt is at fixed rates other than the $3.5 million on the line which is at a floating rate.
I would like to start my portion of this earnings call by recognizing the many different people that contributed to helping Franklin Street successfully navigate the challenges of our business in 2020 that was so impacted by the COVID-19 pandemic.
It has been one of the most challenging and collaborative efforts I have ever seen in business.
All of these efforts are ongoing as we begin 2021 and at the end of the day, are ultimately directed toward FSP's customers, our valued tenants, each one of them grappling with their own challenges, responses and business realities resulting from the pandemic.
For 2021, we are focused on two primary objectives; leasing progress and debt reduction.
From a leasing perspective, we anticipate the potential for growing office space demand in our markets as a result of improved economic situation due to increasing access to both therapeutics and of course now the vaccines.
We believe that users of office space are now reconsidering the office densification trends of the past approximately 20 years.
We also believe that even with the continuation of some planned for level of remote work-from-home flexibility, the potential reversal or slowing of office densification could bode well for future office space absorption.
Our 2021 leasing focus includes both increased economic occupancy and longer-term renewals of existing tenants.
John Donahue will give more color to these leasing thoughts in just a minute.
As for debt reduction efforts in 2021, FSP intends to pursue several property dispositions from its portfolio where valuation objectives have been met and where we believe embedded value may not be accurately reflected in the price of our common stock and then apply those proceeds from dispositions, primarily for the repayment of debt.
We believe that further debt reduction will provide greater financial flexibility and position the Company for stronger shareholder returns.
Accordingly, we have introduced full-year 2021 disposition guidance in the range of approximately $350 million to $450 million in aggregate gross proceeds.
Jeff Carter will talk about this more later in the call.
At the end of the fourth quarter, the FSP portfolio including redevelopment properties was approximately 83.8% leased which is a decrease from 84.3% leased at the end of the third quarter.
The decrease was primarily attributable to the disposition of Emperor Boulevard in December.
The average leased occupancy of the portfolio for calendar 2020 was approximately 83.6%.
FSP leased approximately 1.130 million square feet during calendar 2020, which included 368,000 square feet of new leases and approximately 150,000 square feet of expansions with existing tenants.
During the fourth quarter, we finalized over 500,000 square feet of renewals and expansions with existing tenants.
Although demand for office space had slowed down during the holidays in the fourth quarter, the prospective tenant activity at FSP assets in January and February has been gaining momentum, specifically for the Sunbelt assets.
FSP is currently tracking approximately 700,000 square feet of potential new leases and renewals.
There are approximately 300,000 square feet of new tenant prospects that have shortlisted FSP properties.
In addition, we are engaged with existing tenants for approximately 400,000 square feet of renewals.
Barring any surprises, the potential for total net absorption over the next three months to six months is approximately 200,000 square feet.
This includes new prospects, and potential expansions.
We here at Franklin Street Properties hope that everyone is safe and healthy in these uncertain times.
I wanted to start my comments today by sharing four key priorities for FSP during 2021.
The first will be ongoing efforts to work as partners with our tenants to navigate the COVID-19 pandemic together.
FSP recognizes and appreciates that our tenants' health and safety are essential.
The second is to continue working to lease vacancies and on renewing or expanding existing tenants in order to grow occupancy and value within our portfolio.
The third will be to build upon our December 23 sale of Emperor Boulevard with additional but select dispositions, estimated to be in the range of $350 million to $450 million for full-year 2021 and then to utilize such proceeds primarily for the repayment of debt in order to gain greater financial flexibility and to position FSP for stronger shareholder returns.
I will describe our thoughts on this subject further in my comments ahead and fourth will be a continued commitment to our strategy of owning high-quality office properties within the US Sunbelt and Mountain West where we continue to see strong long-term job and population growth potential.
More specifically on the dispositions front and following the sale of Emperor Boulevard in December, FSP will look to pursue additional dispositions of select properties, particularly where we believe that embedded value exists, that may not be appropriately reflected within our current share price and then to utilize such proceeds primarily for the repayment of debt under our revolving line of credit and term loan facilities as well as for any special distributions necessary to meet REIT requirements.
The determining factor for FSP on potential dispositions in 2021 will be an assessment of whether a respective property has achieved its near-term valuation objective.
We believe that further debt reduction will provide greater financial flexibility and position FSP for stronger shareholder returns.
With this in mind, we are currently refining our target list of properties within our portfolio that we believe may have met their respective near-term valuation goals.
We anticipate that these potential disposition assets are likely to include properties from our smaller opportunistic markets as well as some from our larger markets and we wish to point out that regardless of where any specific properties are sold during 2021 that FSP remains committed to our Sunbelt and Mountain West strategic market emphasis where we believe that long-term business and population growth has the potential to exceed the national average.
At this time, the highest likelihood is that the majority of potential sales would occur in the second half of 2021.
Proceeds from potential dispositions under review are currently estimated to be in the range of $350 million to $450 million for full-year 2021, which again would be intended primarily to be used for the repayment of debt.
We will update the market regularly on our efforts with this objective, which will be influenced by the COVID-19 pandemic and resulting investor appetite.
And at this time, we'd like to open up the call for any questions.
| franklin street properties corp - $0.16 ffo (funds from operations) per share for fourth quarter 2020.
franklin street properties - anticipated dispositions in 2021 estimated to result in gross proceeds in range of about $350 million to $450 million.
|
A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC, including in our 10-Q, which we file later today.
I will now turn the meeting over to Dave.
AMETEK delivered a strong third quarter, despite ongoing challenges presented by the COVID-19 pandemic.
While sales continue to be impacted by the pandemic, the demand environment shows solid improvements from the second quarter, as customers return to work and travel restrictions began to slowly ease.
In addition, our businesses delivered outstanding operating performance, allowing us to expand margins, generate excellent cash flow and drive earnings ahead of our expectations.
I continue to be impressed by the strength of our workforce and the dedication to our mission of solving our customer's most complex challenges.
We remain vigilant and focused on our employees' safety.
Our site and country level pandemic coordinators are doing an excellent job adapting to the shifting guidelines provided by the CDC, and local health and safety agencies.
The flexibility our teams have shown in implementing new processes and protocols to ensure a safe working environment has been excellent.
Now let me turn to our results for the quarter.
Third quarter sales were $1.13 billion, down 12% compared to the third quarter of 2019.
Organic sales were down 14%.
With the recent acquisitions contributing five points to growth, the divestiture of Reading Alloys a three point headwind and foreign currency adding one point.
As expected, our commercial aerospace business, which is less than 10% of the overall company, experienced the largest impact from COVID, with sales down approximately 35% versus the prior year.
Our businesses continue to drive operational excellence initiatives to help mitigate demand weakness.
These efforts lead to excellent operating results in the quarter.
Third quarter operating income was $270 million and operating margins were a record 24%, up 40 basis points compared to last year's third quarter, while decremental margins were an impressive 20% in the quarter.
EBITDA in the third quarter was $332 million and EBITDA margins were a record 29.5%, up 210 basis points over last year's comparable period.
This led to earnings per diluted share of $1.01, down just 5% compared to the third quarter of 2019.
Furthermore, our businesses generated a strong level of cash flow.
Operating cash flow in the quarter was $310 million and free cash flow conversion was an impressive 146% of that income.
Next, let me provide additional details at the operating group level.
Our Electronic Instruments Group performed very well in the quarter, despite end-market weakness, delivering outstanding operating performance resulting in strong margin expansion.
Sales in the third quarter for EIG were $748.4 million, down 8% from the comparable period in 2019.
As expected, we saw solid and wide-spread sequential sales improvements from the second quarter.
Organic sales were down 15% year-over-year, with the acquisitions of Gatan and IntelliPower contributing six points and foreign currency contributing one point.
Commercial aerospace remains a largest driver of organic sales weakness in EIG.
EIG's third quarter operating income was $203.7 million and operating margins were an impressive 27.2%, up 30 basis points compared to the same quarter last year.
Our Electromechanical Group also saw sequential sales improvement and mitigated a weak demand environment with solid operating performance.
EMG sales were $378.6 million, down 18% from last year's third quarter, driven in part by the impact of the Reading Alloys divestiture.
Organic sales were down 13%, with a divestiture of 8-point headwind, the acquisition of PDT added two points and foreign currency adding one point.
EMG's operating income was $84.3 million and operating margins were solid at 22.3% for the quarter.
Let me comment briefly on end-market dynamics for some of our businesses.
Overall, we saw solid sequential sales improvements across all markets in the third quarter.
We expect continued sequential improvements in the fourth quarter for all businesses other than customer aerospace, where we expect largely flat conditions sequentially.
Our strongest market remains defense, where we continue to be well-positioned with content across a wide range of important defense platforms.
We are also very well-positioned with our medical and healthcare businesses.
Although, they experienced a delay in the return of electro procedures during the third quarter, which offsets solid COVID-driven demand.
And our most challenging market remains commercial aerospace remain cautious of a trajectory of a recovery given the uncertainty caused by COVID-19.
Given the uncertain and challenging end-market dynamics, our businesses remain highly focused on driving operational excellence initiatives, both structural and temporary, to manage topline weakness, while ensuring we maintain our investments and key growth initiatives across the company.
AMETEK's asset-light operating model provides us with the flexibility to do both.
Our ability to expand margins and generate strong levels of cash flow during this pandemic is evidence of the strength of our operating model.
In the third quarter, we generated $70 million in total cost savings, which was at the high end of our expectations, with $40 million in structural savings and $30 million in temporary cost reduction savings.
Looking ahead to the fourth quarter, we expect a slightly higher level of structural savings, while temporary savings will be reduced from the third quarter levels, as we add back additional temporary costs during the quarter.
As a result, we expect approximately $55 million in our total cost savings in the fourth quarter, with $45 million in structural and $10 million in temporary cost savings.
And for the full year, we expect approximately $230 million in total cost savings, with $140 million in structural savings and $90 million in temporary savings.
Our businesses continue to implement new and innovative ways to reach our customers around the world in new markets.
Through virtual meeting platforms, augmented reality product demonstrations and service, and enhanced digital marketing initiatives, our businesses have adapted quickly to the new landscape.
Seeing our businesses adopt these new ways of doing business quickly and effectively has been very impressive.
Our businesses are also collaborating across platforms.
As an example, AMETEK Land and AMETEK Rauland recently partnered together to help support Rauland's reopen schools safely campaign for their Telecenter U solution.
Rauland is the leading provider of critical communications, workflow and safety solutions for hospitals and schools.
Their Telecenter U solution connects classrooms and educational facilities to district offices for emergencies, event management and everyday communications.
As I mentioned on our last earnings call, AMETEK Land, a leading manufacturer of non-contact temperature measurement solutions, recently developed their new VIRALERT three system for rapid detection of elevated skin temperatures at points of entry to various facilities, including schools.
Through this collaborative effort, Rauland was able to incorporate Land's VIRALERT three technology into their Telecenter U solution to help their customers safely reopen their schools by allowing for temperature screening of students and faculty.
In return, AMETEK Land will reach thousands of new potential customers through Rauland's well-established network of school districts.
The result was a valuable solution for our customers.
Congratulations to the AMETEK and the AMETEK Rauland team for the success on this project.
We are also finding ways to support our customers through new product innovation.
Throughout the pandemic, we continue to invest meaningfully in our research and development initiatives, and we are seeing great success from these efforts.
Our Vitality Index, which measures the amount of sales generated from new products introduced during the last three years was very strong at 25% in the quarter.
During the quarter, Creaform, a worldwide leader in 3D measurement solutions, unveiled its R-Series 3D scanning solution that is designed for automated dimensional quality control applications.
The suite of R-Series solutions includes the new robot-mounted MetraSCAN 3D scanner with CUBE-R, a turnkey industrial measuring cell that is designed to be integrated into factories for at-line inspections.
Together, the solution provides customers with much faster cycle times, more accurate and repeatable results, higher resolution and operational simplicity, to increase productivity by measuring more dimensions on more parts without compromising on accuracy.
Congratulations to the Creaform team for launching this outstanding new solution.
Now shifting to acquisitions.
While deal flow during the second quarter and third quarter has been impacted by the pandemic, we are starting to see a healthy pickup in activity.
Our pipeline is strong and conversations with acquisition targets are accelerating.
As Bill will highlight in a moment, over the last two quarters, we have further strengthened our balance sheet and liquidity position, and remain poised to deploy significant capacity -- capital on strategic acquisitions.
We will remain active, yet disciplined, in our acquisition process.
We continue to focus on acquiring niche technology leaders with attractive growth profiles with opportunities for us to add value commercially and operationally.
Now turning to our outlook for the remainder of the year.
While the global economy continues to present challenges and uncertainties, visibility has improved across most markets.
As a result, we are providing guidance for the fourth quarter.
Overall sales in the fourth quarter are expected to be down high-single digits with a similar level of organic sales decline.
Diluted earnings per share are expected to be in the range of $1 to $1.04, down 4% to 7% versus the prior year.
Fourth quarter decremental margins are expected to remain solid in the low 20%s.
To summarize, our businesses delivered a solid quarter in a difficult environment.
AMETEK continues to manage this global crisis well to the proven strength of the AMETEK growth model and with a talented workforce.
Our cost mitigation efforts have allowed the company to weather this ongoing storm and we are confident that we will overcome these challenges with a bright future.
I'd like to echo Dave's comments on the quarter, as we saw outstanding operating performance driven by the tremendous efforts of our team in a very challenging economic environment.
Let me provide some additional financial highlights for the quarter.
Third quarter general and administrative expenses were down $4.5 million, compared to the same period of 2019, primarily due to lower compensation costs and other discretionary spending cuts.
As a percentage of sales, general and administrative expenses were 1.5% of sales in the quarter, down from 1.7% last year.
The effective tax rate in the third quarter was 17.5%, down from 19.5% in the same period last year.
The lower tax rate in the quarter was due to returned provision adjustments and a lower tax rate on foreign earnings.
For 2020, we now expect our effective tax rate to be between 19% and 19.5%, and as we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from this full year estimated rate.
Operating capital and working capital was an impressive 17% in the third quarter, down sequentially from the second quarter's 19.6% on outstanding working capital management.
Capital expenditures in the quarter were $10 million.
We now expect full year capital expenditures to be approximately $80 million, which is $5 million higher than our full year expectations last quarter, as we are investing in incremental growth opportunities.
Our full year capital expenditures estimate remains below our initial expectations to start the year of $100 million.
Depreciation and amortization expense in the quarter was $63 million.
For the full year, we expect depreciation and amortization to be approximately $255 million, which includes after-tax, acquisition-related intangible amortization of approximately $117 million or $0.51 per diluted share.
Our businesses continue to generate strong levels of cash flow, despite the challenges presented by the pandemic.
Operating cash flow in the quarter was $310 million, free cash flow was $300 million and free cash flow conversion was excellent at 146% of net income.
Total debt at the end of the quarter was $2.8 billion, up slightly from $2.77 billion at the end of 2019 and down $68 million from the end of the second quarter.
Offsetting this debt is cash and cash equivalents of $1.3 billion.
Our gross debt-to-EBITDA ratio at the end of the third quarter was 2.1 times, as we are intentionally holding higher than normal cash balances.
This was comfortably below our debt covenants of 3.5 times and our net debt-to-EBITDA ratio was 1.1 times at quarter end, which improved by two -- 0.2 turns in the quarter.
We remain well-positioned to manage this economic downturn with approximately $2.3 billion in liquidity to support our operations and growth initiatives.
This includes approximately $1 billion in available revolver capacity.
As we have highlighted on previous calls, AMETEK has a robust balance sheet with no material debt maturities due until 2023.
In summary, our businesses continue to manage through the pandemic exceptionally well, delivering strong operating results and high levels of cash flow.
The dedication of our world-class workforce to serving our essential customers has truly been impressive.
We remain well-positioned to manage ongoing economic challenges, while investing in our long-term growth initiatives.
Andrew, we are ready to take questions.
| q3 adjusted earnings per share $1.01.
q3 sales $1.13 billion versus refinitiv ibes estimate of $1.12 billion.
sees q4 adjusted earnings per share $1.00 to $1.04.
ametek - for q4, expect solid sequential improvements in sales versus.
q3 with y-o-y sales down high single digits on a percent basis compared to last year's q4.
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A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC.
I'll now turn the meeting over to Dave.
AMETEK had another outstanding quarter, with better than expected sales growth, strong operating performance, and earnings above our expectations.
We established records for sales, EBITDA, operating income, and earnings per share in the quarter.
Demand remained strong across our diverse set of end markets, leading to robust order growth, and a record backlog.
While the global supply chain and logistics networks remain challenging, our businesses are doing a tremendous job navigating these issues and delivering results which exceeded our expectations.
Given our results in the third quarter and outlook for the fourth quarter, we are again increasing our sales and earnings guidance for the full year.
This strong overall performance reflects the exceptional work of all AMETEK colleagues, as well as the strength, flexibility, and sustainability of the AMETEK growth model.
AMETEK's proven business model is central to our focus on creating a sustainable future for all stakeholders.
We are very proud of the important steps we're taking to further sustainability across AMETEK.
And last week, we published our latest Corporate Sustainability Report to highlight our efforts in this area.
This report provides information on our sustainability initiatives, the strong progress we have made, and the commitments we are making to create a better future.
Now let me turn to our third-quarter results.
Third-quarter sales were a record $1.44 billion, up 28% over the same period in 2020, and above our expectations.
Organic sales growth was 17%, acquisitions added 11 points, and foreign currency was a modest benefit in the quarter.
Overall orders in the third quarter were $1.55 billion, an increase of 37% over the prior-year period.
While organic orders were up an impressive 30% in the quarter.
We ended the quarter with a record backlog of $2.62 billion, which is up over $800 million from the start of the year.
Third quarter operating income was a record $338 million, a 25% increase over the third quarter of 2020, and operating margins were 23.4%.
Excluding the dilutive impact of acquisitions, core operating margins were 24.7%, up 70 basis points versus the third quarter of 2020.
EBITDA in the third quarter was a record $415 million, up 25% over the prior year, with EBITDA margins of 28.8%.
This outstanding performance led to record earnings of $1.26 per diluted share.
Up 25% over the third quarter of 2020, and above our guidance range of $1.16 to $1.18.
We continue to generate strong levels of cash flow, with third-quarter operating cash flow of $307 million, and free cash flow conversion of 109% of net income.
Overall tremendous results in a challenging operating environment.
Next, let me provide some additional details at the operating group level.
First, the Electronic Instruments Group.
Sales for AIG were a record $982 million, up 31% over last year's third quarter.
Organic sales were up 15%, acquisitions added 16%, and foreign currency was a modest headwind.
While growth remains broad-based, growth was particularly strong across our Ultra Precision Technologies, and our Power and Industrial businesses.
AIG's third-quarter operating income was a record $245 million, up 20% versus the same quarter last year, and operating margins were 25%.
Excluding acquisitions, AIG's core margins were excellent at 27.2% in line with prior year margins.
The Electromechanical Group also delivered outstanding sales growth and excellent operating performance.
Third-quarter sales increased 21% versus the prior year to $459 million.
Organic sales were up 20%, and currency added one point to growth.
Growth remained strong across all of the MG, with our automation businesses again delivering notably strong growth in the quarter.
EMG's operating income in the quarter was a record $115 million, up a robust 36% compared to the prior-year period.
EMG's operating margins expanded an exceptional 270 basis points to a record 25%.
Now, switching to our acquisition strategy.
AMETEK has had an excellent year with a record level of capital deployment, leading to the acquisition of 5 highly strategic businesses.
AMETEK is supported, approximately $1.85 billion on acquisitions, thus far this year, reflecting the strength of AMETEK's acquisition strategy and our ability to identify and acquire highly strategic companies.
Our proven operating capability allows us to drive meaningful improvements across our acquired companies, resulting in outstanding returns on capital.
Generating strong returns on capital deployed is critical to long-term sustainable growth, an important element of AMETEK strategy.
AMETEK's strong cash flow generation continues to support our capital deployment strategy, our acquisition pipeline remains very active, our M&A team continue to work diligently, identifying attractive acquisition opportunities, and we expect to remain busy over the coming quarters.
We also remain focused on investing back into our businesses to support their organic growth initiatives, including in support of their new product development efforts.
In the third quarter, we invested over $75 million in RD&E.
And for all of 2021, we now expect to invest approximately $300 million or approximately 5.5% of sales.
Through these investments, our businesses develop unique and highly differentiated solutions that help solve our customers' most complex challenges.
One such example is a new product introduction from AMETEK Gatan.
Gatan is a leading provider of direct detection technology, for Elektron microscopy [phonetic], supporting high-end research and materials and life sciences applications.
Gatan recently introduced The Stela hybrid pixel camera, the only fully integrated hybrid pixel electron detector with the Gatan microscopy [phonetic] suite.
This new product reinforces Gatan's leadership position, providing the highest quality TEM diffraction camera, allowing the user to perform 4D stem analysis for the rapid speed and high dynamic range.
Gatan's new camera builds on a long history of disruptive and award-winning technology.
In August, The Stela Cameron was awarded the 2021 [indecipherable] today Innovation Award, and called one of the ten game changing products and methods.
I would like to congratulate the team at Gatan for the recent launch of The Stela camera, and further support of important research applications.
Now, let me touch on the supply chain issues.
The global supply chain remains challenging, we see extended lead times for a broad range of materials and components with logistics issues, and labor availability adding to the complexity.
While these difficulties exist, we exceeded our sales estimates for the quarter, and are navigating the challenging environment well, given our agile operating approach.
The supply chain issues are leading to higher inflation.
However, given our differentiation, we're able to more than offset this inflation with higher pricing, leading to a strong price inflation spread.
While we expect these challenges will continue into 2022, we remain well positioned to navigate the issues, given the strength and flexibility of the AMETEK growth model.
Moving to our updated outlook for the remainder of 2021.
Given our strong performance in the third quarter, and the continued strong orders momentum and record backlog, we have again raised our 2021 sales and earnings guidance.
For the full year, we now expect overall sales to be up in the low 20% range, versus our previous guide up approximately 20%.
Organic sales are now expected to be up low-double digits on a percentage basis over 2020, as compared to our previous guides of approximately 10%.
Diluted earnings per share for 2021 are now expected to be in the range of $4.76 to $4.78, an increase of approximately 21% over 2020 is comparable basis, and above our prior guide of $4.62 to $4.86 per diluted share.
For the fourth quarter, we anticipate that overall sales will be up in the low 20% range versus last year's fourth quarter.
Fourth-quarter earnings per diluted share are expected to be between $1.28 to $1.30 of 19% to 20% over last year's fourth quarter.
In summary, AMETEK's third-quarter results were excellent.
Our teams continue to execute, and our businesses are performing well.
Our performance through a challenging environment shows the resilience and strength of the AMETEK growth model.
The asset-light nature of our businesses, our leading positions in attractive niche markets, and our world-class workforce will continue to drive long-term sustainable success.
The proven nature of the AMETEK growth model continues to drive long-term success for all of AMETEK's stakeholders.
As Dave highlighted, AMETEK delivered excellent results in the third quarter, with continued strong sales growth, and orders growth, and outstanding operating performance.
Let me provide some additional financial highlights for the quarter.
Third-quarter general and administrative expenses were $22.1 million dollars, up $4.8 million from the prior year, largely due to higher compensation expenses.
As a percentage of total sales, G&A was 1.5% for the quarter, unchanged from the prior year.
For 2021, general and administrative expenses are expected to be up approximately $18 million, driven by higher compensation costs were approximately 1.5% of sales, also unchanged from the prior year.
Third-quarter other income and expense was better by approximately $4 million versus last year's third quarter, driven by a $6 million or approximately $0.02 per share gain on the sale of a small product line in the quarter.
This gain on the sale was more than offset by a higher effective tax rate in the quarter of 19.5%, up from 17.5% in the same quarter last year.
For 2021, we now expect our effective tax rate to be between 19.5% and 20%, actual quarterly tax rates can differ dramatically, either positively or negatively from this full-year estimated rate.
Working capital in the quarter was 14.9% of sales, down 210 basis points from the 17%, reported in the third quarter of 2020, reflecting the excellent work of our businesses, and managing working capital.
Capital expenditures in the third quarter were $26 million, and we continue to expect capital expenditures to be approximately $120 million for the full year.
Depreciation and amortization expense in the third quarter was $75 million, for all of 2021 we expect depreciation and amortization to be approximately $295 million including after-tax, acquisition-related intangible amortization of approximately $138 million or $0.60 per diluted share.
We continue to generate strong levels of cash given our asset-light business model and working capital management efforts.
In the third quarter, operating cash flow was $307 million, and free cash flow was $281 million.
With free cash flow conversion, 109% of net income.
Total debt at quarter-end was $2.65 billion, up less than $250 million from the end of 2020, despite having deployed approximately $1.85 billion on acquisitions, thus far in 2021.
Offsetting this debt with cash and cash equivalents of $359 million?
In the quarter-end, our gross debt to EBITDA ratio was 1.6 times, and our net debt to EBITDA ratio was 1.4 times.
We continue to have excellent financial capacity and flexibility with approximately $2.25 billion of cash and existing credit facilities to support our growth initiatives.
To summarize our businesses drove outstanding results in the third quarter, and throughout the first 9 months of 2021.
Our balance sheet and tremendous cash flow generation, have positioned the company for significant growth in the coming quarters, and years.
| q3 adjusted earnings per share $1.26.
q3 sales rose 28 percent to $1.44 billion.
sees q4 overall sales to be up in low 20% range compared to q4 of 2020.
sees q4 adjusted earnings per share to be in range of $1.28 to $1.30, up 19% to 20% over same period in 2020.
sees fy 2021 adjusted earnings per share to be in range of $4.76 to $4.78, increase of 21% over prior year comparable basis.
sees fy 2021 overall sales to be up in low 20% range with organic sales up low double digits on a percentage basis versus 2020.
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We appreciate your continued interest in our company.
I'm Jim Gustafson, Vice President of Investor Relations.
Over the last several months, we have made incredible progress in our efforts to combat the COVID-19 pandemic.
And it's with continued optimism that I provide several updates today, starting with vaccination followed by a summary of the first quarter performance then an update on our improved outlook for the year and finally, an overview of our ongoing commitment to ESG.
Q1 brought a lot of smiles as the Kidney Care community administered hundreds of thousands of vaccines to its patients.
Providers worked closely with the Biden Administration, the CDC and state government so that dialysis patients could be vaccinated in a trusted and convenient side of care.
We knew that this would help our patients overcome transportation and other access challenges getting to third-party sites.
And we had confidence that the hesitancy rate would decline when they received education from a trusted caretaker.
We also saw an opportunity to positively impact health equity by administering COVID vaccine in our clinics.
Similar to the early results in the broader U.S. population, in the first few weeks of the vaccine rollout, we saw the vaccination rate for Black and Hispanic were approximately 40% below that of White and Asian American.
This did not sit well with us.
We've got to work and mobilized our care teams, including social workers, dietitians and medical directors to have one-on-one conversations with patients to address common causes of hesitancy.
Our Hispanic patients have now been vaccinated at nearly the same rate as white patients and the gap for our black patients has been reduced to 10%.
We are not done.
Our pursuit for health equity continues.
On to our first quarter financial results.
We delivered solid performance in Q1 as our operating margins returned to 15.7% in the quarter, while we continue to lead through the continued challenges presented by the pandemic.
As we covered on our last call, treatment volumes declined in Q1.
Our treatments per day hit a low point in mid-February, including the impact of approximately 25,000 missed treatments from the winter storm.
Since then, our daily treatment trends have steadily improved.
As these trends continue, absent any further infection surges, we believe that our sequential patient census growth through the end of the year could return to pre-COVID levels, which is what we incorporated in our guidance ranges we provided last quarter.
Let me provide a bit more detail on volume that supports our outlook.
First, since our update in Q1, COVID case counts and new infections within our dialysis population have continued to decline.
As of last Friday, the number of active cases among our patients across the country decreased approximately 85% from peak prevalence on January 6, 2021, and the last seven-day incidence rate for new cases decreased approximately 91% from the week ending January 9, 2021.
Second, we're grateful that we're seeing a dramatic decline in the mortality rates associated with COVID.
We've previously shared that the unfortunate incremental mortality associated with COVID was approximately 7,000 in 2020.
In 2021, both our patient mortality count and mortality count in the general population peaked in January.
In the first quarter, incremental mortality associated with COVID was approximately 3,300 lives, with more than half of that number occurring in January, decreasing to approximately 600 in March.
It is too early to provide an estimate for April, but we expect the results will improve versus March.
Shifting to full year outlook, our view of core operation performance for the year remains largely unchanged from our original guidance.
However, now that the likelihood of some downside scenarios have decreased due to the trends I've previously mentioned, we are increasing our adjusted earnings per share guidance range to $8.20 to $9 per share and our adjusted operating income guidance range to $1.75 billion to $1.875 billion.
At the midpoint of our revised adjusted operating income guidance, this would represent approximately a 4% growth year-over-year.
These revised ranges assume no further major disruption from the virus strain.
My final topic is our ongoing commitment to environmental, social and governance matters or ESG.
ESG has become a more significant topic of conversation in the investment community over the last couple of years, but these are not new areas of focus for us at DaVita.
Our beliefs are incorporated into our stated vision of social responsibility that has three components: caring for our patients, caring for each other and caring for the world around us, including both our communities and our environment.
DaVita continues to execute against this vision, providing top quality clinical care for our patients is at the core of what we do and because I've already spoken at length about our patients care and our efforts to vaccinate our patients, I would like to highlight a few of our achievements in caring for our teammates and caring for the world around us.
I believe that fostering an environment rich in diversity and where we all feel that we belong is imperative to our culture and how we connect with each other and how we connect with our patients every day.
And our commitment to cultivating diversity is evident throughout the organization.
It starts with the Board of Directors, currently made up of nine leaders, of whom 67% are diverse, including four women and three people of color.
The diversity of our team extends to the leaders who run the core operations in our clinics of whom 52% are female and 27% are people of color.
These results have been achieved through thoughtful and deliberate practices to create a diverse pipeline of talent.
In 2021, we published our first report on diversity and belonging, disclosing many of our company's diverse metrics and our ongoing efforts to cultivate a diverse organization in which everyone feels that he or she belongs.
We also recently published our 14th Annual Corporate Social Responsibility Report and our first ESG Report.
These reports disclose the progress we made in 2020 and lay out our ambitious ESG goals for 2025, including goals to reduce carbon emissions by 50% and to have vendors representing 70% of emissions set by climate change goals and to achieve engagement scores of 84% or higher among our teammate population.
We are pleased with our progress to date on diversity and ESG.
And as you can see by our goal, we have a lot more we hope to accomplish.
Q1 was a strong start to the year with solid financial performance.
For the quarter, we recorded revenue of approximately $2.8 billion, operating income of $443 million and earnings per share of $2.09.
As Javier referenced, treatment volume was a large headwind and our nonacquired growth was negative 2.2% compared to negative 0.3% in Q4.
While COVID presented the main challenge to NAG in Q1, winter storms, particularly Uri, were responsible for about 30 basis points of the NAG decline.
Treatments per day bottomed out during the first quarter, so we expect to start seeing quarter-over-quarter growth in Q2.
We continue to expect that NAG will be negative for the year, although we expect to see an acceleration of NAG in 2022 and 2023 as mortality rates may be lower than the pre-COVID levels for a few years.
U.S. dialysis revenue per treatment grew sequentially by almost $3 this quarter as a result of the Medicare rate increase, higher enrollment in MA plans, a slight improvement in commercial mix and higher volume from our hospital services business, partially offset by the seasonal impact of coinsurance and deductible.
U.S. dialysis patient care costs declined sequentially by approximately $6 per treatment.
Although we continue to experience elevated costs due to the pandemic, such as higher PPE and certain clinical level expenses from continued infection control protocols, our Q1 patient care costs included a nearly $2 per treatment benefit from our power purchase agreement, a benefit that we do not expect to persist through the rest of the year.
For the quarter, the net headwind related to COVID was approximately $35 million, consisting primarily of higher PPE costs and the compounding effect of patient mortality associated with COVID, partially offset by the benefit from the sequestration suspension with a number of other items that largely offset each other.
For fiscal year 2021, we now estimate the net negative impact from COVID to be approximately $50 million lower than our guidance last quarter.
This is the result of lower COVID impact in Q1, the recently passed extension of the Medicare sequestration relief through the end of the year and lower other offsets, including T&E in the back half of the year.
At the middle of our guidance range, this would equate to $150 million negative impact from COVID in 2021.
Our DSO increased by approximately seven days in Q1 versus Q4, primarily due to temporary billing holds related to the winter storm and the changes in calcimimetics reimbursement.
In certain circumstances, we hold claims to make sure we have complete and accurate charge information for payments.
This quarter, we had more of these holes and the single largest driver was related to winter storm Uri, which impacted more than 600 of our centers until right in the middle of the quarter.
This has the effect of pushing a significant amount of cash flow from this quarter to the next and caused the corresponding DSO increase in the interim.
While claim holds shift cash flow between quarters, they have no negative impact on what we ultimately expect to collect.
We've already seen a significant increase in cash collections in April and expect a corresponding positive impact on both cash flow and DSOs over the next two quarters.
A couple of final points.
In the first quarter, we repurchased 2.9 million shares of our common stock.
And to date, in April, we repurchased approximately one million additional shares.
Debt expense was $67 million for the quarter.
We expect quarterly debt expenses to increase to approximately $75 million beginning next quarter as a result of the $1 billion of notes issued in late February.
Before we open up the line for Q&A, let me share some reflections.
Over the past year, our teams and our business experienced unusual volatility and challenges due to the pandemic.
We have weathered this very difficult period because of our dedication of our people, our scale, our innovation and our holistic platform and approach to patient care.
As I look forward, our organization is stronger, our relationships with patients have deepened and I have even more resolve that our comprehensive Kidney Care platform is well positioned to deliver a best-in-class value proposition to our patients, physicians in hospitals and payer partners.
Now let's open it up for Q&A.
| 1st quarter 2021 results.
q1 earnings per share $2.09 from continuing operations.
now sees fy 2021 adjusted net income from continuing operations per share $8.20 - $9.00.
|
A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC.
I'll now turn the meeting over to Dave.
AMETEK delivered outstanding results in the second quarter.
Strong sales growth and outstanding operating performance led to a high quality of earnings that exceeded our expectations.
We established record levels of sales, orders, operating income and adjusted earnings per share in the quarter.
This performance comes as we are still early in our economic recovery and reflects the outstanding efforts of our teams.
We also ended the quarter with a record backlog driven by exceptionally strong and broad-based orders growth, providing strong visibility across our mid- and long-cycle business profile.
The five acquisitions we completed earlier this year are integrating nicely and are well positioned to drive strong growth.
Given our second quarter results and our outlook for the back half of 2021, we have increased our sales and earnings guidance for the year.
Now let me turn to our second quarter results.
Our businesses saw robust, broad-based sales growth in the quarter.
Overall sales were a record $1.39 billion, up 37% over the same period in 2020.
Organic sales growth was 25%.
Acquisitions added 10 points to growth, while foreign currency added two points.
Overall orders in the quarter were a record $1.91 billion, a sharp increase of 92% over the prior year, while organic orders were an impressive 44% up in the quarter.
We ended the quarter with a record backlog of $2.5 billion, which is up over $700 million from the start of the year.
Our business has also delivered exceptional operating performance in the quarter.
While global supply chains remain tight, our businesses are doing a fantastic job managing through these challenges as is reflected in our results.
Second quarter operating income was a record $317 million, a nearly 40% increase over the second quarter of 2020.
And operating margins expanded 40 basis points to 22.8%.
Excluding the dilutive impact of acquisitions, core margins -- core operating margins expanded an exceptional 160 basis points to 24%.
EBITDA in the quarter was $387 million, up 34% over the prior year's second quarter, with EBITDA margins of 27.9%.
This operating performance led to earnings of $1.15 per diluted share, up 37% over the second quarter of 2020 and above our guidance range of $1.08 to $1.10.
Our businesses also generated strong cash flows in the quarter, which position us well to continue investing in our businesses and on strategic acquisitions.
In the second quarter, operating cash flow was $287 million, and free cash flow conversion was 114% of net income.
Let me provide some additional details at the operating group level.
Both our Electronic Instruments Group and Electromechanical Group delivered strong organic sales growth with excellent core margin expansion in the quarter.
Sales for EIG were a record $934 million, up 44% over last year's second quarter.
Organic sales were up 27%.
Recent acquisitions added 16%, and foreign currency added nearly two points.
EIG's second quarter operating income was $227 million, up 42% versus the same quarter last year.
And operating margins were 24.3%.
Excluding acquisitions, EIG's core margins were 26.3%, expanding an impressive 170 basis points over the comparable period.
The Electromechanical Group also delivered strong sales growth and outstanding operating performance.
EMG's second quarter sales increased 24% versus the prior year to $452 million.
Organic sales growth was 21%, and currency added three points to the quarter.
Growth was broad-based across our EMG businesses with particularly strong growth in our Advanced Motion Solutions business.
EMG's operating income in the second quarter was a record $112 million, up 33% compared to the prior year period.
And EMG's operating margins expanded an exceptional 170 basis points to a record 24.9%.
Now switching to our acquisition strategy.
As we noted during our previous call, we completed the acquisitions of Abaco and NSI-MI at the beginning of the second quarter.
These acquisitions as well as the first quarter acquisitions of Magnetrol, Crank Software and EGS are performing very well, and the integration work for these businesses is progressing as expected.
AMETEK's strong cash flow generation continues to bolster our capacity for capital deployment, including investment in strategic acquisitions.
Our M&A teams continue to work diligently through a robust pipeline of attractive acquisition opportunities, and we expect to remain active over the balance of the year.
Additionally, we're continuing to make key investments in support of our organic growth initiatives.
We remain committed to investing in research, development and engineering of our advanced technology products and to continue to providing our customers with innovative solutions and maintaining our leading positions in niche markets and applications.
In the second quarter, we invested $72 million in RD&E.
And for the full year, we now expect to invest more than $300 million or approximately 5.5% of sales.
For all of 2021, we now expect to invest approximately $100 million in incremental growth investments.
In addition to RD&E, this total investment includes our front-end sales and marketing functions, along with investments to help drive our digital transformation and allow our businesses to accelerate growth.
As noted, operating performance in the second quarter was outstanding with strong core margin expansion despite having to absorb the return of temporary costs into our cost structure.
While we are seeing higher levels of inflation due to the tightness of the global supply chain, we are capturing higher levels of price given our differentiated solutions and allowing us to maintain a healthy price versus inflation spread.
Additionally, we continue to see the benefits of our various operational excellence initiatives.
For the full year, we now expect approximately $145 million of operational excellence savings.
Now moving to our updated outlook for the remainder of 2021.
Given our strong performance in the second quarter, along with our orders momentum and record backlog, we have again raised our 2021 sales and earnings guidance.
For the full year, we now expect overall sales to be up approximately 20% and organic sales up approximately 10% over 2020.
Diluted earnings per share for 2021 are now expected to be in the range of $4.62 to $4.68, an increase of 17% to 18% over 2020's comparable basis and above our prior guide of $4.48 to $4.56 per diluted share.
For the third quarter, we anticipate that overall sales will be up in the mid-20% range versus the same period last year.
Third quarter earnings per diluted share are now expected to be between $1.16 to $1.18, up 15% to 17% over last year's third quarter.
In summary, AMETEK's second quarter results were superb, with excellent sales and orders growth and high-quality earnings growth exceeded expectations.
Our strong operating performance through the first half of the year shows the strength and flexibility of the AMETEK Growth Model.
Our differentiated technology solutions and market-leading positions across diverse niche applications have allowed us to navigate through difficult economic cycles and emerge as a stronger company each time.
The proven sustainable nature of the AMETEK Growth Model continues to drive long-term success for all of AMETEK's stakeholders.
As Dave highlighted, AMETEK delivered outstanding results in the second quarter with strong sales and orders growth, excellent operating performance and a high quality of earnings.
Let me provide some additional financial highlights for the quarter.
Second quarter general and administrative expenses were $22.5 million, up $5.6 million from the prior year largely due to higher compensation expense.
As a percentage of total sales, G&A was 1.6% for the quarter versus 1.7% in the same period last year.
For 2021, general and administrative expenses are now expected to be approximately $15 million -- or expected to be up approximately $15 million on higher compensation costs.
The effective tax rate in the second quarter was 20.6% compared to 19.5% in the same quarter last year.
The higher rate was driven by the impact of a U.K. rate change and the associated remeasurement of our deferred tax liabilities.
For 2021, we continue to expect our effective tax rate to be between 19% and 20%.
And as we've stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.
Our businesses continue to manage their working capital exceptionally well.
For the quarter, working capital was 13.9% of sales, down an impressive 570 basis points from the 19.6% reported in the second quarter of 2020.
Capital expenditures in the second quarter were $23 million, and we continue to expect capital expenditures to be approximately $120 million for the full year.
Depreciation and amortization expense in the second quarter was $75 million.
For all of 2021, we continue to expect depreciation and amortization to be approximately $300 million, including after-tax, acquisition-related intangible amortization of approximately $141 million or $0.61 per diluted share.
As Dave highlighted, our businesses continue to generate strong levels of cash given our asset-light business model and strong working capital management.
In the second quarter, operating cash flow was $287 million and free cash flow was $264 million, with free cash flow conversion in the quarter a very strong 114% of net income.
Total debt at quarter end was $2.96 billion.
Offsetting this debt was cash and cash equivalents of $390 million.
As Dave noted, we've been very active on the acquisition front.
During the second quarter, we deployed approximately $1.58 billion on the acquisitions of Abaco Systems and NSI-MI.
This was in addition to the acquisitions of EGS, Crank Software and Magnetrol, which were completed in the first quarter of the year.
Combined, we have deployed approximately $1.85 billion on five strategic acquisitions thus far in 2021.
At quarter end, our gross debt-to-EBITDA ratio and our net debt-to-EBITDA ratio were 1.9 times and 1.6 times, respectively.
We remain well positioned to deploy additional capital and invest in our acquisition strategy given our strong financial capacity and flexibility.
At quarter end, we had approximately $2 billion of cash and existing credit facilities to support our growth initiatives.
To summarize, our businesses delivered excellent results in the second quarter that outperformed our expectations.
The performance of our businesses through the first half of the year, along with our strong balance sheet, tremendous cash flow generation and the dedication of our world-class workforce, has positioned the company exceptionally well for meaningful growth in 2021 and beyond.
Michelle, we're ready to take questions.
| q2 adjusted earnings per share $1.15.
q2 sales $1.39 billion versus refinitiv ibes estimate of $1.33 billion.
for 2021, now expect overall sales to be up about 20%.
2021 adjusted earnings per diluted share expected to be in range of $4.62 to $4.68.
expect overall sales in q3 to be up in mid-20% range compared to q3 of 2020.
q3 adjusted earnings per diluted share anticipated to be in range of $1.16 to $1.18.
|
Today, we will discuss Cardinal Health's first quarter fiscal 2022 results.
Please note that during our discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out as GAAP.
During the Q&A portion of today's call, we please ask that you try and limit yourself to one question, so that we can try and give everyone an opportunity.
Our first quarter results were in line with our expectations.
As we continue to manage through the global pandemic, we're staying focused on the near-term priorities and long-term strategies to drive growth and momentum across our businesses.
In Pharma, we continue to see sequential volume improvement and are encouraged by the profit growth that we saw in the first quarter.
We believe our Pharma business, inclusive of our strategic growth areas of Specialty, Nuclear and Outcomes, is well positioned for growth in FY '22 and beyond.
Our Medical segment continues to be impacted by the disruptions in the global supply chain that we called out last quarter.
Recently, these pressures have rapidly escalated and we are experiencing significantly elevated product costs due to international freight and commodities.
While we believe the majority of these elevated supply chain costs are temporary, we do not expect them to return to normalized levels this fiscal year.
As a result, we are lowering our FY '22 outlook for Medical segment profit to adjust for these increased headwinds.
We are taking action to mitigate these impacts across the enterprise and we are reaffirming our FY '22 earnings per share guidance of $5.60 to $5.90 per share.
We have been on a journey to simplify our portfolio and strengthen our core businesses, so we are positioned for broad-based sustainable growth as noted in the long-term targets we're announcing today.
We are prioritizing investment in our strategic growth areas and in innovative solutions to meet our customers' needs today and tomorrow.
And with our improved balance sheet, commitment to our dividend and now an additional $3 billion share repurchase authorization, we're positioned to return capital to shareholders.
Looking ahead, we remain confident in our strategy.
I will review our first quarter results and updated expectations for fiscal '22 before closing with some comments on capital deployment.
Beginning with total company results; first quarter revenue increased 13% to $44 billion, driven by sales growth from existing customers.
Total gross margin decreased 4% to $1.6 billion driven by the Cordis divestiture and the net impact of elevated supply chain costs in Medical.
As a reminder, the sale of Cordis was completed on August 2 and impacted the quarter's results by approximately two months.
SG&A increased 1%, reflecting information technology investments and higher costs to support sales growth, partially offset by the Cordis divestiture and benefits from cost savings initiatives.
Overall, first quarter operating earnings tracked in line with our expectations, down 15%.
Moving below the line; interest and other decreased by $2 million, driven primarily by lower interest expense from continued debt reduction actions.
During the first quarter, we exercised a make-whole call provision to redeem $572 million of outstanding June 2022 debt maturities.
We continue to expect to repay the approximately $280 million of remaining June 2022 notes upon maturity.
Our first quarter effective tax rate was approximately 24%.
Average diluted shares outstanding were 289 million, about 4 million shares fewer than the prior year.
This reflects prior year share repurchases as well as the $500 million share repurchase program initiated in the first quarter and recently completed.
The net result for the quarter was earnings per share of $1.29.
We ended the first quarter with a cash balance of $2.5 billion and no outstanding borrowings under our credit facilities.
This cash balance also reflects our first annual settlement payment into escrow under the proposed opioid settlement agreement.
Now, turning to the segments; beginning with Pharma on Slide 5.
Revenue increased 13% to $40 billion, driven primarily by branded pharmaceutical sales growth from large Pharmaceutical Distribution and Specialty customers.
Segment profit grew 1% to $406 million which reflects an improvement in volumes compared to the prior year quarter which was adversely impacted by COVID-19.
This was largely offset by investments in information technology enhancements.
As a reminder, last quarter, we began deploying new technology platforms across our Pharmaceutical Distribution business as a part of a multiyear journey to enhance our IT infrastructure.
This rollout is tracking according to plan and we continue to expect incremental implementation and depreciation costs through the first three quarters of fiscal '22.
As Mike mentioned, during the quarter, we saw broad-based sequential improvement in pharmaceutical demand, including generics.
We continue to expect the recovery in generic volumes to pre-COVID levels by the end of the calendar year.
Outside of volumes, our generics program continued to experience generally consistent market dynamics along with strong performance from Red Oak.
And during the quarter, Pharma saw double-digit contributions from our growth businesses: Specialty, Nuclear and Outcomes.
Transitioning to the Medical segment on Slide 6.
Medical revenue increased 5% to $4.1 billion, driven primarily by PPE sales, partially offset by the Cordis divestiture.
Segment profit decreased 46% to $123 million, primarily due to elevated supply chain costs.
To a lesser extent, this also reflects the impact of the Cordis divestiture, as well as net favorability in the prior year attributed to COVID-19.
As Mike mentioned, Medical segment profit was negatively impacted by increased product costs due to significant inflationary pressures in our global supply chain, particularly in the areas of commodities and international freight.
In commodities, we have seen spikes in some key resins, such as polypropylene, that are inputs into our self-manufactured and sourced products with recent index prices nearly double where they were last year.
And with international freight, we were seeing ocean container costs at roughly 8x to 10x pre-COVID levels.
We believe the majority of these headwinds are temporary but we do not expect them to abate this fiscal year.
We are taking action, including through pricing and aggressive cost management.
I will discuss these impacts to our full year Medical outlook shortly.
To wrap up the quarter, despite some impact from the Delta variant on elective procedure volumes, overall, our customers continued to manage effectively and total elective volumes exited the quarter near 95% of pre-COVID levels.
Additionally, lab testing volumes remained significantly elevated above pre-COVID levels but was not a material driver to the quarter due to the strong performance in the prior year.
Next, on Slide 8; a few updates to our fiscal '22 outlook.
We are reiterating our earnings per share guidance range of $5.60 to $5.90 per share.
This reflects updated expectations for the Medical segment as well as lower ranges for our tax rate and share count.
We now expect our annual effective tax rate in the range of 23% to 25%.
We also now expect diluted weighted average shares outstanding in the range of 280 million to 282 million.
As for the segment outlooks on Slide 9; first, we are adjusting our Pharma revenue outlook to low double-digit growth to reflect the strong branded pharmaceutical sales growth that we are seeing from large customers.
For Medical, we now expect fiscal '22 segment profit to be down mid-single to low double digits.
This change is driven by the significant increases in supply chain cost inflation that I previously discussed which is expected to result in an incremental net headwind of approximately $100 million to $125 million on the year.
Given the anticipated timing of realizing these cost increases and our mitigating actions, as well as the timing of selling higher-cost PPE, we expect a sequential decline in Medical segment profit in the second quarter.
Stepping back, the only large operational item that we see meaningfully different today compared to our original fiscal '22 guidance is the incremental impact of elevated supply chain costs in Medical.
Notably, we do not anticipate any material net impact in Pharma from inflationary supply chain costs.
And as noted last quarter, we still expect the cadence of our earnings per share guidance to be significantly back half-weighted.
Now, to close; an update on capital deployment.
We are focused on deploying capital in a balanced, disciplined and shareholder-friendly manner and we'll continue to allocate capital through the lens of our priorities which are unchanged.
We have been on a journey to improve our balance sheet and our portfolio and have made tremendous progress.
As we look forward, we see our debt paydown beginning to moderate which will provide an increased ability to be more opportunistic with our return of capital to shareholders.
On that note, two important updates.
Our Board recently approved a new three year authorization to repurchase up to an additional $3 billion of our common stock, expiring at the end of calendar year 2024.
And we now expect approximately $1 billion of share repurchases in fiscal '22 which includes the $500 million of share repurchases executed to date.
We believe that capital deployment, along with the future growth that we expect in both our segments, will be a key driver to the double-digit combined earnings per share growth and dividend yield that we are targeting over the long term.
Throughout the pandemic, we have responded to challenges with resilience and agility, approaching every situation with a focus of delivering for our customers so they can care for their patients.
We are continually reviewing our business and seeking areas to improve as we navigate the dynamic macroeconomic environment.
We're taking action to mitigate elevated costs and manage through temporary supply chain disruptions in Medical.
These actions include pricing adjustments, cutting additional costs throughout the organization and accelerating additional growth opportunities.
Outside of a continual focus on the customer, we are directing our efforts to the three main areas that will support our long-term target of mid-single to high single-digit growth for the Medical segment.
First, we are simplifying our operating model.
We continue to take decisive action to reposition the business for growth.
We divested the Cordis business and have begun significantly reducing our international commercial footprint.
We have announced and are in the process of exiting 36 initial markets which will allow us to focus on the markets where we have a competitive advantage.
Additionally, we are further streamlining our medical manufacturing footprint and modernizing our distribution facilities.
We expect these simplification initiatives to contribute to our $750 million enterprise cost savings target and position us to generate sustained long-term growth.
Second, we are focused on driving mix through commercial excellence.
Our Cardinal brand portfolio has significant breadth with leading brands and clinically differentiated products such as Kendall compression, Kangaroo enteral feeding and Protexis surgical gloves, among others.
While we have made important changes to align our commercial organization structure and incentives, we recognize that we are underpenetrated in Cardinal Health brand mix relative to our potential.
An increase in private-label penetration across our U.S. and in-channel customer base represents a significant profit opportunity with even further opportunities out of channel and internationally.
As we move past the pandemic, we see this as a significant opportunity to both deliver savings for our customers and grow our business over the mid to long term.
And third, we're fueling our Medical segment growth businesses, at-Home Solutions and Medical Services which includes OptiFreight Logistics and WaveMark.
These growth businesses are aligned with industry trend and positioned to capture market share and grow double digits in FY '22 and beyond.
We continue to invest in technology enhancements and innovative solutions that give our businesses a competitive edge.
In OptiFreight, we continue to expand our customer base and offerings.
And in at-Home Solutions which is now a $2.2 billion business, we continue to see volume growth as care is rapidly shifting to the home.
We are investing in new technologies to drive operational efficiencies and enhance data visibility.
Moving to Pharma; we have two primary objectives to achieve our long-term guidance of low to mid-single-digit segment growth: continuing to strengthen our core Pharma Distribution business; and fueling our growth businesses, Specialty, Nuclear and Outcomes.
We will continue to strengthen our core business by focusing in three primary areas.
First, supporting our diverse customer base.
Over 50 years, we honed our distribution expertise and develop a strong customer base across multiple classes of trade with leaders in chain pharmacy, direct mail order, grocery and retail independent customers, all of whom play critical roles in providing healthcare access to their local communities.
Along those lines, during the quarter, we extended our distribution agreement with CVS Health through FY '27.
Second, we're managing our generics program to ensure consistent dynamics which we continue to see and expect.
Our generics program is anchored by the scale and expertise of Red Oak Sourcing, a partnership we also recently extended through FY '29.
Third, we've been investing heavily in our technology to enhance customer experience and drive efficiencies.
We are approaching the end of a multiyear investment journey to modernize our IT infrastructure which will yield meaningful working capital improvements and operational efficiencies.
As for our second overall Pharma objective, fueling our growth businesses, we continue to expect these three businesses to realize double-digit growth over the next several years.
And as these businesses grow, it will become a bigger portion of the overall Pharma segment.
In Specialty, key downstream and upstream initiatives will enable our growth.
In oncology, we are competing differently downstream by transforming from a distribution-led orientation to a focus on supporting independent oncology practices with solutions to thrive in a value-based care environment.
We are seeing commercial momentum with Navista TS, our technology platform that helps oncology practices improve their performance in value-based care.
We have a strong presence in other therapeutic areas, such as rheumatology which today is a $4 billion distribution market growing double digits.
We are also encouraged by the anticipated growth in biosimilars as more products come to market such as the FDA's approval for the first interchangeable biosimilar insulin product.
We're well positioned to support the next phase of biosimilar growth as adoption increases in areas outside of oncology.
Upstream, we are expecting strong growth from higher-margin services supporting biopharma manufacturers.
We operate a leading 3PL supporting hundreds of manufacturers that continue to see wins and support new products coming to market, such as in the area of cell and gene therapy.
In Nuclear, we are expecting continued double-digit profit growth resulting in a doubling of our profits in this business by FY '26.
We continue to build out our multimillion dollar center for Theranostics advancement in Indianapolis and are investing to expand our tech capabilities.
We're partnering with several companies to grow the pipeline of novel Theranostics.
For example, through our agreement with TerraPower, we will produce and distribute Actinium-225, a radionuclide involved in creating targeted therapies for several cancer types.
And in Outcomes, we continue to see and expect strong growth.
This business has added new payers and PBMs and is expanding clinical solutions for both independent pharmacies and retail chains to include solutions for medical billing, point-of-care testing and other clinical capabilities.
With respect to the enterprise, we continue to aggressively review our cost structure as we work to streamline, simplify and strengthen our operations and execute our digital transformation.
As I mentioned earlier, we recently increased our total cost reduction goal to $750 million by FY '23 and we are on track to deliver those savings.
We're pairing cost reduction efforts with balanced, disciplined and shareholder-friendly capital allocation with a focus on investing in the business, maintaining a strong balance sheet and returning cash to shareholders.
Long term, we're targeting a double-digit combined earnings per share growth and dividend yield.
These expectations are driven by our growth targets for our segments, our commitment to our dividend and our new $3 billion share repurchase authorization.
Now, let me provide an update on the proposed opioid settlement agreement and settlement process.
In September, we announced that enough states agreed to settle to proceed to the next phase.
And each participating state is offering its political subdivisions the opportunity to participate in the settlement for an additional 120-day period which ends on January 2, 2022.
At that point, each of the distributors and the states will have the opportunity to determine whether there is a sufficient participation to proceed with the agreement.
If all conditions are satisfied, this agreement would result in the settlement of a substantial majority of opioid lawsuits filed by the state and local governmental entities.
This is an important step forward for our company.
As we've consistently said, we remain committed to being part of the solution to the U.S. opioid epidemic and believe that settlement would provide relief for our communities and certainty for our shareholders.
Turning to ESG; these priorities remain critical to achieving a healthier, more sustainable world.
In closing, what we do matters and it is our privilege to serve our customers, their patients and their communities around the world.
| q1 non-gaap earnings per share $1.29.
q1 revenue rose 13 percent to $44 billion.
reaffirms fy non-gaap earnings per share view $5.60 to $5.90.
fy22 non-gaap earnings per share guidance reaffirmed, long-term financial targets announced.
board of directors approved a 3-year authorization to repurchase up to an additional $3 billion of cardinal health common shares.
first-quarter revenue for pharmaceutical segment increased 13% to $39.8 billion.
expectation that we will see greater inflationary pressures in medical segment for remainder of year.
|
I'm Dave Martin of Harsco.
As previously noted, we are very fortunate to have recruited Anshooman to Harsco and he has held significant financial and operational roles at Siemens, AECOM and Cubic, and he is already adding tremendous value to our company.
Turning to our results, the third quarter was characterized by healthy underlying demand in our two core businesses, Harsco Environmental and Clean Earth.
It also reflected cost inflation and supply chain disruptions across all three business units.
Overall, Harsco consolidated revenue was up 7% versus Q3 of 2020 while adjusted EBITDA was up 22% on the same basis.
Demand in our Rail segment was dampened by continued weakness, in-transit ridership, a slowdown in domestic freight traffic and uncertainty as customers wait for the passage of the US infrastructure bill.
As we have indicated in the past Harsco Rail is not aligned with our long-term strategy to focus on and drive growth in businesses that provide environmental solutions to a broad mix than markets.
However, Harsco Rail is a unique business with innovative solutions and a global reach with meaningful growth opportunities ahead.
We have received solicited expressions of interest from many parties over the past several months and expect a very competitive sale process.
I'll comment on each of our segments beginning with Harsco Environmental.
Harsco Environmental continued to perform in line with our expectations and we are pleased with its momentum.
Capacity utilization of the steel mills we support remains lower than the levels of the first half of 2019 and analysts expect low-to-mid single digit LST growth through next year.
Commodity prices along with the contributions from our so called echo products, previously referred to as applied products, remains strong.
Looking ahead to 2022, against a continued positive outlook for the global steel industry and a decline to normalized levels of capital spending in our business we expect the Environmental business to deliver the highest EBITDA and free cash flow in many years.
Clean Earth experienced a moderate impact in the third quarter from cost inflation and an excess of backlog of material requiring incineration, which negatively affected volume.
The recovery and contaminated soil continues to be a bit slower than anticipated due to delays in certain infrastructure projects.
Nonetheless, Clean Earths EBITDA in Q3 was close to our expectations, and these pressures should abate throughout Q4 and become de minimis by Q1 of 2022.
Similar to Harsco Environmental we believe the Clean Earth has set up to deliver another strong year of growth in 2022.
Underlying market demand, new business, and you had higher benefits from the ESOL turnaround and integration will be the primary drivers.
As noted, our Rail business had a challenging quarter due to cost inflation and the timing of equipment orders and shipments.
Many of our customers have been affected by their own supply chain issues, and as a result, maintenance programs are being put on hold.
While we expect to see some continued impact from these inflationary and supply chain issues in Q4, we expect the situation to improve as we move through the first half of next year.
The passage of the US infrastructure bill and the introduction of new products aimed at improving the efficiency of rail maintenance activities should also support growth.
The other components of our business those being aftermarket technology and contracted services are performing in line with expectations and the outlook is encouraging.
Therefore, we believe the timing of the divestiture of the rail business should coincide with improving market fundamentals and deliver the value we expect for our shareholders.
Let me start by saying I am very excited to be here and a part of the Harsco team.
I joined Harsco because I thought the promise of the Company's ongoing transformation to a single investment thesis environmental solutions company, and the value creation opportunities.
I've enjoyed getting to know and working with the Harsco team over the past three months and my time with Harsco so far has strengthened my optimism.
Harsco's strategy is well defined and our financial priorities are unchanged.
Strengthening of free cash flow and reducing our leverage remain paramount to Harsco and the key priorities for me as CFO.
There is strong underlying momentum within our businesses and the opportunities to grow both organically and inorganically are significant.
Now let me turn to our results for the quarter and our outlook for Q4.
Harsco consolidated revenues in the third quarter increased 7% compared with the prior year quarter to $544 million and adjusted EBITDA increased 22% to $72 million.
The year-on-year improvement can be attributed to steady operational execution, strong performance in our Harsco Environmental segment as well as growth and improvements within the hazardous waste line of business of Clean Earth.
Harsco's adjusted EBITDA margin as a result reached 13.2% in the third quarter versus 11.6% in the comparable quarter of 2020.
Despite strong year-on-year improvement, our adjusted EBITDA was the lower guidance driven by new project delays from rail customers, cost inflation and supply chain constraints.
Transit ridership remains weak, freight traffic has slowed and uncertainty related to the infrastructure bill has put pressure on customer capital and operating budgets.
The majority of the deferred sales for Rail in the third quarter and now expected to be realized in Q4 and early 2022.
Material cost inflation and supply chain pressures had a mid single-digit EBITDA impact in the quarter relative to prior expectations.
Harsco's adjusted earnings per share from continuing operations for the third quarter was $0.20.
This figure compares favorably to adjusted earnings per share of $0.08 in the prior year quarter.
Lastly, our free cash flow for the quarter was nominal.
This outcome was lower than anticipated for the quarter with Rail and related delayed projects as the primary driver.
Our Environmental segment performed very well in the quarter.
Revenues totaled $270 million and adjusted EBITDA was $56 million.
Revenues were 21% higher than the prior year quarter and EBITDA increased 40% year-on-year.
These details illustrate the positive operating leverage in this business.
Compared with Q3 of 2020 the EBITDA improvement is primarily attributable to increased demand for environmental services and applied products on a global basis.
Steel market fundamentals remain strong.
Liquid Steel Tonnage or LST increased roughly 20% versus the prior year.
The outlook for steel consumption remains positive.
We expect to see some modest disruptions in the fourth quarter due to normal seasonality, but the industry and market observers are predicting another year of growth in 2022.
Compared to the second quarter of 2020 revenues increased 3% to $200 million with hazardous materials business driving this growth.
With hazardous materials retail and healthcare activity was strong while volumes from the industrial sector were modestly lower than the prior year quarter due to disposal market constraints.
Also activity within our soil dredged materials business was modestly lower year-on-year, however, we did see sequential improvement.
With that said, the improvement has been slow and recall that soil remediation is a late cycle business, that then trough until the fourth quarter of 2020.
Segment EBITDA increased to $21 million and Q3 of this year supported by higher hazardous material volumes and ESOL integration benefits.
These positive impacts were offset by investments to support Clean Earth and inflation related to containers and transportation.
We have seen a significant increase in the cost of steel containers and transportation and have taken action already, which I will discuss in more details later.
Lastly on Clean Earth, I'd highlight that our year-to-date free cash flow now totals $39 million.
This total represents more than 70% of segment EBITDA.
Rail revenues totaled $74 million and its EBITDA totaled $3 million in the second quarter.
These figures are below those realized in Q3 of 2020.
The change in EBITDA can be attributed to lower equipment sales volume and higher costs.
I have mentioned earlier most of the deferred sales are expected to be realized in the next few quarters.
Also higher material costs impacted results.
We incurred a negative LIFO adjustment in the quarter of approximately $2 million, which has not been anticipated.
These impacts were partially offset by higher contributions from aftermarket parts and contracted services both in US and Asia.
Turning to slide 8, which is our consolidated 2021 outlook.
Our adjusted EBITDA guidance is now $248 million to $256 million for the year while adjusted earnings per share is anticipated to be within a range of $0.51 to $0.54.
These figures consider $4 million of stranded corporate costs that were previously allocated to Rail.
This outlook also includes 100% of Harsco's interest costs and a pro forma estimated tax rate.
A detailed segment outlook is included in the appendix of the slide deck.
And, from a business segment point of view our adjusted EBITDA outlook for environmental is essentially unchanged.
Meanwhile, our outlook for Clean Earth's adjusted EBITDA is lowered by $5 million at the midpoint.
This change reflects the impact of higher container and transportation costs as well as a volume impact from end disposal constraints.
Last quarter we noted certain risk related to Clean Earth including the impacts related to incineration and inflation.
These impacts, however, are larger than what we previously anticipated for the second half of the year.
Looking forward, we do expect these pressures to abate.
There are a number of disposal assets that have restarted or are increasing output.
Also we have been pushing through price increases to offset the inflation.
Price initiatives take time as you have aware driven by timing of contractual annual price increases in many cases, and we expect to fully offset the cost increases we've seen year-to-date during the first quarter of 2022.
Also, we remain very diligent on our cost structure, including corporate costs and the need for continuous improvement.
In this regard, we recently launched a cost improvement program which includes targeted reductions at both Clean Earth and Rail.
These efforts are anticipated to provide annual run rate benefits of $10 to $15 million when fully realized in the second half of 2022.
Any non-recurring costs related to this program as well as our recently announced decision to move our corporate office to Philadelphia are excluded from this outlook.
Let me conclude on slide 9 with our fourth quarter guidance.
Q4 adjusted EBITDA is expected to range from $55 million to $62 million.
Again, this range excludes Rail.
Clean Earth is expected to see a nice improvement year-on-year as a result of integration benefits and higher volumes, including in the soil dredged materials business line.
These impacts are expected to be partially offset by inflation and investments.
Environmental EBITDA is anticipated to be similar or slightly below the prior year quarter.
This guidance contemplates a negative FX impact, some contract exit costs and the less favorable services mix compared to Q4 of 2020.
Sequentially, we anticipate that some seasonality will reemerge across our businesses.
And before opening the call to questions let me again reiterate our focus on reducing leverage and strengthening free cash flow.
We ended the quarter with a leverage ratio of 4.48 times.
Importantly, we are targeting a leverage ratio of approximately 3 times at the end of 2022.
This outcome would be consistent with our long-term targets and reflects our optimism about our businesses and ability to sell Rail.
| q3 revenue rose 7 percent to $544 million.
intends to explore strategic alternatives for rail business, continuing co's transformation to pure-play environmental solutions provider.
compname says full year 2021 adjusted ebitda guidance updated to range of $248 million to $256 million for continuing operations.
q3 adjusted earnings per share $0.20 from continuing operations.
sees 2021 adjusted earnings per share $0.51 - $0.54.
|
These beliefs are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those detailed in our periodic SEC filings.
Please note that the company's actual results may differ materially from those anticipated and we undertake no obligation to update these statements.
There will be an opportunity for Q&A at the end of the call.
For those participating, please limit your remarks to one question and one follow-up if necessary.
I'm pleased with our company's performance in the fourth quarter of fiscal 2021.
In a challenging global supply chain environment, we grew sales 11% and expanded our gross profit and operating profit margins.
Our performance demonstrated our focus on product vitality and customer service.
We allocated capital effectively by closing the acquisition of OSRAM's North American digital business and have created permanent value for our shareholders through the repurchase of company shares.
2021 was a pivotal year for us as we advanced our corporate transformation and I'd like to take a few minutes to recap some of those achievements.
We returned the company to growth.
We grew sales in the third quarter, the fourth quarter, and the full year and we expect this growth to continue.
We expanded gross profit margins for the full year, despite a challenging global environment.
We realigned our businesses into ABL, our Acuity Brands Lighting and Lighting Controls business and ISG, our Intelligent Spaces Group.
This alignment creates the necessary strategic focus on each business and allows us to develop the leadership teams that will deliver on their potential.
We generated strong cash flow and allocated capital in a way that creates permanent value for shareholders.
We held our first ever Investor Day.
We built a strong and diverse leadership team and are attracting new talent throughout the organization.
Our continuing improvements around ESG, are central tenants to our strategy.
We have made significant progress by reaching carbon neutrality in our operations and by committing to the reduction of 100 million metric tons of carbon from our put in place products and services by 2030.
We made progress on diversity, equity, and inclusion and on governance.
And you can read more about all of this in our upcoming 10-K, our Annual Report, our annual EarthLIGHT report and our proxy.
And finally, we have positioned ourselves well for 2022 and beyond.
I now want to update you on our ongoing transformation in each of our businesses and I will start with ABL.
We've had a good year in ABL.
Our focus on innovation through product vitality and increasing our service levels for the benefit of our customers has delivered strong results.
And we are continuing our efforts to drive our product expansion.
The Compact Pro High Bay, which we've discussed before, continues to deliver from both a revenue and margin perspective in the high growth industrial sector.
Our product vitality efforts include improvements to existing products and the introduction of new ones.
In the fourth quarter, we introduced the HomeGuard LED Security flood light.
It's an exciting addition to our contractor select portfolio.
This new platform offers a technology upgrade, higher efficacy, greater safety options, and ease of installation.
Sales have been strong.
We're off to a great start in a category where we currently have low share and strong growth opportunities.
We are also continuing to increase our service levels and deliver productivity improvements.
We are using better, smarter, faster to improve our processes and our technology for better, more efficient, customer service.
Today, I'd like to focus on Agile.
Agile as our commerce platform that is used by our channel for all of the key step that they need to do business in lighting and lighting and controls.
From finding products to creating solutions for large projects, to bidding on those projects, to placing the orders and finally tracking those orders to completion.
Our team is constantly improving Agile.
One of our key areas of focus has been to improve the quality of the product data that we provide.
This improvement provides many tangible benefits including ease of use and improved order accuracy.
Another area of focus that I have spoken about before is order status.
I bring this up again because it has been essential during this complicated period.
We were able to provide clear information to our channel about their order status, which allows us to better meet their needs in the face of the global supply chain challenges.
These examples address significant historical pain points and our foundational, which allow us to improve our service levels today and in the future.
As we enter 2022, the priorities for Trevor and the rest of the ABL team remain the same.
Maintain high product vitality, continue to elevate our service levels, and continue to use technology to differentiate ourselves.
Now moving to the Intelligent Spaces Group.
The mission of ISG is to use technology to solve problems in spaces by making them smarter, safer, and greener.
We believe that each of these provides ample opportunities for future growth.
This tech controls is a collection of open protocol products necessary to effectively operate spaces.
Atrius provides applications which use data to deliver value in those spaces.
We are having success across Europe and North America with our Distech platform, especially around campuses, data centers, and spaces that require a significant amount of control around the operation of the facilities.
We continue to add products to this ISG portfolio.
During the quarter we added the ECLYPSE Connected Thermostat, an open protocol device that reduces installation costs, helps manage energy costs, and improve the comfort of spaces.
In the face of a challenging global environment, we have demonstrably improved our company and its performance.
We have demonstrated our ability to grow sales through innovation and our ability to service our customers.
We've improved our gross profit margins through product and productivity improvements.
We have improved our operating profit margin by leveraging our costs, we have allocated capital efficiently through reinvestment in the business, acquisitions and share repurchase.
We have the talent and the tools to build upon the operating strength we have developed over the last 18 months.
As we look forward, we expect to continue this performance.
We are strategically positioned at the intersection of sustainability and technology.
We have assembled a world-class team.
We have demonstrated the ability to both build and acquire businesses.
We have strong organic cash generation and we have demonstrated that we know what to do with it to create value.
I want to start by recognizing the accomplishments of the team this year.
We have made progress on our transformational priorities, improve the financial performance of the business, and continue to thoughtfully allocate capital.
Our fourth quarter performance was solid.
Net sales were $192 million, an increase of 11% compared to the prior year.
This performance was driven by strong customer demand, improved execution across our go-to-market channels, and the addition of the OSRAM acquisition, which added approximately 200 basis points.
Gross profit margin was 42.2% for the fourth quarter of fiscal 2021, an increase of 10 basis points over the prior year, despite rising costs from raw materials, electrical component supply chain interruptions and a significant escalation of freight costs.
We were able to offset the increased costs with higher sales volume, product and productivity improvements and a benefit from price increases.
I'm extremely pleased with the team's execution around our gross profit margin that led to such a great result in a volatile cost environment.
Reported operating profit margin was 13.4% of net sales for the fourth quarter of fiscal 2021, an increase of 150 basis points over the prior year.
Adjusted operating profit margin was 15.8% of net sales for the fourth quarter of fiscal 2021, an increase of 110 basis points over the prior year.
The majority of this improvement was driven by the higher gross profit margin and leverage of our operating expenses.
The effective tax rate for the fourth quarter of fiscal 2021 was 21.9% compared with 24.5% in the prior year due to the impact of several discrete items.
Finally, we saw significant improvement in diluted earnings per share for the fourth quarter of fiscal 2021.
Diluted earnings per share of $2.72, increased $0.85 or 46% over the prior year and adjusted diluted earnings per share of $3.27 increased $0.92, or 39% over the prior year.
Our share repurchase program favorably impacted diluted earnings per share by $0.24 versus the prior year.
Before I move on to the segment results, I want to highlight a few numbers in our full year 2021 operating results.
Net sales were $3.5 billion, an increase of 4% compared to the prior year, driven by improved sales performance in the second half of 2021.
We delivered a full year gross profit margin of 42.6%, an increase of 40 basis points over the prior year.
Reported operating profit margin was 12.4% of net sales for fiscal 2021, an increase of 180 basis points over the prior year with adjusted operating profit margin at 14.6% for fiscal 2021, an increase of 90 basis points over the prior year.
The effective tax rate for fiscal 2021 was 22.7% compared with 23.5% in the prior year.
We expect this rate to be approximately 23% for the full year in fiscal 2022, excluding any unusual or discrete items and assuming no change to the corporate tax rate.
Diluted earnings per share of $8.38, was 34% increase over the prior year and adjusted diluted earnings per share of $10.17 was a 23% increase over the prior year.
We had 36.6 million diluted shares outstanding during fiscal 2021, with our share repurchase program favorably impacting diluted earnings per share by $0.07 versus the prior year.
Moving onto our segments.
During the quarter, the Lighting and Lighting Controls segment delivered a sales increase of 11% versus the prior year.
This was driven by improvements within our independent sales network, which grew approximately 10% and the direct sales network, which grew about 15% in the current quarter as a direct result of our strong go-to-market efforts as well as recovery in the construction market.
Our corporate accounts channel continued the positive momentum and saw an increase in sales of 16% compared to the prior year, as large retailers move forward with previously deferred renovation spend.
The performance in this channel is dependent upon our customers' renovation cycle and can be uneven quarter to quarter.
Sales in the retail channel declined approximately 20% as compared to the prior year and will continue to be impacted through the remainder of the calendar year as a result of a customer inventory rebalancing.
The retail channel continues to be an attractive channel for Acuity.
During the quarter, we closed the acquisition of OSRAM's DS business.
The acquisition contributed around 200 basis points of growth to ABL revenue and we expect a similar level of impact in 2022.
Now moving to ABL operating profit for the fourth quarter of 2021, which increased 23% to $149 million versus $122 million in the prior year, with operating profit margin improving 150 basis points to 15.8%.
Adjusted operating profit for the fourth quarter of 2021 improved 21% versus the prior year with adjusted operating profit margin improving 140 basis points to 16.8%.
2021 was a year of improvement.
To summarize the full year the ABL business saw sales growth of 3% to $3.3 billion versus the prior year and an improvement across profitability metrics.
Operating profit for the full year increased 12% to $476 million versus the prior year with operating profit margin improving 110 basis points to 14.5%.
Adjusted operating profit for fiscal 2021 improved 10% to $515 million versus the prior year and adjusted operating profit margin improved 100 basis points to 15.7%.
Now moving on to the results for our Intelligent Spaces Group.
For the fourth quarter of 2021 sales in spaces increased approximately 24% to $51 million, reflecting continued demand with strength across our building and HVAC controls.
Spaces operating profit for the fourth quarter of 2021 increased $3.6 million to $2 million versus the prior year.
Adjusted operating profit for the fourth quarter of 2021 of $6 million was $3.9 million greater than the prior year as a result of continued sales growth.
The spaces team had a great year.
We recruited an incredible leadership team and broke the business out into a stand-alone segment.
The team ended fiscal 2021 with sales growth of 21% to $190 million versus the prior year.
Operating profit increased $13.8 million to $9.9 million versus the prior year and operating profit margin of 5.2% for fiscal 2021 improved 770 basis points versus the prior year, with adjusted operating profit margin improving 400 basis points to 13.5%.
Now turning to cash flow.
We continue to generate solid cash flow.
The net cash from operating activities for fiscal 2021 was $409 million.
This was a decrease of $96 million or 19% compared to the prior year, largely due to the increase in working capital needed to support the higher level of sales.
We invested $44 million or 1.3% of net sales in capital expenditures during fiscal 2021 and we continue to believe that capital expenditures of around 1.5% of net sales is an appropriate annual level as we head into 2022.
We continue to allocate capital effectively by prioritizing growth investments, M&A, maintaining our dividend, and creating permanent value for shareholders through share repurchases.
During the year, we repurchased approximately 3.8 million shares of common stock for $435 million at an average price of $114 per share.
We have around 3.8 million shares still remaining under our current Board authorization.
I would now like to spend a few minutes reviewing some of the most important conversations around our company and offer insight into how we are thinking about them.
This is a complicated global environment and input costs have been changing frequently, for example, freight costs.
I'd like to use this as a window into how we are managing these challenges.
We balance our long term freight contracts, which are favorable costs with additional capacity at current cost to deliver high levels of service to our customers.
We have passed along some of these costs through price increases and we are balancing delivering on our margin expectations and delivering on our most important promise, which is to be the company which our customers can rely upon.
As we head into 2022 we are confident in our businesses and in our team.
We expect ABL to grow net sales in the high single digits for the full year of 2022.
We expect ISG to deliver net sales growth in the mid-teens.
We expect 42% plus annualized gross profit margin for the full year of 2022.
And we believe we can continue to leverage our operating costs as we increase net sales.
Finally, we will continue to allocate capital effectively.
We are transforming our business and focusing on our customers, our investors and our associates.
We enter 2022 a much stronger company and with clear opportunities.
| q4 adjusted earnings per share $3.27.
q4 earnings per share $2.72.
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Please keep in mind that our actual results could differ materially from these expectations.
All these documents are available on our website at brunswick.com.
Our businesses had a fantastic start to 2021 with a very healthy marine market, strong boating participation and outstanding operating performance, driving historic financial results.
Robust retail demand for our products continues to drive low field inventory levels, with increased production across all our facilities necessary to satisfy orders from our OEM partners and dealer network.
Our teams have performed exceptionally well in the face of supply and transportation headwinds, tighter labor conditions, and continued impact from the COVID-19 pandemic.
And we are excited about our ability to further harness the positive momentum we've generated to propel our growth and industry leadership.
Our Propulsion business continues to deliver outstanding top-line, earnings and margin growth, outperforming the market by leveraging and expanding the strongest product lineup in the industry.
Our parts and accessories businesses delivered strong top-line growth and robust operating margins as a result of increased boating participation, which drove strong aftermarket sales, together with high demand for our full range of OEM systems and services, as boat manufacturers attempt to satisfy retail demand.
Our boat business performed well, as anticipated, in the quarter, reaching double-digit adjusted operating margins for the first time in over 20 years.
Despite elevated production levels consistent with our plans for the year, the continued surge in retail demand is still driving historically low pipeline inventory levels, with 41% fewer boats in dealer inventory at the end of the first quarter, versus the same time last year.
Finally Freedom Boat Club has had an extremely busy start to the year, which I will discuss further in a couple of slides.
We have exceptional momentum as we enter the prime retail season in most markets, and as you can see from our significant guidance increase, we are confident in our ability to perform for the rest of the year and well beyond.
Before we discuss the results for the quarter, I wanted to share with you some updated insights from 2020 concerning our boat buyers and Freedom Boat Club members that reflect very favorable trends for the future of our business.
We continue to outperform the industry in attracting new, younger and more diverse boaters, positioning us for very strong growth in the years to come.
Last year, Brunswick's average boat buyer age was two years younger than the industry average and reached its lowest level in over a decade.
Additionally, Brunswick's first-time boat buyers averaged five years younger than our overall boat buyer demographic, and three years younger than the industry.
Equally encouraging was the fact that the percentage of Brunswick female boat buyers in 2020, while still a minority, equaled the highest percentage on record and first-time female boat buyers entered at double that rate, which was a notable 700 basis points higher than the industry.
In Freedom Boat Club, we saw even more promising trends with the average Freedom member being almost three years younger than our typical boat buying customer, and female Freedom members making up 35% of our member base in 2020 and 2021.
These trends are an extremely important validation of our strategy to secure a healthy future for Brunswick and are also favorable for the entire marine industry.
I also wanted to briefly update you on some very important awards and milestones for Brunswick during the first quarter, which are important in positioning Brunswick for investors and employees, and our ability to secure top new talent.
I am pleased to announce that for the second consecutive year, Brunswick has been recognized by Forbes as one of the Best Employers for Diversity.
Those recognized were chosen based on an independent survey of over 50,000 employees working for companies employing at least 1,000 people in their U.S. operations.
Diversity and inclusion are cornerstones of our culture and a source of innovation and inspiration for our Company.
We also published our 2020 Sustainability Report at the end of March which reviews the exceptional progress we have achieved against our sustainability goals, including our prioritization of the health and safety of our employees.
In 2020, we reported the lowest recordable incident rate in Company history, in the face of immense challenges resulting from the COVID-19 pandemic.
And I also wanted to share with you a snapshot of what the return to in-person boat shows looks like.
The Palm Beach International Boat Show was recently held for the first time since the Spring of 2019.
This was the first major in-person saltwater show of the 2021 season and the outcomes were very positive.
Attendance was up and our brands outperformed the broader marine industry.
Over the course of the four-day show, Sea Ray and Boston Whaler more than doubled the number of boats sold this year vs.
2019 and revenues more than tripled, driven by increased demand for the recently launched models.
Consumers were also able to see Mercury's V-12 600 horsepower Verado in person for the first time, with many eager to repower their boats with this new, game changing engine.
I'll now provide some first quarter highlights on our segments and the overall marine market.
Our Propulsion business continues to gain significant retail market share in outboard engines, especially in higher horsepower categories where we have focused higher levels of investment in recent years.
Mercury gained share in each horsepower category over 50 horsepower in the first quarter, with outsized gains in nodes in excess of 200 horsepower.
As I mentioned earlier, Mercury launched its new 600 horsepower, V-12 Verado engine in February at Lake X in Florida to much fanfare.
Many OEM partners, including Fountain, Scout, Viking and Tiara, and our own Boston Whaler and Sea Ray brands, have already designed boats with this engine in mind and are taking orders.
Many models are already sold out for 2021, with twin-, triple- or even quad-configurations being very popular with both OEMs and customers.
New or enhanced OEM relationships, along with significant investments in new technology, have also helped fuel the continued growth in Mercury's industry-leading controls, rigging and propeller businesses.
As Mercury's growth continues to accelerate, we regularly review our capacity requirements to ensure we are able to meet projected demand and fully capitalize on future growth opportunities.
In this regard, we anticipate having to pull ahead some additional capacity actions.
Our Parts and Accessories businesses also experienced significant top-line and earnings growth in the quarter as aftermarket sales remain elevated due to strong participation trends and service needs, with increased OEM orders to keep up with production resulting from the accelerating retail demand.
Our dealer network reports that their service centers are busier than ever, with the strong participation trends from 2020 continuing into 2021.
In addition, favorable weather conditions in many parts of the U.S. are enabling consumers to return to the water early and in force.
This demand drives the need for aftermarket service parts and a healthy distribution network to get dealers the products they need on a same-day or next-day basis.
The Advanced Systems Group, which has a larger OEM component to its business and also serves some non-marine segments demonstrated significant growth across all its product categories and delivered strong operating margins that were accretive to the overall segment.
Our boat segment had an outstanding quarter, with successful execution of its product plan, resulting in strong revenue and earnings growth, together with double-digit operating margins.
Given the continued retail demand surge, 95% of our production slots are now sold for the calendar year, with many Whaler, Sea Ray and other models now sold out at wholesale well into 2022.
Pipeline inventory, which Ryan will discuss in more detail in a few slides, remains at historically low levels, and we continue to hire additional workers at most facilities to ramp up production consistent with our stated plan.
We remain on track with our plans to reopen and staff the Palm Coast facility and expand our operations at Reynosa and Portugal.
However, it remains very unlikely that pipelines will be significantly rebuilt until 2023 at the earliest.
Freedom Boat Club also continues to exceed our growth expectations, now with over 40,000 memberships and 280 locations, which is more than 100 new locations since we acquired Freedom in 2019.
Freedom has been expanding both through acquisition and organic growth in 2021.
We acquired franchise operations in major boating markets including Chicago and New York, and opened our first location in the U.K. As a reminder, having company operated locations allows us to gain the full economic benefits of the territories, and allows us to increase investment to enable faster growth.
In addition, company operated locations provide the opportunity to get close to the end boating consumer and allow us to enhance our other offerings including Boateka and our F and I businesses.
The outstanding operational and financial performance I have been discussing has not been without some external challenges that our businesses continue to manage and mitigate, sometimes on a daily basis.
Our supply chain teams in particular performed exceptionally well.
Winter storms and resulting power outages in the Central and Southern United States affected oil-based product production and supply, including our third-party producers of resin and foam, while tight semiconductor supply, raw material shortages, and transportation disruption, and resulting cost increases, continue to present challenges to our businesses to varying degrees.
However, the global reach of our supply network and our unique scale in the marine industry, together with our purposeful vertical integration, have so far enabled us to mitigate these challenges and keep our production plans on track for 2021.
Finally, labor conditions remain tight in many locations in which we manufacture product, but our talent acquisition teams have been working hard and successfully to add manufacturing and other talent to our teams as we increase production.
Next, I would like to review the sales performance of our business by region on a constant currency basis.
First quarter sales increased in each region, with international sales up 42% and sales in the U.S. up 47%.
International growth was very strong across all regions, with continued strength in Europe and Asia-Pacific contributing to growth in propulsion and P&A sales.
Canada continued its trend from the back half of 2020 with significant sales growth in all three segments.
This table provides more color on the recent performance of the US marine retail market.
All boat categories reported retail gains in the first quarter, continuing the momentum from 2020.
The main powerboat segments were up 34% in the quarter, with Brunswick's unit retail performance ahead of market growth rates, especially in outboard boat categories.
Outboard engine unit registrations were up 21% in the first quarter, with Mercury significantly outperforming the market and taking market share as I discussed earlier.
As we enter the primary selling season in the U.S., lead generation, finance applications, dealer sentiment and other leading indicators all remain very positive.
In addition, similar to our comments on previous calls, at the end of March, our percentage of dealer orders received with a customer name already attached is approximately three times the percentage from the same time last year.
All these factors give us high confidence in the continuing strength of the retail market as we move through 2021.
Our first quarter results were outstanding.
Year-over-year comparisons are not particularly helpful given the significant COVID impact starting in March of last year, but our performance in the quarter stands on its own against any quarter from the last two decades.
First quarter net sales were up 48%, while operating earnings on an as adjusted basis increased by 116%.
Adjusted operating margins were 17% and adjusted earnings per share was $2.24, each being the highest mark for any quarter for which we have available records.
Sales in each segment benefited from strong global demand for marine products, with earnings positively impacted by the increased sales, favorable factory absorption from increased production, and favorable changes in foreign currency exchange rates, partially offset by higher variable compensation costs.
Finally, we had free cash flow usage of $23 million in the first quarter as we built inventory ahead of the prime retail selling season, which is very favorable versus free cash flow usages of $144 million in the first quarter of 2020 and $159 million in Q1 of 2019.
Revenue in the Propulsion business increased 47% as each product category experienced strong demand and market share gains.
All customer channels showed growth in the quarter as boat manufacturers continued to ramp up production, and increased capacity enabled continued elevated sales to the independent OEM, dealer and international channels.
Operating margins and operating earnings were up significantly in the quarter, benefiting from positive customer mix in addition to the factors positively affecting all our businesses.
In our Parts and Accessories segment, revenues increased 52% and adjusted operating earnings were up 83% versus first quarter 2020 due to strong sales growth across all product categories.
Adjusted operating margins of 21.3% were 350 basis points better than the prior year quarter, with strong sales increases, together with favorable sales mix, driving the robust increase in adjusted operating earnings.
Continuing the theme from 2020, this aftermarket-driven, annuity-based business is benefiting from more boaters on the water, which is being augmented by flexible work schedules allowing for more leisure time, with the OEM component of the business leveraging investments in technology to take advantage of strong demand from boat builders as they increase production.
In our boat segment, sales were up 44%, with 31% adjusted operating leverage resulting in 10.9% margins for the quarter.
Each brand had strong operational performances and contributed to the successful results, with Lund and Boston Whaler leading the gains in the premium brands, and Bayliner having another strong quarter as a mid-tier value brand.
Although it's only one quarter above our stated goal of double-digit margins, this is the third consecutive quarter of margins above 9%, and we believe that we can continue this trend throughout the year and beyond.
Operating earnings were also positively impacted by the increased sales and the lower retail discount levels versus 2020.
Freedom Boat Club, which Dave discussed earlier, contributed approximately two percent of the segment's revenue, at a margin profile that continues to be accretive to the segment.
Our boat production continues to ramp consistent with our plans to produce in excess of 38,000 units during the year.
Despite producing approximately 9,400 units in the quarter, which is up 16% from the 4th quarter of 2020, we only added a few hundred units to dealer inventories given the continued robust retail market.
Our boat brands ended March with just under 19 weeks of boats on hand, measured on a trailing twelve-month basis, with units in the field lower by 41% versus same time last year.
We continue to believe that our current manufacturing footprint will support the production necessary to satisfy the anticipated 2021 retail demand, but we continue to work with our brands to unlock additional near-term capacity through automation, labor and select capital initiatives, including the capacity actions announced earlier in the year related to our Palm Coast, Reynosa and Portugal facilities, which will begin providing benefits by the end of the year.
As a result of historically low product pipelines and continued very strong boating participation, including in many northern regions in recent weeks due to the early Spring, production levels remain elevated across all our businesses to both satisfy retail demand and to rebuild product pipelines.
These factors, together with our strong pipeline of new products and outstanding operational performance, continue to provide enhanced clarity on our ability to drive growth in upcoming periods, resulting in the following guidance for full-year 2021.
We anticipate U.S. Marine industry retail unit demand to grow mid-to-high single-digit percent versus 2020; net sales between $5.4 billion and $5.6 billion, adjusted operating margin growth between 130 and 170 basis points, operating expenses as a percent of sales to remain lower than 2020, free cash flow in excess of $425 million; and adjusted diluted earnings per share in the range of $7.30 to $7.60.
We're also providing directional guidance regarding the second quarter, where we anticipate revenue growth of approximately 50% over the second quarter of 2020, with adjusted operating leverage in the low-20s percent.
As we look to the second half of the year, despite extremely challenging comparisons to 2020, we still believe that we will deliver top-line and earnings growth over the second half of last year.
I will conclude with an update on certain items that will impact our P&L and cash flow for the remainder of 2021.
The only significant update relates to the working capital usage for the year.
Projected increases in accrued expenses and accounts payable are exceeding anticipated increases in accounts receivable, resulting in a lower working capital build throughout the year.
We now estimate a working capital increase of $80 million to $100 million for 2021, which together with the higher anticipated earnings, results in a stronger free cash flow projection of $425 million.
Our capital strategy assumptions, however, have been augmented in places to take advantage of our stronger, early year cash position.
We still plan to retire approximately $100 million of our long-term debt obligations, as we repaid $9 million in the first quarter and $60 million already in April.
We repurchased $16 million of shares in the quarter, and plan to continue our systematic approach throughout the year.
We anticipate spending $250 million to $270 million on capital expenditures in the year to support, and in some cases accelerate, growth initiatives throughout our organization.
This slightly increased spending will be directed to new product investments in all of our businesses, cost reduction and automation projects, and select additional capacity initiatives to support demand and future growth, primarily in the Propulsion business.
We are also raising our dividend, for the ninth straight year, to $0.335 cents a share, or a 24% increase, as our strong cash position enables us to raise our dividend earlier in the year than usual, and keep our payout ratio close to our target 20% to 25% range, and continue to provide strong returns to our shareholders.
Finally, we've had a busy start to the year with M&A activity, primarily in expanding Freedom Boat Club as Dave discussed earlier.
Completed deals to date will have an immaterial impact on 2021 results, but we remain active in several areas including P&A, Freedom and ACES and intend to close additional deals throughout the year.
As we discussed on our January call, we felt that 2021 was setting up to be an outstanding year for all of our businesses and the first quarter did not disappoint.
The combination of robust consumer demand during the quarter and solid operational execution by our businesses has us squarely on track to deliver against our operating and strategic priorities.
Our top priority for the Propulsion segment continues to be satisfying outboard engine demand from new and existing OEM customers and expanding market share, especially in the dealer, saltwater, repower and international channels.
We are continuing to invest heavily in new product introductions and industry-leading propulsion solutions that we project will enable top-line and earnings growth far into the future.
Our Parts and Accessories segment remains focused on optimizing its global operating model to leverage its distribution and position of product strength in the areas of advanced battery technology, digital systems, and connected products in support of our ACES strategy.
We will continue to focus our M&A activity in this area as we look for opportunities to further build out our technology and systems portfolio.
The Boat segment will build on its first quarter successes by continuing to focus on operational excellence, improving operating margins, launching new products, executing capacity expansion plans, and refilling pipelines in a very robust retail environment.
Lastly, we remain keenly focused on accelerating the Company's ACES strategy, building on our connectivity and shared access initiatives, but also in the areas of autonomy, where we recently announced a new partnership with Carnegie Robotics, and in marine electrification, where we plan a portfolio of new products.
We will also continue to advance our ESG and DEI strategies across the company.
As we have done with past investor days, we have gathered our business leaders to provide you with an update to our 2022 strategy that was originally presented in February of 2020 in Miami, as well as to discuss certain longer-term initiatives that will grow and differentiate Brunswick through the next decade.
We will also hold a Q&A session for investors to ask questions of our management team on Monday, May 17th at noon Central Daylight Time.
Just a reminder that while we will not be providing a full financial update during this event, Ryan will be providing an abbreviated update on our 2022 financial targets, which will include further details regarding the substantial increase of our 2022 earnings per share target to between $8.25 and $8.75 per share as announced today.
Your hard work has enabled us to seamlessly execute our strategic plan and significantly outpace our initial growth and profit expectations.
| brunswick corp releases first quarter 2021 earnings.
oration releases first quarter 2021 earnings.
first quarter gaap diluted earnings per share of $2.15 and as adjusted diluted earnings per share of $2.24.
increasing 2021 guidance, adjusted diluted earnings per share range of $7.30 - $7.60; free cash flow in excess of $425m.
anticipate 2021 net sales between $5.4 billion and $5.6 billion.
for the q2, we anticipate revenue growth of approximately 50 percent.
believe that h2 2021 comparisons will be more challenging due to potential inflationary pressures.
brunswick - believe h2 2021 comparisons will be challenging due to less favorable factory absorption comparisons, smaller benefits from forex rate changes.
brunswick - guidance assumes revenue and earnings growth in the second-half of the year versus second-half 2020.
brunswick - increase of 2022 earnings per share target to $8.25 to $8.75 per share.
|
This is Michael Haack.
To access it, please go to www.
These statements are subjects to risks and uncertainties that could cause results to differ from those discussed during the call.
I'm pleased to be able to report another consecutive quarter of record revenue and net earnings growth, along with further strengthening of our balance sheet.
Let me begin with four important facts: first, our earnings per share was up 20%, which I'm sure you appreciate, is no small feat in this pandemic environment; second, we shipped an all-time record 2.2 million tons of cement during the quarter; third, we shipped the second quarter record 720 million square feet of Wallboard; and fourth, and most importantly, we achieved these results safely.
Now let's turn to the outlook for each of our businesses.
Let me start with Cement.
Cement volumes were up 23% for the quarter and up 28% for the fiscal year, reflecting the overall strength across all of our organic markets.
Some on the call may not realize that state and local budgets account for the lion's share of infrastructure funds, not the federal government.
State and local budgets have been stretched during this pandemic, but state DOT budgets have remained resilient to date.
A significant portion of local government funds is property taxes.
It is worth noting that property values actually have been rising considerably through this pandemic.
Sales taxes represent another significant portion of the pie.
And as you know, retail sales have rebounded, and retail sales are now, in fact, above pre-pandemic levels.
Gasoline taxes have rebounded as well with the increase in miles driven.
The states will be under undeniable pressure since expenditures have been rising as well as revenues.
Each state will face different challenges and different urgencies with their infrastructure's priorities.
The states with the largest negative funding variances from their five-year averages, are states, largely outside our footprint, such as Washington, Oregon and some Northeastern and Southeastern states.
Many of our Heartland geographies are faring better.
We anticipate that demand over the longer-term should be positive, especially with the added potential contribution from the federal government for infrastructure funding at some point.
I do not want to discount that there is also the potential for slower trend growth over the near term, especially with the current significant uncertainties about the overall economy.
The reality is that, we at Eagle, are operating at very high levels of capacity utilization today.
We are working hard to squeeze out every last bit of Cement capacity to meet the customer's existing demand.
If demand were to continue at the pace we have seen, frankly, our production would not be able to grow with it.
Now let me turn to Wallboard.
The South leads the nation in the housing starts, and it is more important than the Northeast, West and Midwest combined in terms of construction activity.
We have long belief that the Sunbelt, meaning for us, the lower half of the U.S. and now California is the right place to be it Wallboard through cycles.
We have strategically positioned ourselves here due to long-term construction activity, growth and demographic migration trends.
Recent developments around out migration from the Northeast, Chicago and in California, and the prospects of even higher taxation in some states, is reinforcing our optimism that this is a good long-term strategic position.
Our Wallboard shipments were up 6% this quarter and were up 6% for the fiscal year, a consistent trend.
Latest industry data showed industry shipments, up 1% for the quarter.
We fared better through the pandemic dip, simply due to our geographic positioning.
Continued strong housing starts and the latest single-family permits would suggest these trends should remain intact for the foreseeable future.
The relationship between single-family starts and Wallboard demand is a close one.
Single-family construction utilizes more Wallboard than a multi-family on a per unit basis.
Against this backdrop, we have announced a Wallboard price increase to be implemented next week.
Finally, let me comment on the status of the planned separation of these two businesses, Cement and Wallboard.
Industrial logic for the separation remains intact, as does our intention to complete the separation, but the timing remains uncertain.
Timing is a factor we must watch closely and carefully evaluate.
While the economy in 2020 trough seems to be in the rearview mirror, the path to normality remains exceptionally and remarkably uncertain.
Because of this uncertainty, we have not determined the timing for the split.
We will continue to evaluate and watch the market.
It should be noted that although, it is not a driver for the decision timing, a distinct benefit of the business remaining together beyond the obvious ability to weather uncertainty as a larger enterprise is the speed of company deleveraging that is occurring.
This deleveraging is highly supportive of a successful separation launch and a benefit that should not be underestimated, as we formulate the capital structures and policies around return of cash to shareholders for each business.
Second quarter revenue was a record $448 million, an increase of 12% from prior year.
This increase primarily reflects contribution from the Kosmos Cement Business, we acquired in March, and organic revenue improved 2%, reflecting increased Cement and Wallboard sales volume.
Second quarter earnings per share from continuing operations were $2.16, an improvement of 20%.
This benefit related to regulations issued during the quarter to clarify the calculation of certain interest deduction limitations.
Before we turn to the segment performance, I'd note that having completed the sale of our Oil and Gas Proppants business during September, the current and prior period financial results of that business have been presented separately as discontinued operations on the income statement and balance sheet.
Let's look at our Heavy Material results for the quarter, highlighted on the next slide.
The Heavy Materials sector includes our Cement, Concrete and Aggregates segments.
Revenue in this sector increased 15%, driven primarily by the addition of the recently acquired Kosmos Cement business.
Organic cement sales volume and prices improved 1% and 4%, respectively.
Operating earnings also increased 15%, again, reflecting the addition of the Kosmos Cement Business.
As we discussed last quarter, because of COVID-19, we delayed certain planned cement plant maintenance outages until our second quarter, which resulted in approximately $5 million of higher maintenance costs this quarter compared with the prior year period.
Moving to the Light Materials sector on the next slide.
Second quarter revenue in our Wallboard and Paper business was up 1%, as improved sales volume was partially offset by lower Wallboard prices.
Quarterly operating earnings in this sector declined 1% to $48 million, again reflecting lower Wallboard sales prices, partially offset by increased volume.
Looking now at our cash flow, which remains strong.
During the first six months of the year, operating cash flow increased 94%, reflecting earnings growth, disciplined working capital management and the receipt of the majority of our IRS refund.
Capital spending declined to $41 million, and we continue to expect capital spending in the range of $60 million to $70 million for fiscal 2021.
Finally, a look at our capital structure.
We continue to prioritize debt reduction as a primary use of cash at this time, and the preservation of financial flexibility in line with pandemic-related uncertainties.
At September 30, 2020, our net debt-to-cap ratio was 48% and our net debt-to-EBITDA leverage ratio was two times.
Total liquidity at the end of the quarter was over $700 million, and we have no near-term debt maturities.
We'll now move to the question-and-answer session.
| compname reports q2 earnings per share $2.16 from continuing operations.
q2 earnings per share $2.16 from continuing operations.
q2 revenue $448 million versus refinitiv ibes estimate of $445.7 million.
remain committed to separation.
continue to make preparations to ensure that two businesses are well-positioned for separation.
timing of separation remains uncertain given effects of covid-19 pandemic.
|
With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our Safe Harbor statement.
These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles.
Following Jeff's remarks, I'll give an overview of our financial results for the quarter, and we will then have a Q&A session.
Since our last earnings call, the world has continued to be impacted by the COVID pandemic, which has led to an economic crisis in nearly every region of the world.
Most countries continue to deal with this pandemic and depressed economic activity.
I'll begin with a few comments about our operations and how the pandemic has continued to affect our business.
Like most other industrial companies, we have been affected in many ways by the pandemic.
The effect of COVID made the second quarter one of the more challenging quarters in the history of our company.
Our global workforce has adapted to a new way of work and performed exceptionally well under extremely challenging circumstances.
I'm very proud of our talented and dedicated employees around the world for the work they've done and continue to do to serve our customers and each other.
We are fully operational at all of our manufacturing facilities and continue to work under enhanced safety protocols designed to safeguard our workplaces and protect the health and safety of our employees.
These precautionary measures have served us well and allowed us to continue operating in every region of the world.
While some regions around the world are starting to reopen, it will take some time to see this increased economic activity reflected in new orders.
The early signs of the recovery are still fragile and could be appended by new surges in the virus.
Having said that, we believe we are well positioned to navigate through the pandemic and uncertainties in the economic environment.
Our balance sheet remains healthy and our liquidity position is solid.
Robust cash flows have always been a strength of Kadant, and we believe this will continue as economies begin to reopen around the world.
Performance in the second quarter was impacted by our customers' request to delay projects and postpone service work and curtail production.
Our cash flow from operations and our free cash flow were both strong.
Cash flow of $22 million was down 3% compared to Q2 of 2019, while free cash flow increased 2% to $21 million.
Our parts and consumables revenue made up 64% of total revenue comparable to the period -- to the prior year period.
This relative stability in our parts and consumables business is reflected in our strong cash flows and our focus on growing this area continues to be a key strategic initiative.
Overall, most of our customers are operating and adjusting to the new level of demand in the current environment.
After the initial surge in packaging and tissue demand early in the second quarter, these markets have returned to levels more indicative of the general economic environment.
The one sector that seems to be performing better than expected is wood, and specifically lumber.
I'll provide additional comments on that later in my remarks.
Also during the second quarter, we put into place various tough contingent measures and implemented selective reductions in our workforce via early retirement offers, furloughs and lay-offs at certain divisions.
While never something we look forward to, these adjustments were necessary to ensure our staffing levels reflect to the business environment.
We continue to assess the situation at each of our businesses and take actions where appropriate.
Before leaving this slide, I wanted to comment on our recent acquisition of Cogent Industrial Technologies announced yesterday.
This acquisition is an exciting addition to the Kadant family.
We believe this new platform greatly expands our ability to deliver automation and plantwide technology solutions to process industries.
It also allows us to play a bigger role in our customers' digital ecosystem by offering integration solutions across multiple processes, products and systems for enhanced productivity and increased operational agility.
Next, I'd like to review our performance in our three operating segments.
As shown on Slide 7, our Flow Control segment faced a challenging market environment with industrial production down across most sectors.
This was especially evident in non-critical infrastructure industries where manufacturers were forced to shut down operations, and those that did continue to operate, were doing so at much lower operating rates.
Capital project activity at most industrial companies was particularly impacted during the quarter.
While demand for our aftermarket parts was solid and made up 72% of total revenue in the quarter, customer delays in capital project execution, postponed service work and the inability of our employees to engage face-to-face with customers and prospects due to the pandemic negatively affected both our bookings and revenue performance.
Looking ahead to the third quarter, we expect Q3 to show some improvement, while we expect capital project orders to remain subdued.
Our Industrial Processing segment was also impacted by the global lockdown in Q2.
However, we are seeing encouraging signs in some of our market sectors, and particularly, in wood products.
Revenue in this segment declined 14% to $66 million year-over-year, but was up slightly compared to Q1 of this year.
This decline was largely due to a significant slowdown in capital projects, following two exceptional years of capital project activity.
Parts and consumables revenue, on the other hand, was solid and made up 62% of total revenue in the second quarter.
Encouragingly, U.S. housing starts in June were up 17% sequentially to $1.2 million, which followed a boost in May housing starts, up 14% compared to April.
The increase in housing construction coupled with homeowners forced to remain at home during the widespread shutdowns in April and May led to strong demand for lumber and other wood products.
As a result, lumber of prices for July delivery increased 8% above pre-pandemic high and demand is providing support for higher price levels.
This in turn has benefited our customers producing wood products.
We are experiencing an increase in capital project activity and expect capital bookings to strengthen as the second half of 2020 unfolds.
Turning now to our Material Handling segment.
We had solid results in the second quarter, due in part, to a healthy backlog.
This operating segment experienced depressed levels of bookings due to most customers being unable to receive visitors and others being shut down due to government-mandated closures associated with the pandemic.
Demand for our fiber-based products was in bright spot in the second quarter as homeowners used more lawn and garden products.
Adjusted EBITDA increased 8% to $6 million and our adjusted EBITDA margin was nearly 18% in the second quarter as a result of solid execution and product mix.
As in our other segments, we are seeing increasing capital project activity.
Looking beyond 2020, we continue to believe this segment has upside potential in its aggregates in market if there is increased infrastructure spending.
While the last several months have proven to be challenging with many unknowns, we remain confident in our ability to manage through these unprecedented times.
As we look ahead to the second half of 2020, the uncertainty in evolving environment limit our visibility to accurately forecast the timing of orders and the speed of economic recovery.
Therefore, we will not be providing guidance at this time.
We expect Q3 to be the weakest quarter of the year and are looking for some improvement in Q4 as we navigate through what we hope is the bottom of this pandemic-induced recession.
I'd like to pass the call over to Mike now for a review of our Q2 financial performance.
I'll start with some key financial metrics from our second quarter.
Slide 12 is a summary of some of the key financial metrics that I'll comment on over the next few slides.
Our GAAP diluted earnings per share was $1 in the second quarter, down 30% compared to $1.42 in the second quarter of 2019.
Our GAAP diluted earnings per share in the second quarter includes $0.03 of restructuring costs and $0.03 of acquisition costs associated with our acquisition of Cogent, which was completed in June.
In addition, our second quarter results include pre-tax income of $2.1 million or $0.14 net of tax attributable to government-sponsored employee retention programs related to the pandemic.
These programs were received by many of our subsidiaries around the world and enabled us to retain employees as we work our way back toward normal operating conditions.
Consolidated gross margins were 43.5% in the second quarter of 2020, up 150 basis points compared to 42% in the second quarter of 2019.
Approximately 80 basis points of the increase was due to the receipt of government-sponsored employee retention programs related to the pandemic and the remainder was due to the negative effect from the amortization of acquired profit in inventory that was included in the results for the second quarter of 2019.
Parts and consumables revenue, as a percentage of revenue, remained fairly consistent with the prior year at 64% in the second quarter of 2020 compared to 63% last year.
SG&A expenses were $45.1 million or 29.5% of revenue in the second quarter of 2020 compared to $48.5 million or 27.4% of revenue in the second quarter of 2019.
The $3.4 million decrease in SG&A expense included $1.1 million decrease from a favorable foreign currency translation effect and a $0.8 million benefit from government-sponsored employee retention programs.
The remainder of the decrease was essentially due to reduced travel-related costs.
Adjusted EBITDA decreased to $26.6 million or 17.4% of revenue compared to $32.7 million or 18.5% of revenue in the second quarter 2019 due to declines in profitability at our Flow Control segment, and to a lesser extent, our Industrial Processing segment.
Operating cash flows were $22 million in the second quarter 2020, which included a modest positive impact of $0.3 million from working capital compared to operating cash flows of $22.6 million in the second quarter of 2019.
We had several notable non-operating uses of cash in the second quarter of 2020.
We paid down debt by $13.8 million, paid $6.8 million for the acquisition of Cogent, paid a $2.8 million dividend on our common stock, and paid $0.9 million for capital expenditures.
Free cash flow increased significantly on a sequential basis to $21.1 million compared to $3.5 million in the first quarter of 2020 as our first quarter typically is the weakest of the year.
In addition, the second quarter of 2020 free cash flow was $0.5 million higher than the second quarter of 2019.
Let me turn next to our earnings per share results for the quarter.
In the second quarter of 2020, GAAP diluted earnings per share was $1 and our adjusted diluted earnings per share was $1.06.
The $0.06 difference was due to $0.03 of acquisition expenses and $0.03 of restructuring costs.
In comparison, the second quarter of 2019, both our GAAP and adjusted duty diluted earnings per share was $1.42.
We had $0.10 of acquisition-related expenses, which were fully offset by a discrete tax benefit.
As shown in the chart, the decrease of $0.36 in adjusted diluted earnings per share in the second quarter 2020 compared to the second quarter of 2019 consists of the following; $0.71 due to lower revenues and $0.08 due to a higher effective tax rate.
These decreases were partially offset by $0.24 due to lower operating costs, $0.11 due to lower interest expense, and $0.08 due to higher gross margin percentages.
Collectively included in all the categories I just mentioned, was an unfavorable foreign currency translation effect of $0.05 in the second quarter of 2020 compared to the second quarter of last year due to the strengthening of the U.S. dollar.
Looking at our liquidity metrics on Slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 128 at the end of the second quarter of 2020 compared to 117 at the end of the second quarter of 2019.
This increase was driven by higher number of days in inventory.
Working capital as a percentage of revenue was 14.8% in the second quarter of 2020 compared to 14.2% in the first quarter of 2020 and 15.4% in the second quarter of 2019.
Our net debt, that is debt less cash, decreased $11.1 million or 5% to $222 million at the end of the second quarter of 2020 compared to $233 million at the end of the first quarter of 2020.
We repaid $13.8 million of debt in the second quarter and have repaid $16.4 million of debt in the first six months of 2020.
After quarter end, we repaid our real estate loan, which had a remaining principal balance of $18.9 million by borrowing from our revolving credit facility.
This effectively swapped debt with an annual interest rate of 4.45% under the real estate loan for a revolver debt currently at 1.68%, which at current interest rates, would reduce interest expense by over $500,000 on an annual basis.
Our leverage ratio, calculated in accordance with our credit facility, decreased to 2.01 at the end of the second quarter 2020 compared to 2.03 at the end of 2019.
After repaying the real estate loan in July, we currently have over $130 million of borrowing capacity available under our revolving credit facility, which matures in December of 2023, and have access to an additional $150 million of uncommitted borrowing capacity under this agreement.
We also have access to $115 million of uncommitted borrowing capacity through the issuance of senior promissory notes under our note purchase agreement.
We do not have any mandatory principal payments on debt facilities until 2023.
We believe that our cash on hand, operating cash flows and access to available credit provide us with sufficient liquidity to meet our capital requirements and continue to navigate through this challenging environment.
Regarding guidance, the current environment has certainly made forecasting quite difficult.
While we have noticed an increase in inquiries related to capital projects, we have also experienced and continue to experience delays in anticipated bookings due to a reduction in capital expenditures and project delays by our customers.
In addition, we expect continued customer-requested delays related to certain capital projects in our backlog.
Given the current uncertainty, we will not be providing guidance for the third quarter or the full year 2020.
We will reevaluate providing guidance next quarter.
While we are not providing guidance, I would like to provide a few directional comments on our outlook for the year.
We anticipate the third quarter will likely be our weakest quarter of the year.
And as a result, sequential revenue could decrease approximately 5% to 9%.
Our revenue for the year could decrease roughly 11% to 14% compared to 2019.
Few other directional notes.
We anticipate that we will remain eligible for some government-sponsored employee retention programs in various locations.
However, as the year progresses, we expect these programs will diminish as our businesses return to more traditional operating levels.
During the second quarter, we recognized $0.5 million in restructuring costs related to reduction of employees across our businesses.
We expect these restructuring activities will reduce our cost structure by approximately $3.7 million annually.
We may incur additional restructuring costs in future periods as we continue to monitor the impact of the pandemic and the resulting global economic downturn on our businesses.
On a positive note, we now expect net interest expense for 2020 to be under $8 million compared to our last earnings call estimate of $9 million to $9.5 million.
Given the lack of visibility into what the future holds across our end markets and geographies, it's difficult to provide firm guidance at the moment.
However, we've given these directional comments to help provide insight into our current business environment as well as our belief that our healthy balance sheet, strong cash flows and recurring revenue streams, will help our business navigate through the current business cycle.
That concludes my review of the financials.
| kadant q2 adjusted earnings per share $1.06.
q2 adjusted earnings per share $1.06.
q2 revenue $153 million versus refinitiv ibes estimate of $150 million.
will not be providing guidance at this time.
expect q3 will be our weakest quarter of year.
anticipating an improvement in business activity in q4.
|
With me on the call today is Jeff Powell, our President and Chief Executive Officer.
Before we begin, let me read our safe harbor statement.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Following Jeff's remarks, I'll give an overview of our financial results for the quarter.
We will then have a Q&A session.
Since our last earnings call, the world has continued to be impacted by the COVID pandemic.
An increasing number of cases in Europe and the U.S. continue to create depressed economic activity and uncertainty around the world.
I'll begin by discussing how this impacts our operations and our third quarter financial results.
The effects of the global pandemic made the third quarter another challenging quarter in terms of predicting demand and overall business levels.
As we continue to work under advanced safety protocols, I remain proud of our dedicated employees around the world for the work they have done and continue to do to serve our customers.
We had solid execution by our businesses in the third quarter, along with various cost containment measures, which contributed to our strong margin performance.
We also benefited from government employee retention assistance, which allowed us to maintain our talented workforce despite the lower business levels during the quarter.
Our balance sheet remains healthy, and our liquidity position is solid.
Both cash flows have always been a strength of Kadant, and we expect this will continue as economies begin to recover.
Turning now to our Q3 performance.
We had better-than-expected earnings per share results due to our industrial processing and flow control segments.
This was further enhanced by government employee retention assistance that contributed to our solid adjusted earnings per share of $1.31 a share.
Our adjusted EBITDA margin was excellent at 19.4%, and our cash flow was strong at $24 million.
Our parts and consumable revenue made up 66% of total revenue.
On a sequential basis, parts revenue was up 6% to $103 million in the third quarter.
As many of you know, growing our parts and consumable business is a key strategic focus.
Overall, the quarter was better than expected, and I'm really pleased with how our employees performed to deliver these solid operating results.
Next, I would like to review our performance in our three operating segments.
While our Flow Control segment performed better than expected during the quarter, we continue to face a challenging market environment with industrial production weakening as the quarter progressed.
Product mix improved operating leverage and solid execution led to a strong adjusted EBITDA margin of 27.5% for the third quarter, up 70 basis points from the same period last year.
Although demand for aftermarket parts was solid and made up 69% of total revenue in the quarter, customer delays in capital project execution and the inability of our employees to engage face-to-face with customers and prospects due to the pandemic suppressed our bookings performance.
Looking ahead to the fourth quarter, we expect Q4 to show improvement in terms of both capital project bookings and demand for parts and consumables.
Turning now to our Industrial Processing segment.
We experienced strong demand for our wood processing equipment, with bookings at their highest level since our record-setting 2018.
This demand was driven by our robust U.S. housing market and continued strong demand for wood-based products.
Revenue in this segment declined 16% to $62 million year-over-year and down 5% sequentially.
This decline was largely due to a slowdown in capital business during the quarter in certain end markets, particularly in paper and packaging.
Parts and consumables revenue, on the other hand, was solid and made up 68% of total revenue in the third quarter.
Encouragingly, U.S. housing starts continue to show strength and were $1.4 million in September, up 11% compared to the same period last year, which benefits our customers producing OSB and dimensional lumber.
We are experiencing an increase in capital project activity and expect capital bookings to strengthen significantly in the fourth quarter.
Just last week, for example, we received a large order for a turnkey recycled stock preparation system from a containerboard producer in the U.S. with a value of approximately $11 million.
And expect to receive additional capital orders as the quarter progresses.
In our Material Handling segment, we saw improved project capital project activity and increased demand for aftermarket parts in Q3 versus Q2.
Parts and consumables revenue in the third quarter made up 60% of total revenue, but still below historical run rates.
Capital bookings in our material handling segment increased 34% sequentially, led by increased demand for our balers used in agricultural and waste processing applications.
While this increase was coming off of a weak prior quarter, we are encouraged to see our customers showing increased confidence in our economic outlook by awarding these larger capital purchases.
As in our other segments, we are seeing increased market activity, albeit still not on pace with prior years.
Looking beyond 2020, we continue to believe this segment has upside potential in its aggregates and food end markets as economies continue to recover from the pandemic.
As we look ahead to the final quarter of 2020, we are seeing signs of increased project activity in a number of end markets, particularly in our Industrial Processing segment.
With capital equipment expected to make up a larger portion of our product mix in Q4, we expect to show solid improvements in bookings compared to Q3.
As was the case in the second and third quarters of this year, the uncertainty caused by the pandemic limits our ability to forecast the timing of orders.
As a result, we will not be providing guidance for Q4.
I'd now like to pass the call over to Mike for a review of our Q3 performance.
I'll start with some key financial metrics from our third quarter.
Slide 12 is a summary of some of the key financial metrics that I will comment on over the next few slides.
Our GAAP diluted earnings per share was $1.28 in the third quarter, down 9% compared to $1.41 in the third quarter of 2019.
Our GAAP diluted earnings per share in the third quarter includes $0.03 of restructuring costs, $0.03 from a discrete tax benefit, $0.02 of acquired backlog amortization and $0.01 of acquisition costs.
In addition, our third quarter results included pre-tax income of $2.7 million or $0.18 net of tax attributable to government employee retention assistance programs related to the pandemic.
These government assistance benefits were received by many of our subsidiaries around the world and enabled us to retain employees during the past two quarters.
As our business continues to strengthen, we expect this benefit to decrease significantly in the fourth quarter.
Consolidated gross margins were 44.2% in the third quarter of 2020, up 140 basis points compared to 42.8% in the third quarter of 2019.
Approximately 110 basis points of this increase was due to the receipt of government assistance benefits related to the pandemic.
The remaining 30 basis point improvement is principally due to better product mix related to a higher percentage of parts and consumables.
Parts and consumables as a percentage of revenue increased to 66% in the third quarter of 2020 compared to 61% last year.
SG&A expenses were $43.9 million or 28.4% of revenue in the third quarter of 2020 compared to $47.1 million or 27.1% of revenue in the third quarter of 2019.
The $3.2 million decrease in SG&A expense was principally due to reduced selling and travel-related expenses and a $1 million benefit from government assistance programs.
Adjusted EBITDA decreased to $30 million or 19.4% of revenue compared to $32.3 million or 18.6% of revenue in the third quarter of 2019.
On a sequential basis, adjusted EBITDA increased 13% due to increased profitability in our Flow Control and Industrial Processing segments.
Operating cash flows were $24.4 million in the third quarter 2020, which included a modest negative impact of $0.8 million from working capital compared to operating cash flows of $25.7 million in the third quarter of 2019.
On a sequential basis, operating cash flows increased 11%.
We had several notable nonoperating uses of cash in the third quarter of 2020.
We repaid $25.5 million of debt, paid a $2.8 million dividend on our common stock and paid $1.8 million for capital expenditures.
Free cash flow increased 7% sequentially to $22.6 million in the third quarter of 2020.
Free cash flow decreased 4% compared to $23.6 million in the third quarter of 2019.
Let me turn next to our earnings per share results for the quarter.
In the third quarter of 2020, GAAP diluted earnings per share was $1.28, and our adjusted diluted earnings per share was $1.31.
In comparison, the third quarter of 2019, our GAAP diluted earnings per share was $1.41, and our adjusted diluted earnings per share was $1.38, which included a $0.02 discrete tax benefit.
As shown in the chart, the decrease of $0.07 and adjusted diluted earnings per share in the third quarter of 2020 compared to the third quarter of 2019 consists of the following: $0.55 due to lower revenue, $0.01 due to higher weighted average shares outstanding.
These decreases were partially offset by $0.18 due to government assistance programs, $0.17 due to lower operating costs, $0.10 due to lower interest expense, $0.02 due to higher gross margin percentages and $0.02 from an acquisition.
Collectively, included in all the categories I just mentioned, was a $0.01 favorable foreign currency translation effect in the third quarter of 2020 compared to the third quarter of last year due to the weakening of the U.S. dollar.
Looking at our liquidity metrics on slide 15.
Our cash conversion days, which we calculate by taking days in receivables plus days in inventory and subtracting days in accounts payable, was 140 at the end of the third quarter 2020 compared to 128 at the end of the second quarter of 2020 and 122 at the end of the third quarter of 2019.
The increase in cash conversion days was driven by a higher number of days in inventory due to a number of factors, including delays in capital project deliveries, weakness in capital project activity and delays in maintenance spending by our customers.
Our subsidiaries manage their inventory supply to ensure that critical components are available for our customers as needed and the timing of these purchases has been difficult to predict in this environment.
Working capital as a percentage of revenue was 15.6% in the third quarter of 2020 compared to 14.8% in the second quarter of 2020 and 14.6% in the third quarter of 2019.
Our net debt, that is debt less cash, decreased $18 million or 8% to $204 million at the end of the third quarter of 2020 compared to $222 million at the end of the second quarter of 2020.
We repaid $25.5 million of debt in the third quarter and have repaid $41.9 million in debt in the first nine months of 2020.
During the quarter, we repaid our real estate loan, which had a remaining principal balance of $18.9 million by borrowing from our revolving credit facility.
This effectively swapped debt with an annual interest rate of 4.45% under the real estate loan for U.S. revolver debt currently at 1.65%, which at current rates would reduce interest expense by over $500,000 on an annual basis.
In addition, our leverage ratio calculated in accordance with our credit facility decreased to 1.88 at the end of the third quarter 2020 compared to 2.03 at the end of 2019.
As a result of being below 2, the applicable margin on our revolver debt will decrease by 25 basis points, which at current debt levels, would reduce our interest expense by roughly $600,000 on an annual basis.
Regarding guidance, the current environment continues to make forecasting difficult.
We have noticed an increase in demand for our parts and consumables products.
And on the capital side, we anticipate a sequential increase in bookings in the fourth quarter.
Given the current uncertainty, we will not be providing guidance for the fourth quarter 2020.
We will reevaluate providing guidance next quarter.
While we are not providing guidance, I would like to provide a few directional comments on our outlook for the remainder of the year.
We currently anticipate a modest sequential increase in revenue for the fourth quarter.
I should caution here that if countries start locking down, that could impact the timing of when projects are delivered.
We also anticipate the fourth quarter product mix will be weighted more toward capital than the third quarter.
Last quarter on our call, I gave a few directional comments indicating our revenue for the year could decrease roughly 11% to 14% compared to 2019.
Our current view is that the revenue decrease compared to 2019 would be closer to the lower end of that range.
We anticipate that we will remain eligible for some government assistance programs.
However, as our business strengthens, the benefits from these programs in the fourth quarter will be significantly less than amounts received in the second and third quarters.
We recognized $0.5 million in the third quarter and $0.9 million on a year-to-date basis of restructuring costs related to the reduction of employees across our businesses.
In aggregate, we expect these year-to-date restructuring activities will reduce our cost structure by approximately $4.1 million annually.
We may incur additional restructuring costs in future periods as we continue to monitor the impact of the pandemic and the resulting global economic downturn on our businesses.
Given the current uncertainties regarding what the future holds across our end markets and geographies, it's difficult to provide firm guidance at the moment.
However, we've given these directional comments to help provide insight into how we see our current business environment.
| q3 adjusted earnings per share $1.31.
q3 gaap earnings per share $1.28.
qtrly bookings decreased 16 percent to $143.3 million compared to $170.9 million in 2019.
expect a solid sequential improvement in our capital bookings in q4.
will not be providing guidance at this time.
|
I'm joined today by Scott Buckhout, CIRCOR's president and CEO; and Abhi Khandelwal, the company's chief financial officer.
These expectations are subject to known and unknown risks, uncertainties and other factors and actual results could differ materially from those anticipated or implied by today's remarks.
You can find a full discussion of these factors in CIRCOR's Form 10-K, 10-Qs and other SEC filings also located on our website.
CIRCOR delivered solid first-quarter results as our portfolio of mission-critical products continues to perform.
While our end markets are not fully back to pre-pandemic levels, strong orders performance in the quarter gives us the confidence to raise our 2021 earnings guidance.
Starting with some financial highlights on Slide 2.
We booked orders of $227 million in the quarter, which were up 34% sequentially and 7% versus prior year on an organic basis.
We saw strong sequential increases in demand in both businesses, with industrial up 25% and A&D up 55%.
We ended the quarter with $421 million of backlog, up 11% versus prior quarter.
Revenue in the quarter was $181 million, down 8% organically, driven by lower industrial backlog entering 2021, the timing of large defense order shipments and slowly recovering demand in commercial aerospace.
Adjusted operating income was $12 million, representing a margin of 6.9%, up 110 basis points from prior year.
We expect strong margin expansion as we progress through 2021, driven by higher volume in virtually all regions and end markets, our continued actions on pricing, ongoing simplification across the company, and productivity.
The company delivered $0.24 of adjusted earnings per share and generated free cash flow of negative $21 million, both in line with our expectations.
Our cash performance in the quarter is consistent with typical seasonality due to the concentration of annual disbursements in the first quarter.
Starting with industrial on Slide 3.
Industrial organic orders were up 11% versus last year and 25% sequentially.
We're seeing recovery in virtually all of our end markets.
Regionally, we saw particular strength in EMEA, China and rest of Asia.
Notably, we booked two large international downstream orders in the quarter, which we will deliver over the next 12 months.
We delivered a strong book-to-bill ratio of 1.3 in the quarter.
Industrial revenue was $121 million, down 6% versus last year and 9% from prior quarter.
The year-over-year decline was a result of starting the year with a lower backlog and some COVID-related customer issues.
The sequential decline was largely driven by normal seasonality.
Adjusted operating margin was 8.1%, an improvement of 380 basis points versus last year.
The margin improvement was driven by the non-repeat of the COVID-related write-off from Q1 2020, partially offset by lower sales volume.
Adjusting for the impact of this receivable write off, organic decrementals in the quarter were 32%.
We expect industrial margins to expand through the year as volume increases and our price and productivity initiatives cut in.
Turning to Slide 4.
Our aerospace and defense segment booked orders of $73 million in the quarter, flat versus last year and up 55% sequentially.
Versus prior year, favorable defense orders offset the ongoing COVID-19 impact on our commercial business.
The sequential improvement was driven by the timing of large defense program orders for the Joint Strike Fighter, as well as the CVN-80 and 81 aircraft carriers.
Revenue in the quarter was $60 million, down 10% year over year and 23% from prior quarter.
Versus prior year, sales were down due to lower commercial revenue.
Sequential sales were lower due to seasonality and the timing of defense shipments for the Joint Strike Fighter, Dreadnought submarines and F-16 spares.
Orders and revenue in our defense business will continue to be lumpy, but we have a strong backlog, and we are well-positioned on growing platforms.
We're excited about the growth trajectory of the business.
Finally, operating margin was 18% in the quarter, down 130 basis points year over year.
The margin decline was driven by lower sales volume and unfavorable mix.
Organic decremental margins in the quarter were 29%.
We remain confident in our ability to expand operating margins throughout the year with higher volume, ongoing price actions and productivity.
Turning to Slide 5.
Our free cash flow was negative $21 million in the quarter.
As Scott mentioned, this was in line with the typical seasonality of our cash flow and timing of annual disbursements.
While capex was relatively flat, our cash flow from operations improved versus prior year as a result of our exit from upstream oil and gas.
We ended the quarter with $461 million of net debt, up slightly, driven by our cash flow in the quarter.
In 2021, we will continue to use free cash flow generated from operations to further pay down debt.
We expect to improve net debt to adjusted EBITDA leverage by greater than one turn by end of the year.
Now I'd like to share our expectations for second quarter and update our outlook for the full year.
In the second quarter, we expect revenue to be down 2% to 4% organically.
Scott will cover this in more detail in the upcoming slides, but let me provide the key highlights.
While we are seeing industrial demand recover across virtually all of our end markets, we expect deliveries to be heavily weighted to Q3 and Q4.
Similarly, in aerospace and defense, we expect a large portion of our recent orders in backlog to ship in the second half of the year.
Commercial aerospace will continue to recover slowly, as aircraft production rates and fleet utilization improves throughout the year.
We're expecting adjusted earnings per share of $0.30 to $0.35 in the second quarter, which implies approximately 75% of our full-year earnings that are expected in the second half.
This earnings profile was directionally in line with last year and was driven by the natural seasonality in our businesses.
Markets recovering from COVID-19 through the year and project shipment timing in aerospace and defense and industrial.
Finally, 2Q free cash flow is expected to be breakeven to slightly negative, driven by the timing of milestone payments on large projects.
Based on our first-quarter performance and expectations for second quarter, we have high confidence in delivering our 2021 commitments.
We now expect organic revenue growth at the high end of our original guidance and higher adjusted earnings per share of $2.10 to $2.30.
The increase is mostly driven by industrial, which is now expected to grow low to mid-single digits and increase confidence in our aerospace and defense outlook.
Free cash flow generation remains a top priority.
And we still expect to convert 85% to 95% of adjusted net income into free cash flow for the year.
Now I'll hand it back to Scott.
Let's start with our industrial outlook on Slide 7.
As Abhi mentioned, we saw recovery in the first quarter across virtually all industrial end markets with orders back to pre-COVID levels.
Geographically, we saw sequential improvement in North America and EMEA, while orders growth in China, India and rest of Asia remains strong.
We saw strong sequential and year-over-year orders growth in our short-cycle end markets.
In addition, we saw strength in our long-cycle businesses, with activity increasing overall and several large project orders across the portfolio.
So far in Q2, we continue to see momentum in our end markets with quoting activities at high levels and strong orders so far in the quarter.
For Q2 industrial revenue, we expect a moderate improvement year over year, with growth ranging between 1% and 4%.
We continue to see improvement across our short-cycle end markets as consumer demand increases.
In addition, the aftermarket remains strong with a mid-single-digit increase expected in the second quarter.
Our longer cycle end markets, including downstream, commercial marine and midstream oil and gas, are showing positive momentum, and we're encouraged by our deal pipeline and quoting activity.
Finally, pricing is expected to be a benefit of roughly 1%, consistent with prior quarters.
Moving to aerospace and defense.
Orders in Q1 were up sequentially and flat versus prior year, driven by timing of large defense program orders, which are inherently lumpy.
For the aftermarket, we expect improvements in defense spares and MRO activity through the year.
In our commercial aerospace business, we saw a modest improvement sequentially and expect a slow recovery to continue.
Revenue in the second quarter is expected to be flat to down 5% versus prior year.
Defense revenue is expected to be up 0% to 5% with strong volume on our top OEM programs.
Revenue from our other OEM programs and defense spares is expected to be relatively flat in the quarter.
Based on customer orders and timing of requirements, we expect stronger shipments in all major defense categories in the second half of the year.
Commercial revenue is expected to be down between 10% and 15%.
Our market position with Boeing and Airbus remains strong, and we expect revenue to improve through the year, in line with aircraft production rates and fleet utilization.
Finally, pricing is expected to be a benefit of 3% in the quarter with additional price increases coming in the second half.
We expect full-year pricing to be in line with last year.
Before we get into Q&A, I'd like to close by providing an update on the strategic priorities that I've shared for 2021, investing in people, accelerating growth, expanding margins and allocating capital effectively.
These strategic priorities guide what our team works on every day, and I wanted to take a moment to highlight some actions we've taken in the first quarter.
We remain focused on investing in growth.
Air Force T-X trainer jet and a high-speed impact kinetic switch module for a next-generation missile system for the U.S. Navy.
On the industrial side, we launched the CIRCORSmart app, our first mobile application and the start of a significant digital solution offering for our customers.
The mobile app allows a customer to scan a QR code affixed to the product, pull up performance data, user guides and contact information for technical support and aftermarket orders.
Over time, we'll add more capabilities to the app.
We expect more than 50% of industrial's product shipments to have a QR code attached by the end of the second quarter.
This enhances the customer experience and provides an opportunity for incremental high-margin aftermarket growth.
We're expecting to launch 45 new products in 2021, with revenue generated from new products launched in the last three years accounting for approximately 10% of our total 2021 revenue.
We're also expanding our aftermarket presence in aerospace and defense.
We're in the process of opening a Waterfront Service Center in Virginia.
This will improve customer support and increase our operational efficiency.
Finally, the CIRCOR operating system is driving operational improvements across the company.
For example, I recently visited one of our aerospace and defense sites, which produces components for the Joint Strike Fighter.
By implementing the CIRCOR operating system, the team has improved on-time delivery to 95%, improved product quality and cost and significantly lowered working capital as a percentage of sales.
Over the last three years, the business has grown 55% and expanded operating margins by 670 basis points.
This is just one example of the power of the CIRCOR operating system and our efforts to enhance operations.
Continued execution on our strategic priorities will deliver long-term value to our customers, employees, suppliers and shareholders.
| compname reports q1 loss per share of $0.35.
q1 adjusted earnings per share $0.24.
q1 gaap loss per share $0.35.
q1 revenue $181 million versus refinitiv ibes estimate of $187.9 million.
sees q2 adjusted earnings per share $0.30 to $0.35.
sees fy adjusted earnings per share $2.10 to $2.30.
expects q2 reported revenue to increase from 0%-2% and q2 organic revenue to decline 2%-4%.
now expects 2021 organic revenue growth in range of 2 to 4%.
|
There is an inherent risk that actual results and experience could differ materially.
You can find a discussion of our risk factors, which could potentially contribute to such differences, in our Form 10-Q filed earlier today.
Before we get started on operational results, one of the strategic priorities outlined during our Strategy Day was to foster a high-performance culture with purpose.
And I'm pleased to announce that we have appointed Tolani Azis, a six-year Fluor employee with 20 years of EPC experience, to lead our diversity, equity and inclusion efforts.
Fluor is a vast and diverse company, and with Tolani's leadership, she will help us retain, attract and cultivate a workforce that represents the world in which we live and operate.
On a separate subject, please note that earlier this week, a favorable motion was granted as it relates to an outstanding securities class action lawsuit.
This motion dismissed with prejudice all allegations, except those relating to a single statement in 2015 about one gas-fired power project.
While no assurance can be given as to the ultimate outcome of this remaining allegation, we do not believe it is probable that a loss will be incurred.
It's been great to see the vaccine rollout around the globe, and I'm particularly encouraged at the speed of distribution here in the United States.
Although there are still many regional challenges to deal with, the end of the pandemic seems to be in sight, which will be a relief to all of us.
Currently, well over 90% of our project sites and about 80% of our offices are operating at limited operations or better.
One exception is our office in New Delhi, where a surge in COVID cases has caused local officials to issue a lockdown and curfew order effective until May 10.
The safety and well-being of all employees is our top priority.
To help support our Delhi colleagues and families that are in medical need, we airlifted several oxygen concentrators from Houston.
Our 1,500 New Delhi employees are all now working safely and productively from home.
In the first quarter, our book-to-bill ratio was 1.25, with new awards led by the Dos Bocas in our Energy Solutions Group.
While we continue to see softness in the markets when it comes to capital spending, we anticipate that awards will start to pick up as we get into the back half of 2021.
And our teams are busy on front-end work and project pursuits that will help to build a healthy backlog over the next few years.
Note again that we are now reporting in line with our three new business segments: Energy Solutions, Urban Solutions and Mission Solutions.
Additionally, Stork is now a part of discontinued operations.
Joe will give an update on our divestitures of Stork and AMECO in just a few minutes.
Moving to Slide 5, with regard to NuScale's.
On April 5, we announced a $40 million equity contribution from JGC.
We know JGC well, having executed projects with them for more than 10 years.
They are an ideal partner that could support NuScale's industry-leading carbon-free energy solution.
This is consistent with the strategy announced in January to reduce Fluor's equity ownership of NuScale.
Regarding our cost savings initiative, efforts are now well under way to streamline the organization.
We will be updating you on our progress as the year proceeds.
Key to this program will be ensuring the deployment of world-class execution teams onto new prospects over the coming quarters, coupled with the proper level of fit-for-purpose back-office support.
I'd like to take the next few minutes to inform you on what is happening across our end markets and what we expect to see over the next few quarters.
In Energy Solutions, this quarter, our ICA Fluor joint venture was awarded three contracts totaling $2.8 billion for the PEMEX Dos Bocas refinery in Mexico.
We have a long and successful history of PEMEX contracts, and we are pleased to be adding our $1.4 billion share of this refinery program to backlog.
During the quarter, a chemicals project was canceled.
And as a result, we removed approximately $1 billion from backlog while slightly increasing Energy Solutions total backlog to $11.1 billion.
When we unveiled our strategy in January, there was a lot of interest in Fluor's energy transition opportunities, supporting a reduced carbon future.
Over the past few months, we've been in extensive conversations with clients about our energy transition capabilities.
We are executing several carbon capture FEED and feasibility studies using our proprietary Econamine FG plus technology.
Additionally, we are doing early work in the areas of refinery efficiency, gasification to produce carbon-negative energy, green hydrogen, renewable diesel, renewable jet fuel and energy storage.
In each of these areas, we have identified projects and are continuing to pursue new opportunities as well.
I encourage all of you to check out the project website and social media channels to see our progress on the project.
On site, we have completed all site preparation work.
The Cedar Valley Lodge camp is filling up, pilings are in place and -- overseas -- modules are being constructed in the fab yards.
We've been remobilizing craft workers on site and are currently at required staffing levels.
In 2021, the focus on site is completing the installation of underground cable and pipe as well as concrete foundations.
This will allow the project team to go vertical and be positioned for the receipt of large equipment and the first modules which are scheduled to arrive later this year.
COVID-19 and changes in law have impacted both engineering and material deliveries as well as the site's ability to mobilize workers due to public health orders.
However, several opportunities are being jointly explored with the client to mitigate the COVID-19 and change in law impacts.
We will keep you updated on the outcome of these discussions.
Moving to Urban Solutions on Slide 8.
This segment is comprised of the infrastructure, mining and metals and advanced technologies and life sciences end markets.
In infrastructure, we completed the handover for the 183 South Highway project outside of Austin, just a few miles from the Oak Hill Parkway project we booked in 2020.
There is obviously a lot of interest and excitement with the proposed federal infrastructure plan.
We think a long-term infrastructure bill would obviously be a good thing for the U.S. economy.
In addition to providing needed funding for surface transportation improvements, it would enable state and local governments to better plan for future growth and capacity needs.
It's too soon to tell what impact the bill could have on Fluor, but we typically experience a two- to three-quarter lag between any new federal infrastructure spending and the release of construction and services RFPs within the states.
Within our infrastructure-focused area of regional projects in selected states, we are tracking some key opportunities in Texas and North Carolina this year.
Next, we remain confident in our mining and metals opportunities and prospects.
We are currently completing FEED work that represents $20 billion of potential projects, and we see a robust pipeline of FEED and feasibility studies ahead of us.
These projects will support an increasingly urbanized and electrified world that is driving the need for investment in minerals like copper and lithium.
We have several large prospects in 2021 and expect awards throughout the year.
For our last group in Urban Solutions, we have a lot of positive momentum in advanced technologies and life sciences, as we briefly mentioned in February.
In the first quarter, we won a significant EPCM biotech project in Europe.
This award from Fujifilm is for a world-scale biologics drug substance manufacturing facility that will be used to produce a variety of treatments, including vaccines.
As we have seen over the last 18 months, vaccine development is an integral part of our global economy, and facilities like this one will be essential going forward in protecting the population.
Finally, there's been a lot of news recently about the inability of semiconductor chip manufacturers to increase production to meet demand.
While it will take several months for the supply chain to overcome this shortage, this is another area where we can leverage our advanced manufacturing capabilities.
Currently, we are tracking several semiconductor prospects in the United States.
Moving to Mission Solutions on Slide 10.
This quarter, our Fluor-led joint venture won an extension for the Portsmouth decontamination and decommissioning contract from the Department of Energy in Ohio.
This reimbursable 12-month contract with two six-month options is valued at $690 million.
The DOE is a key long-term client, and we look forward to continuing our support at Portsmouth.
And finally, a few weeks ago, the federal government announced that it was -- would withdraw all troops from Afghanistan by September 11.
Although uncertainty about the pace of withdrawal remains, Fluor expects to book an additional three-month extension to LOGCAP IV in the second quarter that will allow us to further support the U.S. Army in Afghanistan until they are demobilized.
Peter is the last of a long line of family members to serve the company since our founding in 1912.
Joining the Board in 1984, he continued the Fluor family legacy of a commitment to excellence, integrity and ethics, always putting the safety and well-being of employees first and recognizing that teamwork is a key component of our success.
For the first quarter of 2021, we are reporting adjusted earnings per share of $0.07.
As a reminder, we are adjusting out NuScale expenses, foreign exchange fluctuations, impairments and certain legal-related costs.
Our adjusted results also exclude an embedded foreign currency derivative for an Energy Solutions project in Mexico.
This derivative is based on exchange rates between the U.S. dollar and the Mexican peso and will fluctuate over the life of the contract or at least until the job has been fully procured.
Our overall segment profit for the quarter was $60 million or 2% and includes the $29 million embedded derivative in Energy Solutions and quarterly NuScale expenses of $15 million.
This compares favorably to $55 million in the first quarter of 2020.
Removing NuScale expenses and the effect of the embedded derivative would improve our total segment profit margin to 3.6%.
Margins in Energy Solutions and Urban Solutions reflect reduced execution activity on certain projects and the lack of new awards to replace projects we are completing.
We anticipate project activities will accelerate as we move through 2021.
In Mission Solutions, margins were strong due to the increased execution activity on DOE projects as well as an increase in performance scores on several projects.
As David mentioned, we received a $40 million investment in NuScale from JGC this quarter and are anticipating other significant investments in the near future.
Note here that even though partners are meeting NuScale's cash needs, we will continue to expense 100% of this investment on our income statement on a consolidated basis.
Our G&A expense in the quarter was $66 million.
This is higher than our expected run rate due to the increase in our stock price driven -- driving up the value of our executive compensation expense.
As David said, our cost savings initiative is well under way.
We have identified cost savings above the $100 million target previously discussed.
I look forward to providing an update on the progress as we get into the execution phase later this year and transition into a fit-for-purpose organization.
On Slide 12, our ending cash for the quarter was $2 billion, 25% of this domestically available.
As a reminder, the rest of our cash is tied up in either VIEs in projects or in foreign accounts and is not easily accessible.
Our operating cash flow for the quarter was an outflow of $231 million and was negatively impacted by increased funding of COVID costs on our projects, higher cash payments of corporate G&A, including the timing and extent of employee bonuses, and increased tax payments.
While it is typical to have a lower operating cash flow in the first quarter, we expect full year operating cash flow to be positive.
We used approximately $50 million in cash for challenged legacy projects in the first quarter.
As I stated in February, we expect to spend an additional $65 million over the balance of 2021 to fund these projects.
As we announced earlier this week, we have divested our AMECO North America business for $73 million.
This follows our successful transaction of our AMECO Jamaica business last year.
We are now focusing on our South American assets, and we'll update you on that plan later in 2021.
The store divestiture process is well under way, and we have received interest from a number of promising buyers.
We are working through our diligence and are targeting a sale near the end of this year or early in 2022.
Please move to Slide 13.
We are maintaining our adjusted earnings per share guidance of between $0.50 and $0.80 for the full year.
Hitting this target is dependent on projects being awarded in a timely fashion and revenue picking up over the next two quarters.
We are also maintaining our previous segment level guidance and expect 2021 full year segment margins to be approximately 2.5% to 3.5% in Energy Solutions, which excludes any fluctuation from the embedded foreign currency derivative; 2% to 3% in Urban Solutions; and 2.5% to 3% in Mission Solutions.
We have posted unaudited financials for 2019 and 2020 that aligns with our new reporting structure on the Investor Relations section of our website.
Operator, we are now ready for our first question.
| compname reports q1 adjusted earnings per share $0.07.
q1 adjusted earnings per share $0.07 from continuing operations.
q1 adjusted earnings per share $0.07 excluding items.
maintaining its adjusted earnings per share (eps) guidance of $0.50 to $0.80 per diluted share for 2021.
guidance for 2021 assumes increased opportunities for new awards in second half of year as post-pandemic capital spending improves.
|
This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwitt, Our CEO.
I will provide some financial commentary and then Adam will give an overview of the business as well as current trends.
Then we will take questions.
The Company closed the fourth quarter with record sales of $2.426 billion, and record GAAP and adjusted diluted earnings per share of $1.15 and $1.13, respectively.
Sales were up 13% in U.S. dollars and up 11% in local currencies and organically compared to the fourth quarter of 2019.
Sequentially, sales were up 4% in U.S. dollars and 3% in local currencies and organically.
Breaking down sales into our two segments.
The interconnect business, which comprised 96% of our sales, was up 14% in U.S. dollars and 11% in local currencies compared to the fourth quarter of last year.
Our cable business, which comprised 4% of our sales, was down 4% in U.S. dollars and 2% in local currencies compared to the fourth quarter of last year.
For the full year 2020, sales were $8.599 billion, which was up 5% in U.S. dollars, 4% in local currencies and 2% organically compared to 2019.
Adam will comment further on trends by market in a few minutes.
From a segment standpoint, in the interconnect segment, margins were 22.5% in the fourth quarter of 2020, which increased from 22% in the fourth quarter of 2019 and 22.4% in the third quarter of 2020.
In the cable segment, margins were 10.3%, which increased from 10% in the fourth quarter of 2019 and decreased from 10.7% in the third quarter of 2020.
For the full year 2020, adjusted operating income was $1.650 billion, which was slightly up from 2019 and resulted in a full year 2020 adjusted operating margin of 19.2% compared to 20% in 2019.
This 80 basis point decline reflects the challenges and results -- resulting impacts related to the COVID-19 pandemic, primarily in the first half of the year.
Given the unprecedented challenges we saw this year, we are extremely proud of the Company's performance.
Our team's ability to effectively manage through this crisis is a direct result of the strength and commitment of the Company's entrepreneurial management team, which continues to foster a high-performance, action-oriented culture, which has enabled us to capitalize on opportunities and maximize profitability in an uncertain market environment.
The Company's GAAP effective tax rate for the fourth quarter was 21.7%, which compared to 20.3% in the fourth quarter of 2019.
On an adjusted basis, the effective tax rate was 24.5% for both the fourth quarter of 2020 and 2019.
For the full year, the Company's GAAP effective tax rate for 2020 and 2019 was 20.5% and 20.2%, respectively.
On an adjusted basis, the effective tax rate for both the full year 2020 and 2019 was 20.5% -- 24.5%.
On a GAAP basis, diluted earnings per share increased by 12% to $1.15 in the fourth quarter compared to $1.03 in the prior year period.
Adjusted diluted earnings per share increased by 15% to $1.13 in the fourth quarter of 2020 from $0.98 in the fourth quarter of 2019.
For the full year, GAAP diluted earnings per share was $3.91, a 4% increase from 2019 GAAP diluted earnings per share of $2.75.
Adjusted diluted earnings per share was $3.74 for 2020, which was unchanged compared to 2019.
This was a strong performance considering the significant challenges and related incremental costs related -- resulting from the pandemic.
Orders for the quarter were $2.512 billion, which was up 14% compared to the fourth quarter of 2019 and up 10% sequentially, resulting in a book-to-bill ratio of 1.04 to 1.
The Company continues to be an excellent generator of cash.
We are proud that operating and free cash flow for both the fourth quarter and full year 2020 were all records for the Company.
Cash flow from operations was a strong $441 million in the fourth quarter, or 124% of net income.
Net of capital spending, our free cash flow was $371 million, or 104% of net income.
Cash flow from operations for the full year was $1.592 billion, or approximately 132% of net income.
And net of capital spending, our free cash flow for 2020 was $1.328 billion, or 110% of net income.
From a working capital standpoint, inventory days, days sales outstanding and payable days, were 79, 72 and 61 days, respectively, all within a normal range.
During the quarter, the Company repurchased 1.5 million shares of common stock for approximately $182 million under the $2 billion open market stock repurchase plan, bringing total repurchases for the year to 6 million shares or $641 million.
Total debt at December 31 was $3.9 billion and net debt at the end of the year was $2.1 billion.
Total liquidity at the end of the quarter was $4.2 billion, which included total cash and short-term investments on hand of $1.7 billion plus the availability under our credit facilities.
Fourth quarter and full year 2020 EBITDA was approximately $600 million and $2 billion, respectively.
And at December 31, 2020, our net leverage ratio was 1.1 times.
Lastly, the Company announced a 2-for-1 stock split, which will be effective as of March 4, 2021.
First, I just want to express my hope that all of you on the call here today that you, your family, your friends and colleagues are all staying safe and healthy throughout the pandemic.
I'm going to highlight our achievements in the fourth quarter and the full year.
As Craig mentioned, I'll discuss our trends and progress across our served markets.
Now, with respect to the fourth quarter and amid what has, no doubt, been an unprecedented and volatile year, I'm truly proud that we finished 2020 with record sales and adjusted earnings per share in the fourth quarter, both of which were significantly above our guidance.
Sales grew 13% in U.S. dollars and 11% organically, reaching a new record $2.426 billion.
This organic growth, which was very strong, was driven by growth in mobile devices, industrial and automotive end markets in particular.
The Company booked a record of $2.512 billion in orders in the fourth quarter and that's a strong book-to-bill of 1.04 to 1.
Despite continuing to face some operational challenges related to the ongoing pandemic, adjusted operating margins were strong in the quarter, reaching 20.6%, a 10 basis point increase from third quarter levels and 60 basis points from prior year.
Craig already highlighted the operating and free cash flow of the Company, very strong at $441 million and $371 million, respectively, in the fourth quarter.
Both just excellent reflections of the quality of the Company's earnings.
I just want to say, with this fourth quarter how proud I am of our team around the world.
And our results this quarter once again reflect the discipline and agility of our entrepreneurial organization, as we continue to perform well amid the environment that still has continued challenges.
Our small acquisition team was also very busy in the fourth quarter and here in the last few weeks of January.
As we announced on December 9, we're very pleased to have signed an agreement to acquire MTS Systems, a leading supplier of advanced test systems, motion simulators and precision sensors, for $58.50 a share.
The MTS acquisition continues to be subject to MTS shareholder approval, certain regulatory approvals, as well as customary closing conditions.
In addition, last week we announced that we had entered into an agreement with Illinois Tool Works, under which ITW will acquire MTS' Test & Simulation segment following the closing of our acquisition of MTS.
The sale is also subject to certain regulatory approvals and other customary closing conditions.
We continue to expect that both the acquisition of MTS, as well as the follow-on sale of the Test & Simulation business to ITW, will both occur approximately in the middle of 2021.
I can just say that we've long been attracted by the outstanding technology and deep entrepreneurial culture of MTS Sensors and look forward to welcoming this wonderful team of people into the Amphenol family.
This acquisition, which is highly complementary to our current sensor offering, represents a further broadening of our high technology sensor offering to customers across the automotive, industrial, military and commercial air industries.
We expect the addition of MTS Sensors to add approximately $350 million in revenues and to generate approximately $0.10 per share of earnings accretion in the first year post closing.
Now here in the last few weeks of January, we're also pleased to have closed two additional acquisitions of outstanding entrepreneurial companies, which we purchased for a combined price of $160 million.
First, Positronic is a provider of high reliability harsh environment connectors for customers primarily in the military aerospace, IT datacom and industrial markets.
Based in Springfield, Missouri and with also operations in France, India and Singapore, and with annual sales of approximately $80 million, Positronic represents a great addition to our harsh environment product offering.
Next El-Cab, which is based in Poland, is a manufacturer of cable assemblies and related interconnect products, primarily serving the industrial market and with annual sales of approximately $55 million.
What I'm very pleased by is that both Positronic and El-Cab are private, family owned companies with rich histories, leading technologies and excellent positions with customers in their target markets.
Our ability to identify and execute upon acquisitions and successfully bring these new companies into Amphenol remains a core competitive advantage for the Company.
Now, if we just look back on 2020 and some of the highlights from the year, despite the many challenges we all faced in 2020, from both a personal and a professional standpoint, Amphenol's dedicated entrepreneurial team performed just incredibly well.
And I just could not be more proud of our performance this year.
Sales reached a record $8.6 billion, growing 5% in U.S. dollars and 2% organically, and actually surpassed our pre-pandemic outlook that we had given back a year ago.
Our full year adjusted operating margins of 19.2%, did decline 80 basis points from prior year, but this decline was due to the significant cost challenges we experienced in the first half of 2020, after which our team was able to return to more typical profit levels in the second half.
And that enabled us to achieve adjusted diluted earnings per share of $3.74, which was the same level as we achieved in 2019.
No question, an impressive result given the circumstances.
We generated record operating and free cash flow of $1.592 billion and $1.328 billion, respectively.
Excellent confirmations of the Company's superior execution and disciplined working capital management, even in these most unprecedented of times.
Our acquisition program remains strong, despite the challenges related to the pandemic, with two new companies added to the Amphenol family in 2020, EXA Thermometrics and Onanon, as well as Positronic and El-Cab here in January and the signing of MTS that we already discussed.
These acquisitions expand our position across a broad array of technologies and markets, while bringing outstanding and talented individuals into the Amphenol organization.
We're particularly excited that these acquisitions represent expanded platforms for the Company's future performance.
In addition, in 2020, we bought back over 6 million shares under our buyback program and increased our quarterly dividend to 16%.
And as Craig mentioned, we're announcing today, a 2-for-1 stock split of the Company's shares.
So, while the overall market environment in 2020 was highly uncertain, our agile entrepreneurial management team is confident that we have built further strength from which we can now drive superior long-term performance.
Now turning to our -- the trends and our progress across our served markets, I would just comment that we remain very pleased that the Company's balanced and broad end-market diversification continues to create value for the Company, with no single end-market representing more than 22% of our sales in the year 2020.
We believe that this diversification mitigates the impact of the volatility of individual end markets.
That was particularly important here in 2020, but while also exposing us to leading technologies wherever they may arise across the electronics industry.
The military market represented a 11% of our sales in the fourth quarter and 12% of our sales for the full year.
Sales in the quarter grew modestly from prior year, increasing by approximately 1% in the fourth quarter, with growth in naval, space and avionics applications offset in part by moderations in ground vehicles, rotorcraft and airframe.
Sequentially, our sales increased as we had expected coming into the quarter by 3%.
For the full year 2020, our sales grew by 3% in U.S. dollars and 2% organically, reflecting our leading market position and strong execution across virtually all segments of the military market, offset in part by the impact of the pandemic-related production disruptions that we experienced in the first half of 2020.
Looking ahead, we expect sales in the first quarter to decrease modestly from these fourth quarter levels.
I just want to say that our organization working in the military market has worked long and hard for many years to strengthen our broad technology position, while increasing our capacity to serve customers across all segments of this important market.
Our performance in 2020, especially given the many disruptions related to the pandemic, is a great reflection of the results of those efforts.
Given the ongoing and favorable military spending environment, our team continues to solidify our leadership position by ensuring that we execute on the demands of our customers by supporting the many next generation technologies that are required for modern military hardware.
The commercial air market represented 2% of our sales in the fourth quarter and 3% of our sales for the full year.
Not surprisingly, fourth quarter sales were down significantly, reducing by approximately 50%, as the commercial air market continued to experience unprecedented declines in demand for new aircraft, due to the pandemic-related disruptions to the global travel industry.
Sequentially, our sales were a little bit better than expected, declining 10% from the third quarter and for the full year 2020, sales declined by 34%, reflecting that significant impact of the pandemic on travel and aircraft production.
Looking into the first quarter of 2021, we expect a sequential moderation in sales from these levels.
Look, there is no doubt that these are difficult times for the entire travel industry, which is seriously impacting the market for commercial airplanes.
Nevertheless, our team, who has just been so resilient over the course of this year, remains committed to leveraging the Company's strong technology position across a wide array of aircraft platforms, as well as next-generation systems that are integrated into those airplanes and we remain well positioned when this market ultimately returns to growth.
The industrial market represented 22% of our sales in the quarter and in the full year of 2020.
Our sales in this market significantly exceeded expectations that we had coming into the quarter, increased by a very strong 29% in U.S. dollars and 24% organically from prior year.
This robust growth was driven, especially by the battery and electric vehicle, instrumentation, heavy equipment, factory automation and medical segments of the industrial market.
On a sequential basis, sales increased by 4% from the third quarter.
We're really pleased with our results in industrial for the full year, with sales growing 15% in U.S. dollars and 11% organically, as we saw strong demand in really those same markets, battery and EV, instrumentation, heavy equipment, also alternative energy and of course, medical, which was a very strong segment in the year.
Looking into the first quarter, we expect a slight moderation from the strong fourth quarter sales levels.
I'm truly proud of our team working in the industrial market, whether enabling the growth in volumes of a wide array of medical equipment or managing through significant increases in demand for semiconductor capital goods and next-generation batteries, our global organization has reacted quickly to ensure that our customers are fully supported regardless of the many operational challenges that have arisen during the pandemic.
The automotive market represented 20% of our sales in the fourth quarter and 17% of our sales for the full year 2020.
Sales in this market were also much stronger than we had expected coming into the quarter, with revenue growing by 24% in U.S. dollars and 19% organically in the fourth quarter, and that was really driven by broad-based growth across all geographies in the automotive market.
Sequentially, our automotive sales increased by a very strong 22% as we continue to benefit from the broad recovery in the global automotive market.
For the full year 2020, our sales declined by 6% in U.S. dollars and 8% organically.
And that really reflected the significant challenges in factory shutdowns experienced by the auto industry in the first half of the year related to the pandemic, but was partially offset by our strong recovery that we drove in the second half.
Looking into 2021, we do expect a sequential moderation from these high sales levels in the first quarter.
Look, no doubt about it, the automotive industry faced one of the most difficult periods in recent memory, during the first half of 2020, in particular in the second quarter, and that was followed by an unexpectedly robust recovery here in the second half.
I'm just so proud of our team working in this important market, who has clearly demonstrated their agility and resiliency through these most turbulent times and thereby, secured the Company's position with our customers across the automotive market.
Regardless of this most dynamic of years, we have continued to expand our range of interconnect, sensor and antenna products, both organically and through acquisitions, to enable a wide array of onboard electronics across a diversified range of traditional fuel and electric-powered vehicles made by auto manufacturers around the world.
This consistent strategy will continue to benefit us long into the future.
The mobile devices market represented 18% of our sales in the fourth quarter and 15% of our sales for the full year.
Our sales in the quarter to mobile device customers increased by a much stronger-than-expected 32% from prior year, with strength in all product types, but particularly in wearables and laptops.
Sequentially, our sales increased by 15% and that was driven by higher sales to smartphones and wearable devices.
For the full year 2020, sales in the mobile devices market increased by a very strong 16%, as we continued to benefit from our agility in reacting to changes in demand in this dynamic market.
For the full year, we saw particularly strong sales growth in products incorporated into laptops, tablets, wearables and other accessories as well as production-related products, and that was offset in part by a slight moderation of sales of products incorporated into smartphones.
Looking into the first quarter, we anticipate a typically significant seasonal sequential decline of approximately 40%.
While mobile devices will always remain one of our most volatile of markets, our outstanding and agile team is poised as always, to capture any opportunities for incremental sales that may arise in 2021 and beyond.
Our leading array of antennas, interconnect products and mechanisms continues to enable a broad range of next-generation mobile devices, all positioning us well for the long term.
The mobile networks market represented 5% of our sales in the quarter and 6% of our sales for the full year of 2020.
Sales in the quarter decreased from prior year by 8% in U.S. dollars and 9% organically, with declines in sales to both equipment manufacturers as well as operators.
Sequentially, our sales did increase by a bit less than we had expected, 12%.
For the full year 2020, sales declined by 16% from prior year, which reflected the impact of the U.S. government restrictions on certain Chinese customers that had been imposed in 2019, as well as other impacts related to the COVID-19 pandemic.
Looking ahead, we expect sales in the first quarter to increase from this quarter's levels, as operators expand their investments in next-generation mobile networks.
Regardless of the challenging demand environment in the mobile networks market in 2020, we're confident in the Company's long-term position in this important and exciting industry.
Our team continues to work aggressively to expand our opportunity with next-generation equipment and networks.
And as customers ramp up investment of these advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers around the world.
The information technology and data communications market represented 18% of our sales in the quarter and 21% of our sales for the full year of 2020.
Sales in the quarter was stronger than expected, rising by 3% in U.S. dollars and 2% organically from prior year, as stronger sales of networking equipment and server-related products were offset by lower sales of storage-related products.
Sequentially, our sales declined by 8% from our very robust third quarter.
We're very pleased with our performance for the full year for IT datacom, with our sales growing a very strong 15% in U.S. dollars and 11% organically, as we capitalized on increased demand from our OEM and service provider customers, as they work to accelerate bandwidth capacity expansions, in particular to support home-based work, school and entertainment.
Our team working in support of these customers has clearly distinguished themselves this year, reacting quickly to capitalize on unprecedented demand for our industry-leading high-speed and power products.
At the same time, we've not slowed down our efforts to further develop that broad range of leading interconnect products in support of data communications networks around the world.
Looking into the first quarter of 2021, we expect a typical seasonal moderation of sales here in the quarter.
But nevertheless, we remain very encouraged by the Company's strong technology position in the global IT datacom market.
Our customers around the world continue to drive their equipment to ever higher levels of performance, in order to manage the dramatic increases in bandwidth and processor power.
In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom.
The broadband communications market represented 4% of our sales in the quarter and 4% for the full year.
Sales increased by 3% in the fourth quarter from prior year, driven by stronger demand for home installation related equipment from our broadband operators.
On a sequential basis, sales decreased as expected by 9% from the third quarter.
For the full year of 2020, sales were flat and that's despite the significant disruptions to production and demand that we experienced in the first quarter, offset by the accelerated investments in support of bandwidth later in the year.
Looking into the first quarter, we expect sales to moderate from these levels and we remain encouraged by the Company's position in the broadband market.
With our expanded range of products, together with strong relationships with customers around the world, we look forward to benefiting as operators increase their network investments in the future.
Now just to summarize, there is no question that 2020 was one of the most challenging years we've all experienced.
But in the face of these challenges, I'm just so proud of the entire team of Amphenolians around the world, who have managed extraordinarily well throughout the pandemic and the related disruptions to the economy.
Through our dual-pronged approach of growing both organically and through our acquisition program, the Company continues to expand our market position, while strengthening our financial performance.
Amphenol's superior performance is a direct reflection of our distinct competitive advantages, our leading technology, our increasing position with customers across our diverse end markets, worldwide presence, a lean and flexible cost structure, a highly effective acquisition program and I can say, most importantly in this pandemic-impacted 2020, an agile and entrepreneurial management team.
Now turning to our outlook and regardless of our strong performance in the fourth quarter, there still remains significant economic uncertainties related to the COVID-19 pandemic.
Accordingly, we will not be providing full year guidance at this time.
Assuming no new material disruptions from the pandemic, as well as constant exchange rates, for the first quarter, we now expect sales in the range of $2.120 billion to $2.180 billion and adjusted diluted earnings per share in the range of $0.90 to $0.94.
I would just note that on a post-split basis, this adjusted diluted earnings per share guidance would be $0.45 to $0.47.
This guidance represents sales growth in the first quarter of 14% to 17% year-over-year and adjusted diluted earnings per share growth of 27% to 32%, again compared to the first quarter of 2020.
I remain confident in the ability of our outstanding management team to adapt to the continued challenges in the marketplace and to capitalize on the many future opportunities to grow our position and expand our profitability.
Our entire organization remains committed to delivering strong financial results, all while prioritizing the continued safety and health of each of our employees around the world.
And with that, operator, we'd be very happy to take any questions that there may be.
| compname reports record fourth quarter 2020 results and announces 2-for-1 stock split.
q4 adjusted earnings per share $1.13.
q4 gaap earnings per share $1.15.
q4 sales $2.426 billion versus refinitiv ibes estimate of $2.22 billion.
for q1 2021, amphenol expects sales to be in range of $2.120 billion to $2.180 billion.
not providing full-year 2021 sales and earnings per share guidance at this time.
board approved 2-for-1 stock split to be paid in form of dividend to shareholders of record as of february 16.
expects pre stock-split q1 2021 adjusted diluted earnings per share in range of $0.90 to $0.94.
expects post-stock-split q1 2021 adjusted diluted earnings per share in range of $0.45 to $0.47.
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As usual, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives.
During our call, management may discuss certain items, which are not based entirely on historical facts.
And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business, and believes will provide insight into the company's ongoing operations.
Looking broadly at the quarter, we're encouraged by the continued improvement in the environment, the consumers increasing engagement with the category, and we hope to see those trends continue.
We know there are still challenges out there, especially with independents, yet Brinker continues its strong recovery, posting a better-than-expected first quarter and also delivering earnings of $0.28 a share.
Both brands increased their progression from last quarter with Chili's reporting comp sales of negative 7.2% and Maggiano's negative 38.6%.
And both brands delivered solid sequential improvement throughout the quarter, with Chili's ending September down just 1.4% and Maggiano's down 32.5%.
Plus casual is obviously a more challenged segment that's facing greater headwinds, but the Maggiano's team is doing a great job managing their cost structure and flow through.
We feel good about where Maggiano's is from a very relative perspective, and we're excited about the bold strategy Steve Provost and the team are putting in place to build the business.
The Chili's brand continues to exceed expectations from both a relative and an absolute perspective.
The month of September marked our return to positive traffic, and that's pretty impressive given there are still major states like California and New Jersey, not yet near full dining room capacity.
This brand continued its nearly three-year streak of outperforming other casual dining chains in KNAPP-TRACK, driving a 16-point gap in sales and 23 points in traffic this quarter.
When we broaden our view of the category to include independents, our GAAP widened significantly.
Current credit card data shows a whole category down 30%, which reflects our ongoing impact of this pandemic and the reality of what is likely to be a meaningful shift in the competitive landscape.
In this tough environment, I couldn't be prouder of the resilience and agility of our operations team.
For the quarter, they improved restaurant operating margin 60 basis points year over year.
When the pandemic hit back in March, the market really drove us all to dramatically cut costs.
Since then, we've judiciously evaluated every cost within our P&L, and we've been diligent about reestablishing our media -- our spending levels.
In many cases, we're comfortable maintaining a level of spend below pre-pandemic levels.
One of the biggest changes we made was to rethink our marketing spend.
We significantly reduced traditional television advertising so we could invest more aggressively in digital and direct channels that work harder for us, like My Chili's Rewards.
And with the increased desire for convenience, we're shifting to support all our brands more aggressively with delivery resulting in higher third-party delivery fees and promotional expenses.
Based on where we're tracking with sales and the efficiency of our P&L, we feel really good about these decisions.
Our top priority has been and remains the safety of our team members and guests.
We're committed to supporting our team that's working so hard to take care of our guests.
We've now brought back most of our hourly team members, and that we've been able to help them maintain their hourly wage levels.
We've also kept our management structure intact.
We know how critical their leadership is to our guests and our business and we're proud that we've been able to bonus our managers close to target.
Instead, we leaned into the same strategies that have been helping us take share from the last three years, and they've been even more effective since the pandemic.
But even before that, our challenge was to prove to ourselves and to you that we could create a growth model out of a legacy business in a category that's seen meaningful declines in traffic over the years.
We have always believed growth is available in this category if you do the right things.
By delivering a better guest experience, a strong value proposition and more effective marketing, we unlocked sustainable organic growth within our base business.
Our results demonstrate we're doing the right things.
Our improvements to the base enables us to introduce our first virtual brand, It's Just Wings, an incremental growth vehicle that offers convenience and value in a way no one else is positioned to do.
Now there's been a lot of discussion about what a virtual brand is.
It's Just Wings is not a disposable vehicle.
We're committed to this brand for the long haul.
There are barriers to entry in doing virtual brands well, and Brinker is uniquely positioned to do it right.
We have the scale, the asset ownership that's available capacity in our well-equipped kitchens, the right technology and unbelievably strong operators who can focus and deliver consistently.
When we rolled out It's Just Wings overnight to more than 1,000 restaurants.
Now that's easy to say, but tremendously hard to do.
So I know everyone is curious about how it's going so far.
We're excited with how the brand is already performing, and we're well on track to meet our first year target of more than $150 million in sales.
We're encouraged by what DoorDash sees with regard to our consumer data.
The brand is really generating high satisfaction scores and strong repeat usage.
It's really resonating with consumers, which we know is critical to the health and long-term success of any brand.
Going forward, our focus is to ensure we're executing at the highest level possible, and we're maximizing the brand's growth potential.
It's Just Wings started as a virtual brand, but as we wire in the execution and accelerate growth, it may take different trajectories.
We're evaluating internal and external opportunities to increase awareness levels and expand access to consumers.
This is just phase I for It's Just Wings.
We also believe we have capacity to expand our virtual brand portfolio.
We're testing a few ideas to better understand consumer demand and ensure that we can execute at a high level.
We'll have more to say on that in the not-too-distant future.
Obviously, we see a lot of upside for virtual brands.
Listen, with the uncertainty surrounding COVID and the economy, we anticipate some volatility ahead.
And like the rest of our country and the world, we are hoping and planning for a vaccine and an end to the sickness and deaths from this virus.
We are hoping and planning for economic stability and continued recovery in the post-election environment.
But despite the things no one can know, here's what we do know.
We will keep running our own race and working our strategy.
We will stay flexible and agile, and we'll take care of each other and our guests.
We will also continue to manage our P&L and our balance sheet with discipline to create an even more stable model for our shareholders.
And we will boldly grow these brands so we can continue to be a great place for our team members to work and our shareholders to invest.
And with that, I'll turn now it over to Joe.
As you just heard, we begin our fiscal year 2021 with momentum on the top and bottom line.
We continued our recovery by delivering adjusted diluted earnings per share of positive $0.28, marking the return to profitability after just a one quarter hiatus.
Now for the quarter, Brinker's total revenues were $740 million and consolidated reported net comp sales were negative 10.9%.
Importantly, comp sales materially improved as the quarter progressed, with September consolidated comp sales down only 5.2%.
Chili's has continued to lead the casual dining sector, ranking as the #1 brand in the KNAPP-TRACK index each month in this quarter.
And as Wyman indicated, beat by significant margins in both sales and traffic.
In September, Chili's achieved another important milestone in its recovery, posting positive traffic for the brand of 2.2%.
Another way to see Chili's impressive progression is to look at our net comp sales results, excluding those restaurants and markets not fully open for our indoor dining during the quarter, such as California and New Jersey.
These restaurants represent approximately 86% of the Chili's system, and they were only negative 1.3% for the quarter and positive 3.6% for September.
Now turning to margins.
Restaurant operating margin for the first quarter was 11.6%, a noteworthy 60 basis points improvement versus prior year.
Food and beverage expenses were favorable 10 basis points versus prior year due to the favorable menu mix, offset by low level of commodity inflation.
Labor was also favorable 120 basis points versus prior year.
Now several items contributed to this improved performance.
First, labor expense relative to prior year benefited from the shift in sales from dine-in to off-premise in the quarter.
Second, favorability was also buoyed by the fact some of our higher labor cost states reopened at a slower pace during the recovery, a benefit that will diminish as we move forward.
Of course, naturally, we'll take the sales that go with adding that labor back into the equation.
And finally, labor expense benefited from the ability to seamlessly integrate our It's Just Wings brand into the existing labor model, a point of leverage and we plan to sustain.
The labor favorability was partially offset by the increase in restaurant expenses, which was up 70 basis points for the first quarter versus prior year.
Sales to leverage, higher delivery related fees and packaging expense were the primary increases, while lower advertising and repairs and maintenance expenses helped mitigate the overall increase.
Generating positive cash flow is an important part of our recovery process.
With the business improving, we generated operating cash flow of $83 million.
After capital expenditures of the approximately $14 million, our free cash flow for the quarter totaled more than $69 million.
Our first priority for cash generation is to invest back in the business.
And as such, we have resumed both restaurant reimages and new restaurant development.
We have increased our capex budget for the year and now expect to spend approximately $100 million during this fiscal year.
As Wyman reiterated, strengthening the balance sheet is also a key area of focus for us.
As such, our second cash priority is to pay down debt, and we executed against this strategy during the quarter, reducing our long-term debt by approximately $50 million.
We will continue to lower leverage as we move forward from here targeting an adjusted debt level of about 3.5 times EBITDAR.
Now turning to our current second quarter.
Let me provide some color as to our expectations for the quarter and then some specific guidance metrics for the quarter.
Today marks the end of our October period, and it appears we will continue the positive progression of comp sales established during the first quarter.
We expect Chili's to further build its positive traffic performance this period, getting the second quarter off to a very fine start.
While we anticipate year over year improvements in Chile's operating performance in the second quarter, our consolidated performance will likely reflect a more difficult holiday environment for the Maggiano's brand.
With that being said, let me provide some specifics for Brinker's performance in the second quarter.
We expect consolidated comp store sales to be down in the mid single-digit range.
We believe Brinker's restaurant operating margins will be relatively similar to prior year.
Adjusted earnings per diluted share are estimated to be in the range of $0.40 to $0.60 and weighted average diluted shares are estimated to be in the 45 million to 46 million share range.
I would also note we have the holiday flip in the second quarter with Christmas Eve and Christmas Day moving into the third quarter.
This holiday shift will have a positive impact to second quarter comp sales that will be offset in the first period of Q3.
Despite the ongoing challenges in our operating environment, we continue to demonstrate strength and resilience.
So, our first quarter performance is a testament to our ability to deliver results.
While operating in a pandemic environment comes with some uncertainties, there is no doubt we will continue to execute our share gaining strategy, take care of our guests and team members and be a leader in the restaurant industry for the short and long term.
| brinker international inc - qtrly net income per diluted share, excluding special items $0.28.
brinker international inc - chilis total comparable restaurant sales decreased 7.2% in q1 21.
brinker international inc - maggiano's total comparable restaurant sales decreased 38.6% in q1 21.
brinker international inc - for q2 21 net income per diluted share, excluding special items, expected to be $0.40 to $0.60.
|
Those risks include, but are not limited to, risks associated with pricing, volume, inventory supply due to increased customer demand and reduced manufacturing production levels due to component shortages, conditions of markets and adverse developments in the global economy as well as the public health prices related to the COVID-19 virus, and resulting impacts on the demand for new and used vehicles, and related services.
Those and other risks are described in the company's filings with the Securities and Exchange Commission over the past 12 months.
Copies of these filings are available from both the SEC and the company.
As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website.
I'll now hand the call over to Earl.
I'm pleased to report that for the quarter, Group 1 generated adjusted net income of $178 million.
This equates to adjusted earnings per share of $9.62 per diluted share, an increase of 38% over the prior year, and an increase of 219% over the pre-pandemic third quarter of 2019.
Our adjusted results exclude non-core items totaling approximately $5 million of net after-tax losses.
This net amount consists primarily of a loss on debt extinguishment, and acquisition costs related to the Prime transaction, partially offset by favorable legal settlements recognized during the quarter.
These profit results were largely a result of strong vehicle margins that were able to more than offset unit sales declines, as well as continued growth in after sales and impressive cost control.
Consumer demand for vehicles remains extremely strong heading into the fourth quarter.
And we continue to sell most units almost immediately after OEM delivery.
This dynamic should continue throughout the fourth quarter, and potentially much further out, assuming no material change in consumer demand.
As of September 30, we have 2,700 U.S. new vehicle inventory units in stock, representing a 11-day supply.
Our used inventory situation is much stronger at 10,000 units and a 25-day supply.
Daryl will speak more about inventory shortly.
A very encouraging element of our third quarter results is the very strong continued recovery in our after-sales business.
Our U.S. markets saw 15.5% increase in after-sales revenues versus the prior year.
Again, Daryl will provide more detail on our U.S. results in a moment.
As with the U.S., consumer demand for vehicles in the UK is extremely strong.
But new vehicle availability is severely constrained.
We have an order bank with most of our major UK brands extending into the second quarter of next year.
Strong margins were able to more than offset sales declines due to inventory shortages.
And we're proud to report that we generated an all-time record quarterly profit in the third quarter of 2021.
We believe pent-up demand built over the past several years due to both Brexit and the pandemic will help drive strong UK vehicle demand into the foreseeable future.
Our U.S. adjusted SG&A as a percentage of gross profit was 57.6%.
The UK was 64.6%, and Brazil came in at a record 60.9%.
While there is certainly a level of transitory impact due to vehicle margins, we continue to witness very high levels of productivity that will remain after vehicle inventories normalized.
As Earl mentioned, U.S. new vehicle inventory levels finished the quarter at 2,700 units and a 11-day supply.
Our September inventory receipts were the lowest of the year at approximately 6,800 units.
We expect to receive roughly the same level in October and November, which we believe will be the trough.
We do not have much visibility yet into 2022.
But based on OEM communications, we expect production to increase over current levels at some point in the first quarter.
Our team did a great job increasing vehicle margins throughout the quarter as inventory supply continues to decline.
And we will continue to adjust our operations as required.
Our Same Store used vehicle retail unit sales improved by 15% versus the third quarter of 2020.
Our team also did a great job increasing gross profit PRUs, which is a result of increased purchases directly from vehicle owners.
We continue to be very aggressive, yet judicious with our used vehicle inventory sourcing strategy, which has allowed us to hold a supply relatively constant while largely avoiding public auctions.
As a franchise dealer, we have a distinct advantage over used-only operators due to the numerous channels afforded us a sourcing inventory, including our service drives, lease returns, and OEM closed auctions.
The most encouraging profit driver was once again our after sales performance.
Our customer pay continues to ramp-up following a very strong first half of the year with 19% same-store dealership gross profit growth compared to the third quarter of 2019.
This allowed us to grow same-store dealership after sales gross profits by 9%, despite continued headwinds in warranty and collision, both of which we believe will reverse in time.
We foresee after sales continuing to ramp up over the near-term.
The final major factor driving our outstanding profit performance was continued cost discipline.
Our third quarter adjusted SG&A as a percentage of gross profit was 67.6%, down from 59% in the third quarter of 2020, and down from 70.5% in the pre-pandemic third quarter of 2019.
Material part of the improvement is due to productivity gains, which we believe will be permanent.
I would like to provide another quarterly update of AcceleRide, our digital retailing platform.
AcceleRide is proving again to be a difference maker for our customers.
In the third quarter, we sold 5,200 vehicles to AcceleRide, a 68% increase over last year.
And since we have very little inventory pre-selling incoming new vehicles is critical to our business and AcceleRide allows customers to finalize transactions on in-transit units and take deposits digitally.
In addition to expanding our reach at in-transit inventory, AcceleRide has proven to be an exceptional way to grow our footprint.
In the third quarter, 75% of AcceleRide buyers were new to Group 1.
Customers clearly value the superior omni-channel experience that AcceleRide provides which gives Group 1 another avenue to grow incrementally.
Of the customers who placed orders online last quarter nearly 50% uploaded a driver's license and 25% uploaded proof of insurance.
An additional 36% of the orders had a completed credit application as well.
We believe that giving customer's control of completing any or all of the car buying process online is critical to their overall satisfaction, and our ability to continue to generate incremental volumes through the platform.
AcceleRide is also giving us great advantages in sourcing used vehicles.
During the quarter, we purchased nearly 5,000 used vehicles from customers through AcceleRide either through trades or through individual acquisitions.
That's up 30% sequentially from the second quarter.
A differentiator for us is our ability to digitally pay customers through Zelle, nearly 1,000 customers out of our 5,000 total took advantage of the digital payment feature in AcceleRide.
In addition to remote selling, we have increased the adoption of AcceleRide for customers in our showroom, about half of U.S. vehicle sold in the third quarter utilized AcceleRide in the everyday traditional sales process.
In our view, digitizing the in dealership experience saves everyone time, creates complete transparency and increases professionalism.
In September, we activated integrated delivery fees at 38 dealerships, preliminary results are encouraging.
About 13% of customers chose delivery up front, and so far 5% are confirming in the final steps.
The average delivery distance is 164 miles, further demonstrating our ability to extend our reach with AcceleRide.
We look forward to launching integrated delivery fees and more dealerships soon.
AcceleRide will launch at our newly acquired dealerships in Texas and California very soon.
And our AcceleRide footprint will expand significantly in the Northeast with the upcoming Prime dealership acquisitions.
We expect to start rolling out AcceleRide in those dealerships in January of 2022.
Turning quickly to Brazil, despite a nearly 30% decline in industry units sold versus the third quarter of 2019.
Our team once again did a fantastic job growing margins across all lines of business and aggressively thinning the cost structure, resulting in the lowest SG&A quarter in the region's history.
For the second quarter in a row, our Brazilian teams at an all-time quarterly profit record.
We continue to be well positioned to benefit from a sales rebound coming out of the pandemic.
As of September 30, we had $297 million of cash on hand, and another $335 million invested in our floorplan offset accounts, bringing total cash liquidity to $632 million.
There was also $282 million of additional borrowing capacity on our U.S. syndicated acquisition line, bringing total immediate liquidity to $914 million.
Subsequent to quarter-end, we issued $200 million of bonds as an add-on to our existing 4% notes to 2028.
This debt was raised to help fund our previously announced acquisition of the Prime Automotive Group, which we expect to close in November.
We also plan on raising approximately $180 million in mortgage debt to help fund the deal and provide future liquidity flexibility.
We generated $234 million of adjusted operating cash flow in the third quarter and $210 million of free cash flow after backing out $24 million of capital expenditure.
This brings our September year-to-date free cash flow to $522 million, which is allowed us to fund the majority of our Prime acquisition with access cash on hand.
Our rent-adjusted leverage ratio, as defined by our U.S. syndicated credit facility was reduced to 1.5 times at the end of September.
On a net debt basis which considers all U.S. cash on hand.
Our leverage was 0.9 times at September 30.
As previously announced when considering the pending Prime acquisition, we do not expect our rent adjusted leverage ratio to exceed two times, leaving plenty of flexibility for further capital deployment.
Finally, related to interest expense, our quarterly floorplan interest of $4.8 million was a decrease of $3.3 million or 41% from prior year, due to lower vehicle inventory holdings.
Non-floorplan interest expense decreased $1.5 million or 10% from prior year, primarily due to last year's bond debt refinancing.
Related to our corporate development efforts, We previously announced the October acquisitions of two dealerships in the Dallas-Fort Worth metroplex and one dealership in California.
And as Daniel mentioned, we expect our purchase of the Prime Group in New England to close in November.
Once closed our 2021 Total acquired revenues will equal $2.5 billion.
Our balance sheet, cash flow generation, leverage position will continue to allow for further capital deployment.
And we will continue to seek ways to maximize value for our shareholders as we head into 2022.
| compname announces record third quarter 2021 results.
compname announces record third quarter 2021 financial results.
q3 adjusted non-gaap earnings per share $9.62.
|
These forward looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the Securities and Exchange Commission.
As a consequence, actual results may differ significantly from those expressed in any forward looking statements in today's discussion.
We do not intend to update any of these forward looking statements.
We will refer to those slides during this earnings call.
All calculations we will discuss also exclude loss or gain from early extinguishment of debt impairment expense as well as gains or losses on the sale of businesses; expenses from government and other legal settlements and related costs, expenses from settlement and legal expenses related to cases covered by the CVR expenses related to employee termination benefits and other restructuring charges, change in tax valuation allowance and gain on sale of investments and unconsolidated affiliates.
We are very pleased with our third quarter operational and financial performance, especially as our healthcare teams provided care for a large number of patients with COVID-19.
Despite this challenging environment, we continue to advance key growth strategies and other important operational improvements.
During the third quarter, the Delta variance spread through many of our markets across the Sun Belt space.
As a result, we provided care for approximately 15,000 inpatient COVID admissions or 13% of our total admissions, which was our highest quarterly case count to date.
This compared to more than 3,000 inpatient COVID cases during the second quarter and 9,500 during the first quarter.
And it is also worth noting that non-COVID healthcare demand was higher in the third quarter than in our prior quarters with elevated COVID-19 cases.
Since the onset of the pandemic, the importance of our healthcare team and the critical role they play in the communities we serve has certainly been reinforced.
I am impressed with their professionalism and compassion and remain grateful for their commitment to providing safe, high quality patient care.
Looking at the third quarter, we produced strong results despite the COVID surge.
On a same store and year over year basis, net revenue increased 7.1%.
Same store admissions increased 2.8% and adjusted admissions were up 4.7%.
Surgeries increased 1.5%, while ER visits were up 24.2%.
As a reminder, during the third quarter of 2020, we drove solid volume recovery as industry volumes were returning.
So we were pleased with this year over year volume performance.
Looking at our third quarter volumes compared to the pre-pandemic third quarter of 2019, same store admissions decreased 3%, while surgeries declined 4%.
ER visits further improved and were up 1% versus 2019 due in large part to our freestanding ED expansion strategy as well as elevated levels of COVID visits and testing.
Despite the COVID surge in the third quarter being our largest to date, non-COVID demand was higher than the last significant surge in the first quarter of this year.
As a result, we delivered stronger volumes across all key metrics compared to the first quarter.
That said, deferred care and related procedures have been impacted throughout the pandemic, and we expect healthcare demand to return over the next several quarters.
And our recent investment, which I will cover in more detail shortly, will help meet growing demand for healthcare services in the months and years ahead, and drive market share gains across our portfolio.
Moving now to EBITDA during the third quarter.
On a consolidated basis, adjusted EBITDA was $482 million.
Excluding pandemic relief funds, adjusted EBITDA was $463 million, which was up 7% year over year, with an adjusted EBITDA margin of 14.8%.
Compared to the third quarter of 2019 and excluding release pandemic relief fund, adjusted EBITDA increased 19%, and our adjusted EBITDA margin was up 280 basis points despite operating 19 fewer hospitals, which further validates our underlying confidence in the renewed core portfolio.
In terms of expense management, for more than 1.5 years now, the pandemic has created a continuously changing operating environment, requiring flexibility on a daily basis.
This was certainly the case again during this quarter.
Our hospital leadership teams and providers have adeptly managed the ebbs and flows, utilizing best practices, leveraging organizational resources and operating with agility all while prioritizing safety for their patients and care teams.
They continue to effectively manage their resources and control expenses.
Similar to prior waves of COVID, we experienced increased costs related to staffing, pharmaceuticals and other supplies, such as PPE and COVID testing.
And while the entire country is ready for the impacts of COVID-19 to subside, we remain confident in our ability to manage the dual-track operation strategy for as long as the pandemic continues.
Our portfolio is strong, and it is situated across parts of the country with attractive population trends and favorable economic conditions, which provide a solid foundation for growth over the next several years.
To broadly advance these growth opportunities, we have previously highlighted investments in incremental bed capacity new outpatient access points, higher acuity service lines, physician recruitment, our transfer center service, Telehealth technologies and in care coordination and patient experience.
These investments are working.
They have greatly improved our competitive position and are creating opportunities for incremental market share gains into the future.
Now I would like to share with you some of our recent growth oriented investments.
They include the JV opportunities, we announced last quarter with partnerships across rehab, long term acute care and behavioral health, the opening of new ASCs in the Knoxville, Tennessee and Tucson, Arizona markets.
The recent completion of an OB and neonatal intensive care expansion at Grandview Medical Center in Birmingham, Alabama, where we have now added more than 70 beds over the past three years.
The November opening of a new hospital in Downtown Fort Wayne, as part of Lutheran Health Network, the upcoming opening of our 17th freestanding ED near Bentonville, Arkansas, which is part of our Northwest Arkansas network, and a de novo hospital campus, the fourth in Tucson, Arizona, which is scheduled to open in early 2022.
We are also excited about the recently announced expansion of the physician's regional healthcare system in Naples, Florida.
This includes the construction of 100 new beds at our two existing hospital campuses in that market and the early 2022 addition of a third hospital campus in North Naples, which will specialize primarily in orthopedic surgery and rehabilitation.
Beyond these projects, we have a growing pipeline of both inpatient and outpatient investment opportunities, which we expect to further develop and strengthen our core markets even more.
We have been pleased with our progress this year, and in our overall execution in the midst of a challenging operating environment.
Due to our strong performance, we are raising our adjusted EBITDA guidance again this quarter.
And looking forward, we remain extremely optimistic about our portfolio and markets as well as the opportunities ahead of us to drive long term incremental EBITDA and cash flow growth.
As Tim highlighted, it was another strong quarter for the company.
as we delivered solid financial performance and further advanced a number of our strategic initiatives.
Through the recent transformation we've undertaken to reposition the company, we introduced strategies to drive net revenue growth and improve efficiency throughout the organization as well as to strengthen our balance sheet.
We completed our divestiture program, which allowed for debt paydown and additional focus in our core markets.
We made improvements to the capital structure, extending maturities and reducing annual cash interest.
And we've made operational improvements, which have improved our margins.
We are pleased with all of this recent progress and excited about the opportunities in front of us.
Switching back to the third quarter performance.
Net operating revenues came in at $3.115 billion on a consolidated basis.
On a same store basis, net revenue was up 7.1% from the prior year.
This was the net result of a 4.7% increase in adjusted admissions and a 2.3% increase in net revenue per adjusted admission, which faced a difficult comp from the prior year.
Excluding nonpatient revenue, which was lower year over year, net patient revenue per adjusted admission was up 3% compared to the prior year.
Adjusted EBITDA was $482 million.
During the third quarter, we recorded approximately $19 million of pandemic relief funds with no relief funds recognized in the prior year period.
Excluding those pandemic relief funds, adjusted EBITDA was $463 million, with an adjusted EBITDA margin of 14.8%.
In terms of expenses, supply cost increased in the third quarter, a result of higher pharmaceutical and other costs associated with caring for additional COVID patients.
Contract labor expenses increased in the third quarter similar to prior COVID waves during which COVID case counts were elevated.
As a reminder, our contract labor expense is recorded in the other operating expense line.
It's worth noting that our strategic margin improvement program has remained on plan during the year.
The formalized program continues to drive efficiency across the organization.
and the execution helped to offset cost pressure across all three expense lines during the quarter.
We expect this plan will drive incremental savings over the next several years.
Turning to cash flow.
Cash flows provided by operations were $400 million for the first nine months of 2021.
This compares to cash flows from operations of $2.1 billion during the first nine months of 2020.
The comparison versus the prior year is difficult as the $2.1 billion in cash flow from operations during the first nine months of 2020 included $1.159 billion of accelerated Medicare payments received and $715 million of pandemic relief funds received.
Declining net revenue during the first three quarters of 2020 resulted in declining accounts receivable which was, therefore, a benefit to working capital cash flows last year.
Conversely, with strong net revenue growth in the current year, we have a net working capital drag as accounts receivables have increased.
We expect this net working capital headwind to ease in future quarters.
Excluding repaid Medicare payments, cash flows provided by operations were $667 million for the first nine months of 2020.
For the first nine months of 2021, our capex was $334 million compared to $317 million in the prior period.
Our capex was up 5% in the first nine months of this year despite operating fewer hospitals than a year ago.
Our core markets have benefited from the rollout of our strategic initiatives, along with high return capital to fuel additional growth.
And as Tim mentioned, we have a strong pipeline of opportunities that we expect will drive incremental EBITDA as well as increased cash flow performance going forward.
In terms of liquidity, we continue to have no outstanding borrowings and approximately $728 million of borrowing base capacity under the ABL with the ability for that to increase up to $1 billion.
Also at the end of the quarter, we had $1.3 billion of cash on the balance sheet.
As of September 30, 2021, the company had $814 million of Medicare accelerated payments remaining to be repaid, which were recorded as a current liability on the balance sheet.
Rather than repay these remaining Medicare Accelerated payments over the next several quarters through the regularly scheduled recruitment process by CMS, the company has elected to repay the remaining outstanding balance of Medicare accelerated payments to CMS with cash on hand, which it has now completed during the month of October.
Moving forward, the company will begin receiving the full amount of cash reimbursement on future Medicare claims.
Due to our strong performance during the quarter, we have raised our guidance.
The updated full year 2021 guidance for net revenues is now anticipated to be $12.150 billion to $12.350 billion.
And adjusted EBITDA is anticipated to be $1.780 billion to $1.820 billion as we've increased our full year range.
As a reminder, our 2021 adjusted EBITDA guidance does not include any previously recorded pandemic relief funds or any pandemic relief funds that may be recorded in the future.
Cash flow from operations is anticipated to be $800 million to $900 million, an increase of $75 million at the midpoint.
Our cash flow from operations guidance excludes the repayment of Medicare accelerated payments that have occurred throughout the year.
capex is now expected to be $450 million to $500 million, and net income per share is anticipated to be $1 to $1.20 based on a weighted average diluted shares outstanding of 129 million to 131 million shares.
Lastly, at the beginning of this year, we introduced our medium term financial goals, which included achieving 15% plus adjusted EBITDA margins, delivering positive free cash flow annually and reducing financial leverage below six times.
Looking at the past three quarters, we've made significant progress on these goals as we've expanded our EBITDA margin, driven strong positive free cash flow year to date and further reduced our leverage, which is 5.9 times as of September 30.
We look forward to delivering additional progress across all these metrics as we move forward.
| q3 revenue fell 0.4 percent to $3.115 billion.
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Our performance under these conditions is outstanding.
Our organization showed the grit, resiliency, discipline and innovation that we are known far.
And we stayed focused on keeping our employees safe, while executing for our customers.
Turning to our financial results.
Throughout our discussion, all my financial commentary disregards the impact of the impairment charge that Mark will cover in detail.
We earned an adjusted $1.44 per diluted share for the second quarter.
Adjusted operating income margins for the second quarter were a strong 5.47% [Phonetic].
Operating cash flow is excellent at $276 million on a year-to-date basis.
We accomplished this in an environment where we had 15.5% negative organic revenue growth for the quarter just ended.
Our Mechanical Construction segment performance was exceptional with operating income growth of 24% and 8.5% operating income margins.
Our Electrical Construction segment had strong operating income margins of 7.2%, despite having a 20.17% [Phonetic] decrease in revenues as they were more significantly impacted by the mandated shutdowns than our Mechanical Construction segment was, and further the Electrical Construction segment is more exposed to the volatility caused by our oil and gas exposure in this segment.
Our US Building Services segment had a very strong quarter with 5.6% operating income margins, despite a 9.8% revenue decrease.
We saw demand improved through the quarter, especially in our mechanical services and government services businesses.
We exited the quarter in a nice hot steamy summer with an even more competitive cost structure.
Our Industrial Services segment is also moving ahead in a very challenged market.
Our customers are cutting costs, deferring work and fighting through a really tough market for them and as a result, for us.
We will continue to maximize any opportunity available, cut costs and look to provide flexible solutions when possible.
I don't anticipate this trend to improve until at least the first quarter of 2021 at the earliest.
We are fortunate to be a segment leader and have long-standing relationships with the most important customers in the downstream refining and petrochemical markets.
Our UK segment had a strong quarter and we expect this execution and performance to continue.
They faced many of the same challenges that our US Building Services segment faced.
However, our UK customer base is more institutional, manufacturing and government-focused, and as a result, we have field [Phonetic] employment throughout the UK shutdown as we were deemed essential in many cases.
So how did we continue performing in this environment and how will we continue to perform.
My comments cut across all EMCOR reporting segments.
We outlined some of these actions on our first quarter call in April and we executed well.
So number one, we focused on employee safety first and as a result, we were able to staff drop safely and with the right people.
Said differently, our people had confidence that we would do the right thing.
We limited guidelines to keep operating, and when necessary to reopen.
We aggressively procured PPE, that's the personal protective equipment upfront.
There are employees needed to keep working and we execute the training necessary to work safely in this environment.
We communicated at all levels with a focus on safety, execution and results.
Our flat organizational structure helped our communications remain effective and unhampered despite COVID-related challenges.
Number two, we thoroughly, quickly implement all the different government mandates and programs with respect to COVID.
Our staff did a superb job in distilling these mandates and programs into specific actions for our subsidiary operations to continue operating productively and safely and in compliance with these varied government mandates.
Number three, we aggressively cut SG&A through both the short and long-term measures.
We cut executive pay 25% in the quarter, cut other salary employees pay in the quarter, furloughed staff, permanently laid off salary staff, cut almost all travel and entertainment expenses, and reduced any additional discretionary expenses.
We reduced $21 million in the quarter versus the year-ago period, and when removing incremental SG&A for businesses acquired, we cut $28 million on an organic basis.
I expect about half of those cuts to be permanent.
We acted fast and decisively and it shows in our results.
Further, we aggressively right-sized our craft labor workforce to match demand through layoffs and furloughs.
Number four, we knew we had to comp out what would be reduced productivity because of increased use of PPE and the implementation of other COVID-related safety measures.
We have successfully combated this challenge and met this challenge by working with our customers and our workforce to offer better scheduling, planning and work practices.
We believe for the most part that we are near breakeven on a productivity basis to where we would have been pre-COVID.
Number five, we trained our field and sales force on IAQ, that is, indoor air quality and other building enhancement products and projects during the initial phases of COVID, so we would be ready to provide solutions for our customers to be able to return to their facilities with confidence and in an improved indoor environment.
Number six, our subsidiary leaders led us well as any organization that I could imagine.
I'll say that again.
Our subsidiary leaders led us well as any organization that I could imagine and they executed all the above initiatives I just mentioned in an exceptional manner.
With all that said, we leave the quarter with a strong RPO position of $4.6 billion [Phonetic], our balance sheet has strengthened through the quarter despite adverse conditions and an even more competitive cost structure than we already had.
With all that said, I will turn the discussion over to Mark.
Over the next several slides, I will supplement Tony's opening commentary on EMCOR's second quarter performance, as well as provide an update on our year-to-date results through June 30.
So let's revisit and expand our review of EMCOR's second quarter performance.
Consolidated revenues of $2 billion, were down $310.2 million or 13.3% over quarter two 2019.
Our second quarter results include $50.2 million of revenues attributable to businesses acquired, pertaining to the time that such businesses were not owned by EMCOR in last year's second quarter.
Acquisition revenues positively impacted both our United States Mechanical Construction and United States Building Services segments.
Excluding the impact of businesses acquired, second quarter consolidated revenues decreased approximately $360.4 million or 15.5%.
All of EMCOR's reportable segments experienced quarter-over-quarter revenue declines as a result of the containment and mitigation measures mandated by certain of our customers, as well as numerous governmental authorities in response to COVID-19.
This resulted in facilities closures and project delays, which impacted our ability to execute on our remaining performance obligations in many of the geographies that we serve.
The specifics to each of our reportable segments are as follows.
United States Electrical Construction segment revenues of $445.9 million, decreased $123.5 million or 21.7% from 2019 second quarter.
In addition to the negative impact of the COVID-19 pandemic on second quarter revenues, the unfavorable variance year-over-year was partially attributable to 2019's all-time record quarterly revenue performance.
Revenue declines in most of the market sectors we serve were partially offset by quarter-over-quarter revenue growth in the institutional and hospitality market sectors.
United States Mechanical Construction segment revenues of $790.4 million, decreased $32.7 million or 4% from quarter two 2019.
Excluding acquisition revenues of $47.9 million, this segment's revenues decreased organically 9.8% quarter-over-quarter.
Revenue declines in manufacturing and commercial market sector activities were muted by revenue gains quarter-over-quarter within the institutional transportation and healthcare market sectors.
The prior-year quarter also represented an all-time quarterly revenue record for our US Mechanical Construction segment.
Second quarter revenues from EMCOR's combined United States Construction business of $1.24 billion, decreased $156.2 million or 11.2%.
Some of this growth in RPOs has come at the expense of revenue generation during the second quarter due to COVID-19.
However, we were also successful in obtaining new project opportunities during this period.
United States Building Services quarterly revenues of $472.4 million, decreased $51.3 million or 9.8%.
Excluding acquisition revenues of $2.3 million, this segment's revenues decreased 10.2% from the record results achieved in the second quarter of 2019.
Reduced project and controls activities within their mobile mechanical services division largely attributable to the impact of COVID-19 as well as large project activity in their Energy Services division were the primary drivers of the quarterly revenue decline.
Additionally, as mentioned on previous calls, we are continuing to see a reduction in IDIQ project activity within our government services division due to both a smaller contract base as well as an overall reduction in government spending.
EMCOR's Industrial Services segment was significantly impacted by the sharp decrease and volatility in crude oil prices resulting from geopolitical tensions between OPEC and Russia, as well as the dramatic reduction in demand for refined oil products due to the containment and mitigation measures implemented in response to COVID-19.
These factors have resulted in a decreased demand for our services, as this segment's customer base has initiated severe cost containment measures, which have resulted in the deferral or cancellation of previously planned maintenance, as well as the suspension of most capital spending programs.
As a result, our Industrial Services segment's second quarter revenues declined $212.2 million from the $295.5 million reported in 2019 second quarter.
This represents a reduction of $83.3 million or 28.2%.
United Kingdom Building Services revenues of $93.1 million, decreased $19.4 million or 17.3% from last year's quarter.
The period-over-period revenue reduction was primarily attributable to a decrease in project activities resulting from COVID-19 containment and mitigation measures instituted by the UK government.
This segment's quarterly revenues were also negatively impacted by $3.4 million of foreign exchange headwinds.
Selling, general and administrative expenses of $205.2 million, represent 10.2% of revenues and reflect a decrease of $21.1 million from quarter two 2019.
SG&A for the second quarter includes approximately $7.2 million of incremental expenses from businesses acquired inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter decrease of approximately $28.3 million.
The decline in organic selling, general and administrative expenses was primarily due to certain cost reductions resulting from our actions taken in response to the COVID-19 pandemic.
This includes a period-over-period decrease in salaries expense due to both reduced head count as well as temporary salary reductions.
Additionally, incentive compensation expenses decreased due to lower projected annual operating results relative to incentive targets when compared to the prior year.
Lastly, we have experienced reductions in both medical claims as well as certain discretionary spending such as travel and entertainment costs quarter-over-quarter.
The increase in SG&A as a percentage of revenues is due to the reduction in quarterly consolidated revenues, without a commensurate decrease in certain of our fixed overhead costs as we do not deem the current operating environment to be permanent.
During the second quarter, we identified certain indicators of impairment within those of our businesses that are highly dependent on the strength of the oil and gas and related industrial markets.
Previously referenced volatility in crude oil prices as well as the containment and mitigation measures implemented in response to the COVID-19 pandemic significantly impacted the demand for our services within these businesses resulting in revised near-term revenue and operating margin expectations.
These negative developments additionally resulted in uncertainty within the US equity markets, which led to an increase in the weighted average cost of capital utilized in our impairment analysis.
The combination of lower forecasted revenue and profitability along with the higher weighted average cost of capital has resulted in the recognition of $232.8 million non-cash impairment charge during the quarter.
$225.5 million of this charge pertains to a write-off of goodwill associated with our Industrial Services reporting unit, while the remaining $7.3 million relate to the diminution in value of certain trade names and fixed assets within our United States Industrial Services and our United States Electrical Construction segments.
As a result of the non-cash impairment charge just referenced, we are reporting an operating loss for the second quarter of 2020 of $122.6 million, which represents a decrease in absolute dollars of $242.6 million when compared to operating income of $120 million reported in the comparable 2019 period.
On an adjusted basis, excluding the impact of the non-cash impairment loss, our second quarter operating income would have been $110.1 million, which represents a period-over-period decrease of $9.8 million or 8.2%.
While adjusted operating income has declined, we have experienced an increase in operating margin on an adjusted basis.
For the second quarter of 2020, our non-GAAP operating margin was 5.5% compared to our reported operating margin of 5.2% in the second quarter of 2019, reflecting strong operating conversion within most of our reportable segments.
Considering the operating environment during the quarter, our entire team did a great job.
Specific quarterly performance by reporting segment is as follows.
Our US Electrical Construction Services segment operating income of $32.2 million, decreased $11.6 million from the comparable 2019 period.
Reported operating margin of 7.2%, represents a 50 basis point decline over last year's second quarter.
The reduction in quarterly operating income and operating margin is due to the significant decrease in revenues as well as the impact of favorable project closeouts within 2019 second quarter.
Second quarter operating income of our US Mechanical Construction Services segment of $66.9 million, represents a $13 million increase from last year's quarter.
Despite the disruption caused by the COVID-19 pandemic, this segment experienced an increase in gross profit within the commercial, institutional and healthcare market sectors.
Operating margin of 8.5%, improved 190 basis points over the 6.6% operating margin generated in 2019, primarily due to a more favorable revenue mix than in the year-ago quarter.
Our total US Construction business is reporting $99.1 million of operating income and an 8% operating margin.
This performance has improved by $1.4 million and 100 basis points of operating margin from 2019 second quarter.
In addition, it represents a sequential improvement from 2020 first quarter in both absolute dollars and margin performance.
Operating income for US Building Services is $26.4 million or 5.6% of revenues.
And although reduced by $1.6 million from last year's second quarter, represents a 30 basis point improvement in operating margin.
The quarter-over-quarter reduction in operating income was due to lower gross profit contributions from their mobile mechanical services and energy services division as a result of reductions in revenues as previously mentioned.
The improvement in operating margin is due to a better mix of service maintenance and repair activities within this segment's mobile mechanical services division.
Our US Industrial Services segment operating income of $3 million, represents a decrease of $13.1 million from last year's second quarter operating income of $16 million.
Operating margin of this segment for the three months ended June 30, 2020 was 1.4% compared to 5.4% for the three months ended June 30, 2019.
The decrease in operating income and operating margin was primarily driven by the reduction in quarter-over-quarter revenues, which resulted from the adverse market conditions mentioned during today's call, as well as significant pricing pressure due to limited shop services opportunities.
UK Building Services operating income of $5.4 million was essentially flat with 2019 second quarter, as foreign exchange headwinds accounted for the modest period-over-period decline.
Operating margin of 5.7%, represents an 80 basis point increase over last year as a result of improved maintenance contract performance as well as the implementation of cost containment measures which resulted in SG&A expense reductions.
We are now on Slide 9.
Additional financial items of significance for the quarter not addressed on the previous slides are as follows.
Quarter two gross profit of $315.3 million is reduced from 2019 second quarter by $31.1 million or 9%.
Despite this reduction in gross profit dollars, we did experience an improvement in gross profit as a percentage of revenues with the reported gross margin of 15.7%, which is 80 basis points higher than last year's quarter.
We are reporting a loss per diluted share of $1.52 as compared to earnings per diluted share in last year's second quarter of $1.49.
On an adjusted basis, after adding back the impairment loss on goodwill, identifiable intangible assets, and other long-lived assets, non-GAAP diluted earnings per share is $1.44 as compared to the same reported at $1.49 in last year's quarter.
This represents a modest reduction of $0.05 or just over 3%.
Not to be repetitive in my commentary, but in light of COVID-19 in the economic backdrop we all experienced during the last several months, EMCOR has done a great job of maximizing returns were given the opportunity to deliver its services.
With the quarter commentary complete, let's turn our attention to EMCOR's first six month results.
Revenues of $4.31 billion, represent a decrease of $169.1 million or 3.8% when compared to revenues of $4.48 billion in the corresponding prior-year period.
Our second quarter revenue declines offset revenue gains posted in quarter one at each of our US Mechanical Construction, US Building Services, US Industrial Services and UK Building Services segments, while our US Electrical Construction Services segment has had two consecutive quarters of revenue contraction.
Year-to-date gross profit of $648.3 million is lower than the 2019 six-month period by $6.8 million or a modest 1%.
Year-to-date gross margin is 15%, which favorably compares to 2019's year-to-date gross margin of 14.6%.
Gross margin improvement was largely driven by our combined US Construction business as well as our UK Building Services segment.
Selling, general and administrative expenses of $432.2 million for the 2020 six-month period, represent 10% of revenues compared to $432.4 million or 9.6% of revenues in 2019.
While SG&A for the year-to-date period has decreased nominally from the prior-year, the substantial cost reduction measures implemented in the second quarter have positioned us at a lower run rate than at this time last year.
We reported a loss per diluted share of $0.14 for the six-month ended June 30, 2020, which compares to diluted earnings per share of $2.77 in the corresponding 2019 period.
Adjusting the results for the current year to exclude the non-cash impairment loss on goodwill, identifiable intangible assets, and other long-lived assets, results in a non-GAAP diluted earnings per share of $2.78.
When comparing this as adjusted number to last year's reported amount of $2.77, we are reporting a $0.01 increase.
I would like to remind everyone on the call that our performance for the first six months of 2019 set records for most financial metrics with earnings per share in particular, exceeding the prior benchmark by almost 30%, not to marginalize the sizable impairment charge taken this year, but the fact that on an adjusted basis, we were able to slightly exceed our previous year record.
Despite the extraordinary market challenges presented, I believe EMCOR has done quite an exceptional job.
My last comment on this slide pertains to EMCOR's income tax rate for 2020.
As noted on the slide, EMCOR's tax rate for the six months ended June 30, 2020 was 59.4%.
Our tax rate for the remainder of 2020 will continue to be impacted by the impairment charges recorded during the second quarter, the majority of which were nondeductible for -- tax purposes.
So with that said, at this time, our full-year estimated tax rate is between 58% and 59%.
However, this can change if any discrete tax events occur during the remainder of the year.
We are now on Slide 11.
I spent some time during our quarter one earnings call detailing EMCOR's liquidity profile.
As a reminder, the first quarter is historically our weakest from a cash generation standpoint, due to the funding of prior-year earned incentive awards.
In addition, 2020's first quarter was negatively impacted by our inability to monetize certain of our first quarter revenue activities due to delays in customer billings resulting from our previously communicated ransomware attack.
However, as Tony mentioned, we had record operating cash flow for the first half of the year and as a result, our liquidity profile has improved from our already strong position.
With strong operating cash flow through June, we have paid down the $200 million revolving credit borrowings outstanding as of March 31, 2020 and our cash on hand has increased to $481.4 million from the approximately $359 million on our year-end 2019 balance sheet.
The improvement in operating cash flow was due to excellent working capital management by our subsidiary leadership teams as well as the benefit of the deferral of certain tax payments due to government measures enacted in response to the COVID-19 pandemic.
These measures which included the deferral of estimated US federal income tax payments, the employer's portion of Social Security tax payments.
Please note that while we will continue to benefit from some of these deferrals throughout the remainder of 2020, our estimated US federal tax payments were funded subsequent to the quarter on July 15.
Changes in additional key balance sheet positions are as follows.
Working capital levels have increased primarily due to the increase in cash just referenced.
Goodwill and identifiable intangible assets have decreased since December 31, 2019, largely as a result of the impairment charges previously referenced, in addition intangible assets have decreased as a result of $29.4 million of amortization during the year-to-date period.
Stockholders' equity has declined due to the operating loss recognized during the first six months of 2020.
EMCOR's debt to capitalization ratio of 13.5%, is essentially flat when compared to our position at 2019's year-end and is reduced from 19.9% at March 31, 2020.
We have just over $1.2 billion of availability under our revolving credit line and anticipate that we will continue to generate positive operating cash flow during the last six months of calendar 2020.
EMCOR's balance sheet and resulting liquidity position remains strong and we continue to preserve our flexibility in evaluating all market opportunities.
In short, we continue to win work and have seen our small productivity improve through the second quarter as it hit a low point in April for bookings and execution.
Some comparisons to consider.
Total RPOs at the end of the second quarter were just about $4.6 billion, up $365 million or 8.6% when compared to the June 2019 level of $4.23 billion.
RPO has also increased $167 million from the first quarter of 2020, reflective of the continued demand as we are seeing for market -- continued demand we are seeing for our services in our markets.
So for the first six months of 2020, total RPOs increased $555 million or 13.8% from December 31.
With all this growth, only $11 million relates to a tuck-in acquisition.
So almost all of that growth is organic.
Domestic RPOs have increased $346 million or 8.4% since the year-ago period, driven mainly by our Mechanical Construction segment.
We did burn through some Electrical Construction project as we completed some complex work.
However, we expect to backfill these projects as we continue to see demand, especially in the high-tech and data center market, and high-tech for us means semiconductor and the data center market.
As the economy opens up, combined with the hotter weather, we are getting more access to facilities and seeing a resumption of our work.
Additionally, both of our Industrial Services and EMCOR UK segments increased RPO level by roughly 15% respectively from June 30, 2019.
On the right side of the page, we have, on 12, we show RPOs by market sector.
Of the eight market sectors listed, all had year-over-year RPO increases, except for manufacturing and industrial.
This is not to be confused with our Industrial segment.
Currently, we are in the process of completing some major food processing projects.
We continue to see demand for these large complicated projects and have a number of potential opportunities we are looking at.
Commercial project RPOs comprise our largest sector -- market sector to over 40% of the total.
This is a 19% increase from year-end, spurred by our data center projects.
And as we have said before, we are uniquely suited for these fast-paced, especially in the hyperscale projects from both electrical and mechanical perspective.
Other very active markets for us are healthcare, and water and wastewater, with these sectors being up 25% and 49% respectively from year-end 2019.
To-date, we have not seen any material slowdown in bidding opportunities apart from the mandated areas, that was New York, New Jersey, Boston and parts of California, and a little bit in Pennsylvania.
However, these areas are now open.
As I said earlier, the industry has adapted safety -- safe work practices and protocols to keep project progressing and especially to keep workers safe.
Finally, we are positioned very well to help our customers as they adjust our HVAC and building control systems to improve the IAQ and cleanliness of their buildings and other facilities.
It starts with the introduction of more outside air into the space as one of the simplest ways to make a building healthier.
But unfortunately, this makes the building less efficient.
We have strong experience in IAQ systems and our service companies and mechanical contractors know how to implement UV lights, bipolar ionization, enhanced filtering and control system modifications.
Most of this work will never make it into reported RPOs from a quarter-to-quarter basis and it is a quick turn, high margin activity.
Together, it will amount to a nice medium-sized project with good margins.
I do expect these IAQ additions to longer-term spur a more robust HVAC replacement market as we seek to increase efficiency to combat the increase in IAQ, especially the introduction of outside air.
So as I said in our first quarter call, I don't know exactly how all the work, specifically will rollout and how that booking will be, it's a fluid and challenging environment.
There will be bumps along the way.
However, the direction of future opportunities for a contractor like us remain pointed in a positive direction.
So now I'm going to close on Pages 13 to 14.
When we went through guidance in April, we said we had hoped that we can provide a view on the outlook for the remainder of the year during the second quarter earnings call.
We have spent the last few weeks debating internally whether to provide more definitive versus generic guidance for the remainder of the year.
We have decided to provide more specific guidance with some caveats which mostly deal with the external environment.
The main caveat is, we expect operating conditions to remain similar to today's operating conditions where most of the country is open for our type of work and we are deemed an essential [Phonetic] activity.
So we decided to give guidance as to the why and what as outlined below.
Subject to that main caveat, we are likely going to earn $5 to $5.50 diluted earnings per share this year on an adjusted basis adding back the impact of impairment.
I think revenues will likely be $8.6 billion to $8.7 billion.
In this revenue guidance is our expectation from our recent forecast where we believe that all of our reporting segments will grow revenues in the second half of the year versus the first half of the year except for our Industrial Services segment.
We now understand how COVID-19 has impacted our productivity.
We have seen stabilization in small project work and the summer heat is helping our US Building Services segment.
We have a strong RPO position and we see markets recovering, especially in our Mechanical and Electrical Construction segments and in our US and UK Building Services segments.
So how do you move up in this range largely will depend on three factors, the external market remains largely same or even improves from today's operating environment.
Under today's conditions, we can book and execute work, keep our workforce productive and we believe we will continue to see the recovery in the small project work.
IF the Industrial Services segment -- our folks have an opportunity to help customers in an unexpected way, then we will perform slightly better than expected.
And we have no major project disruptions or any new significant customer bankruptcies.
So as far as capital allocation, the dividend is safe for the foreseeable future.
However, we are unlikely to make any more share repurchases in the near term.
We will look to execute sensible tuck-in acquisitions, where we have decent visibility into and belief in the long-term success of the acquisition.
That's really no different than any time we buy a company, and we are based on the business, the market and the improvements we can make.
We have several potential Mechanical or Electrical Construction segment acquisitions and are in the preliminary stage of discussion on -- several mechanical services, a few small ones and fire protection acquisitions that we will likely execute.
| q2 non-gaap earnings per share $1.44 excluding items.
q2 loss per share $1.52.
sees fy 2020 revenue $8.6 billion to $8.7 billion.
sees fy 2020 non-gaap earnings per share $5.00 to $5.50.
emcor group - during q2, recorded significant impairment charge primarily related to u.s. industrial services segment.
|
We had an exceptional quarter.
As reported with respect to operating income at $135.9 million, operating income percentage at 6.2% and with respect to earnings per diluted share at $1.76 on a non-GAAP adjusted basis.
We earned revenues of $2.2 billion in the quarter and had operating cash flow of $270 million.
We had excellent operational performance and cost control.
Our team executed with focus, discipline and precision.
We continue to take steps to keep our skilled trades workforce safe, motivated and productive.
We achieved this performance despite a very difficult operating environment for our EMCOR Industrial Services segment, which you know focuses on downstream, petrochemical and oil and gas.
We have structurally reduced our SG&A by about $7 million to $9 million per quarter on a go-forward basis.
The exceptional performance of our segments billed in the industrial services GAAP, thus demonstrating how the diversity and balance in EMCOR can work for our shareholders.
I will cover some of the highlights by segment, and I will cover the broad themes and practices that have driven our performance during these challenging times.
Our electrical and mechanical construction segments had outstanding performance in the quarter and on a year-to-date basis.
We leveraged our cost structure across a solid mix of projects to earn strong and robust operating income margins of 9.2% in our Electrical Construction segment and 9% in our Mechanical Construction segment.
We leveraged a lower cost structure, but more importantly, had exceptional field performance on our projects.
We did benefit on some project closeouts and resolutions.
We always have some of those, something that Mark will cover in more detail.
But the underlying performance and productivity in these segments is as good as we have ever had.
Our building -- U.S. Building Services segment performed exceptionally well.
With a record quarterly operating income percentage of 6.9%.
Our commercial site-based business and their best third quarter ever and resets our cost base to position us for even more success in the future as we grow the business.
We have a very good customer mix.
Our customers are demanding, but by involving us in their maintenance capital spending they provide us with the opportunity to add value through incremental small project and service activity.
Our Government business also had a very good quarter.
In addition, we excellent repair service and project performance in our mobile mechanical services division.
Our repair service is aided by a hot summer, coupled with significant demand for our IAQ or indoor air quality product and services.
We also are near flat year-to-date for project bookings on an organic basis, which shows significant recovery from the large drop in organic bookings in April and May.
We also completed a nice acquisition in August, that will build our project capabilities and allow for long-term service growth in the Washington, D.C. market.
Our Industrial Services segment had a tough quarter in line with what we expected and discussed on our second quarter earnings call.
Demand has dropped significantly across the industry.
And that, coupled with successive hurricanes made for a very difficult quarter.
This is a tough environment for industrial services as we focus on petrochemical and refining.
However, we are well positioned with our customers rebound, we have reset the business through aggressive cost-cutting and redeploying personnel to the work that is available.
The issue is our field supervision is absorbed and productive.
However, they are capable of managing much larger work scopes versus what is available today, and that is where the leverage is in this segment.
Our U.K. segment continues to steady performance and continues to build on its strong market position.
Our strong customer relationships give us opportunities to not only meet their service needs, but also their maintenance and project retrofit needs.
I want to take this opportunity to share with you how we've succeeded in this challenging operating environment across EMCOR.
These actions and themes are why we have had this exceptional year-to-date performance across our business.
Number one, we kept our focus as an organization.
As we have moved through this ever-changing environment in 2020, we have stayed focused on accomplishing our mission for our customers.
We are already a flat organization.
And we had direct communication at multiple levels.
We became even flatter with even better communication across our company.
Number two, employee safety is and has been our number one priority throughout this pandemic.
Our people were able to keep this priority paramount as it is one of our core values.
We just had to implement these practices in a different way.
Our team knows we avoid short cuts and we always emphasize worker safety.
This unrelenting focus and commitment to safety is not new to us, and it is one of the main reasons we can fill the best team in the industry.
Number three, would work together across this large decentralized organization by focusing on the task at hand, and we have sought to comply at all times with a multitude of regulations, programs and procedures in this constantly changing environment.
Our staff has made sure that our subsidiaries had the best available information to implement the practices needed to keep progress moving on a project or a service demand.
Again, teamwork and mutual respect for each other are core values of EMCOR.
Number four, we stayed focused not only on safety, but also productivity.
Our people took ownership of job sites, brought solutions forward that allowed us to at least maintain the productivity we bid in the jobs, through better scheduling, adjusted work practices, more prefabrication and better job site logistics.
In many ways, we were uniquely trained to perform in this constantly changing environment.
We are a team of very successful trade contractors who know how to react and adapt to changing markets and job site conditions.
Number 5, we have positioned ourselves into some good long-term markets, which I will talk about later, such as healthcare, manufacturing, high-tech manufacturing, data centers, commercial and food processing.
We offer valuable services in these markets through our electrical trades, our HVAC technicians are pipers, welders, millwright, sprinkler fitters and plumbers.
We are able to move between markets with scale and agility and can handle the most complex construction and service opportunities within these markets.
Number six, we were prepared and trained to serve our customers with new products when the pandemic hit.
We bundled together our services and products related to IAQ/indoor air quality and building wellness and had these solutions ready to present to our customers when we were able to reenter buildings, campuses and industrial facilities.
We've helped and continue to help our customers reopen with more peace of mind by improving the airflow and air quality in their workplaces.
We became leaner and more productive.
We cut costs early and deep in some of our businesses.
We did not wait to react.
We found new ways to work through technology.
And finally, number eight, we leveraged our scale, our suppliers work with us to make sure we had the necessary personal protective equipment necessary for our people to do their jobs.
We had the job materials we needed to be successful, despite supply disruptions that may have impacted others.
We shared ideas on how to keep safe, but also stay productive.
For me, it's been humbling to see this high level of execution during these difficult times.
It speaks to the leadership of our segment and subsidiary leaders who look for solution when obstacles are in front of them.
And our highly skilled and dedicated workforce who continue to work and serve our customers throughout these difficult times driven by this pandemic.
And with that, Mark, I'll turn it to you.
Over the next several slides, I will augment Tony's opening commentary on EMCOR's third quarter performance as well as provide an update on our year-to-date results through September 30.
So let's revisit and expand our review of EMCOR's third quarter performance.
Consolidated revenues of $2.2 billion are down $86 million or 3.8% from quarter 3, 2019.
Our third quarter results include $81.4 million of revenues attributable to businesses acquired, pertaining to the time that such businesses were not owned by EMCOR in last year's third quarter.
Acquisition revenues positively impacted both our United States Mechanical Construction and the United States Building Services segments.
Excluding the impact of businesses acquired, third quarter consolidated revenues decreased approximately $167.5 million or 7.3%.
Unlike our results for the second quarter of 2020, where each of our reportable segments had quarter-over-quarter revenue declines we did see revenue gains in three of our five segments during the third quarter of this year.
However, when you remove the impact of businesses acquired, all of our U.S. reportable segments experienced organic revenue declines period-over-period, as the effects of the COVID-19 pandemic as well as the disruption within the oil and gas markets are still impacting a number of our businesses.
United States electrical construction revenues of $508.9 million decreased $45.8 million or 8.3% from 2019's third quarter.
Revenue declined across multiple market sectors due to the continuing impact of the pandemic, including the associated containment and mitigation measures as well as the curtailment of certain capital spending by some of our customers.
This segment additionally experienced a significant reduction in revenues within the manufacturing or industrial market sector, where certain of our electrical businesses perform services for both midstream and upstream oil and gas customers.
Not dissimilar to our Industrial Services segment, the Electrical Construction segment has experienced numerous project deferrals, specifically in the Manufacturing and Industrial market sector resulting from cost control actions initiated by many of their customers within the broader oil and gas industry.
United States Mechanical Construction segment revenues of $891.5 million, increased $22.3 million or 2.6% from quarter three of 2019.
The results of this segment represent record third quarter revenue performance, excluding acquisition revenues of $61.1 million, the segment's revenues decreased $38.8 million or 4.5% organically.
Reductions in quarter-over-quarter revenues from the manufacturing market sector inclusive of activities within the food processing submarket sector as well as the healthcare market sector due to project completions in the prior year are the primary reasons for this segment's organic revenue decline.
EMCOR's total Domestic Construction business third quarter revenues of $1.4 billion decreased by $23.5 million or 1.6%.
United States Building Services quarterly revenues of $551.5 million increased $19.4 million or 3.7% and represents an all-time quarterly record for this segment.
Excluding acquisition revenues of $20.3 million, this segment's revenues decreased approximately $900,000 or less than 0.25%.
Reduced building control project activities due to access restrictions created by the COVID-19 pandemic were almost entirely offset by increased small project revenues, including indefinite delivery, indefinite quantity project volume from this segment's government services division as well as an increase in demand for certain services aimed at improving indoor air quality in response to the pandemic and in line with the recommendations from the CDC.
United States Industrial Services revenues of $139.7 million decreased $94.4 million or 40.3% and as this segment continues to be impacted by the negative macroeconomic conditions and uncertainty within the markets in which it operates.
Additionally, our quarterly performance within this segment was adversely affected by work stoppages resulting from hurricane and tropical storm activity in the Gulf Coast region, where the majority of our industrial services operations are located.
United Kingdom Building Services segment revenues of $110.1 million increased $12.5 million or 12.7% from last year's quarter.
Revenue gains for the quarter resulted from new maintenance contract awards as well as strong project activity across our customer portfolio.
In addition, revenues of this segment were positively impacted by $5 million as a result of favorable foreign exchange rate movements within the quarter.
Selling, general and administrative expenses of $226.8 million represent 10.3% of third quarter revenues and reflect an increase of $6.7 million.
The current year's quarter includes approximately $8.9 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic quarter-over-quarter decrease in selling, general and administrative expenses of approximately $2.2 million.
SG&A expenses for the third quarter of 2019 and were favorably impacted by $4.5 million of insurance recovery and legal settlements within the Industrial Services segment.
When excluding these recoveries from the prior year period, the adjusted organic decline in 2020's third quarter SG&A is $6.7 million.
Quarter-over-quarter reductions in salaries and travel and entertainment expenses due to a combination of cost-cutting measures and the continuing impact of the COVID-19 pandemic were partially offset by an increase in quarterly incentive compensation expense due to EMCOR's improved operating performance during the period and our revised upward expectations for full year 2020.
The increase in SG&A as a percentage of revenues is due to the reduction in quarterly consolidated revenues without a commensurate decrease in certain of our fixed overhead costs as we do not deem the current operating environment to be permanent.
This is consistent with our assessment during this year's second quarter.
Additionally, with quarter-over-quarter a sequential increase in total incentive compensation expense previously mentioned, our SG&A as a percentage of revenues was unfavorably impacted by approximately 50 basis points within the third quarter of 2020.
Reported operating income for the quarter of $135.9 million represents a $20.1 million increase or 17.4% as compared to operating income of $115.7 million in 2019's third quarter.
This represents an all-time quarterly operating income record for EMCOR, which is quite remarkable performance when you consider the economic backdrop.
Our third quarter operating margin is 6.2%, and which favorably compares to the 5.1% of operating margin reported in last year's third quarter.
We experienced operating margin expansion within each of our reportable segments other than our U.S. Industrial Services segment, which is reporting an operating loss for the quarter and our U.K. Building Services segment, which was essentially flat period-over-period.
Specific quarterly performance by reporting segment is as follows: Our U.S. Electrical Construction segment operating income of $47.1 million increased $13.4 million from the comparable 2019 period.
Reported operating margin of 9.2% represents a 310 basis point improvement over last year's third quarter.
This improvement in both operating income dollars and operating margin is largely attributable to increased gross profit contribution from commercial market sector activities, inclusive of inclusive of numerous telecommunication construction projects.
In addition, operating income and operating margin of this segment benefited from favorable project closeouts within the transportation and institutional market sectors, which positively impacted quarterly operating margin in the current year by 70 basis points.
Third quarter operating income of our U.S. Mechanical Construction Services segment of $80 million represents an $18.8 million increase from last year's quarter, while operating margin in the quarter of 9% and represents a 200 basis point improvement over 2019.
Despite the impact of the COVID-19 pandemic, this segment has experienced increased gross profit from projects within the majority of the market sectors in which it operates.
In addition, a more favorable mix of work with within both the manufacturing and the commercial market sectors drove the improvement in quarterly operating margin.
Our combined U.S. construction business is reporting a 9.1% operating margin and $127.1 million of operating income, which has increased from 2019's third quarter by $32.3 million or 34%.
For the third quarter of 2020, operating income and operating margin for our U.S. Building Services segment was $38.2 million and 6.9%, respectfully.
The performance of this segment represents an all-time quarterly record in terms of both operating income and operating margin.
Operating income increased by $3.2 million over last year's third quarter, and operating margin improved by 30 basis points.
These increases were primarily due to increased gross profit and gross profit margin from this segment's commercial site-based services division.
In addition, this segment's results for the current quarter benefited from lower selling, general and administrative expenses due to cost-cutting measures enacted in response to the COVID-19 pandemic.
Our U.S. industrial services operating loss of $9.8 million represents a decrease of $15.4 million compared to operating income of $5.6 million in last year's third quarter.
These conditions have resulted in reduced capital spending and the implementation of various cost-cutting measures by certain of our customers, which has resulted in a decrease in demand for the services provided by this segment.
Compounding this reduced demand, and as I referenced during my revenue commentary, the Gulf Coast region has been impacted by numerous named storms during 2020's hurricane season, which resulted in the suspension of planned maintenance activities as our customers focused on storm preparation and recovery efforts.
U.K. Building Services operating income of $5.3 million represents an approximately $600,000 increase over 2019's third quarter due to an increase in gross profit within the segment.
Operating margin of 4.8% is slightly reduced from 2019's third quarter operating margin of 4.9%.
We are now on slide nine.
And additional financial items of significance for the quarter not addressed on my previous slides are as follows: quarter three gross profit of $363.2 million or 16.5% of revenues is improved over last year's quarter by $27.2 million and 180 basis points of gross margin.
We experienced quarter-over-quarter improvement in gross profit dollars in all reportable segments other than our Industrial Services segment due to the unfavorable market conditions previously outlined.
Diluted earnings per common share of $1.11 and compares to $1.45 per diluted share in last year's third quarter.
Adjusting our record quarterly performance for the negative impact on our income tax rate resulting from the nondeductible portion of the noncash impairment charges recorded during the second quarter of this year, non-GAAP diluted earnings per share for the quarter ended September 30, 2020, and is $1.76, which favorably compares to last year's quarter by $0.31 or 21.4%.
My last comment on this slide is a continuation of my income tax rate commentary which, as you can see on the bottom of slide nine, is 54.7% for the quarter due to the nondeductibility of the majority of quarter two's noncash impairment charges.
With one quarter of 2020 remaining, I anticipate that our full year tax rate will be between 53% and 54%, which is a downward revision from the previous range provided on our quarter two call.
With my quarter commentary complete, let's now turn our attention to EMCOR's year-to-date results through September 30.
Revenues of $6.52 billion, representing a decrease of $255.1 million or 3.8% and when compared to revenues of $6.77 billion in the corresponding prior year period.
Our year-to-date results include $214.1 million of revenues attributable to businesses acquired, pertaining to the period of time that such businesses were not owned by EMCOR in the 2019 year-to-date period.
Excluding the impact of businesses acquired, year-to-date revenues decreased organically 6.9%, primarily as a result of the significant revenue contraction experienced during quarter 2, given the containment and mitigation measures mandated by certain of our customers as well as numerous governmental authorities in response to COVID-19.
Year-to-date gross profit of $1 billion is higher than the 2019 nine month period by $20.4 million or 2.1%.
Year-to-date gross margin is 15.5% and which favorably compares to 2019's year-to-date gross margin of 14.6%.
The year-over-year gross margin improvement was largely driven by our combined U.S. Construction business.
Selling, general and administrative expenses of $659 million represent 10.1% of revenues as compared to $652.5 million or 9.6% of revenues in the prior year period.
Year-to-date 2020 includes $25.2 million of incremental SG&A, inclusive of intangible asset amortization pertaining to businesses acquired.
Excluding such incremental cost, our SG&A has decreased on an organic basis, by approximately $18.7 million year-over-year.
Reported operating income for the first nine months of 2020 is $119.2 million, adjusting this amount to exclude the noncash impairment loss on goodwill, identifiable intangible assets and other long-lived assets recorded in the second quarter, results in non-GAAP operating income of $352 million for 2020's nine month period as compared to $338 million for the corresponding 2019 year-to-date period.
This adjusted non-GAAP operating income represents a $13.9 million or 4.1% improvement year-over-year.
Diluted earnings per common share for the nine months ended September 30, 2020, is $0.96 when adjusting this amount for the impact of the noncash impairment charges previously mentioned, non-GAAP diluted earnings per share was $4.54, and as compared to $4.22 in last year's nine month period.
This represents a $0.32 or 7.6% improvement period-over-period.
We are now on slide 11.
EMCOR's liquidity profile continues to improve as we just completed another quarter of strong cash flow generation, bringing our year-to-date operating cash flow to $546.8 million.
Our operating cash flow has benefited from the effective management of working capital by our subsidiary leadership teams, coupled with the impact of certain government measures enacted in response to the COVID-19 pandemic.
Which allow for the deferral of the employer's portion of social security tax payments and the remission of value-added tax for our U.K. subsidiary.
On a year-to-date basis, these measures have favorably impacted operating cash flow by approximately $81 million.
With this strong operating cash flow, cash on hand has increased to $679.3 million, from the approximately $359 million on our year-end 2019 balance sheet and is the primary driver of the increase in our September 30 working capital balance.
Other changes in key balance sheet positions of note are as follows: Goodwill has decreased since December 31, 2019, as a result of the noncash impairment charge recognized during the second quarter of 2020, partially offset by an increase in goodwill resulting from the businesses acquired during the 2020 year-to-date period.
Largely as a result of $44.8 million of amortization expense recorded during the first nine months of this year.
Our identifiable and tangible asset balance has decreased since December 31, 2019.
Similar to our goodwill balance, decrease was partially offset by incremental intangible assets recognized as a result of the acquisition of two businesses during the first nine months of this year.
Total debt has decreased by approximately $30 million since the end of 2019, reflecting our net financing activity during the year.
Although not included on this slide due to the periods presented, EMCOR has paid down approximately $273 million of borrowings under its credit facility, inclusive of borrowings executed during 2020.
And EMCOR's debt to capitalization ratio has decreased to 12.3% as of September 30.
Lastly, our stockholders' equity has decreased since December 2019 and as our share repurchase activity and dividend payments for the nine month period of 2020 have exceeded our net income due to the impairment loss recognized in the second quarter.
Due to our strong cash flow performance, in concert with our available credit, EMCOR remains in a very strong position to take advantage of any market opportunities that may be present in future periods.
Well, Mark, and that's what happens when we're in the third quarter, right?
Total RPOs at the end of the third quarter were a little over $4.5 billion, up $495 million or 12.3% when compared to the September 2019 level of $4 billion.
RPOs, likewise, increased the same amount, $494 million for the first nine months of 2020.
With all this growth being organic, except for approximately $86 million relating to two acquisitions in the current 12-month period.
Taken together, our Mechanical and Electrical Construction segment, RPOs have increased $409 million or 12.4% since the year ago period.
Sevenths growth is organic, with the balance being RPOs that came with our November '19 acquisition of BKI, a full-service mechanical contractor headquartered in the Atlanta area.
I should note here that thus far in 2020, BKI has more than doubled its RPOs total in the first nine months of this year as they continue to win work, including projects in the data center, manufacturing and healthcare markets.
The integration of BKI has gone very well due to the exceptional team they have.
They really are a terrific team, and we're thrilled to have them on our team.
Building Services segment RPOs increased in the quarter as this segment's small project, repair service work also continues to regain its footing.
Remember, the small project work in this segment was the first to fill the effect of the pandemic as building operations simply shut down.
We are getting in there now as facilities open up and more and more building owners and tenants are looking for ways to increase their indoor air quality in their facilities.
And I'll go a little deeper into IAQ on the next slide.
Project bookings are nearly flat on a year-to-date basis, which is a pretty good recovery, considering the deep drop in bookings we had in April and May.
On the right side of this page, we show RPOs by market sector.
Similar to a quarter ago, all eight market sectors listed at year-over-year RPO increases, except for Manufacturing/Industrial, where we have just completed some major projects and are looking at reloading for additional.
And we feel pretty good about that as we are in the midst of developing some some good prospects in the manufacturing sector as supply chains change, and we also are very strong in high-tech manufacturing.
Many of these projects come in pieces versus all once into our backlog.
Commercial project RPOs comprised our largest market sector at over 42% of total.
This is almost a 20% increase from the year-end, and it's really spurred by two things: really high-tech and data center projects it bears repeating.
our industry has -- has adopted the safety and work protocols to keep projects progressing with a larger goal of keeping workers safe.
Our protocols are working.
The industry keeps working and bidding opportunities continue in pretty much all sectors and geographic markets.
So I'm going to take the next two pages and cover on pages 13 and 14.
And what I'm going to discuss is some markets and opportunities where as we move forward, we believe, have some resiliency for us to operate in.
And I'm now going to turn to page 13, and it says future affects our markets.
We believe we have multiple pockets of resistance despite wider nonresidential uncertainty.
Let's go first to data centers.
This has only gotten stronger through the pandemic.
It was strong already.
And it demands our electrical, mechanical and fire protection demand across Mid-Atlantic, Pacific Northwest, Midwest and Southeast.
We've done a good job here, and we're one of the leaders, and we've also made some strategic acquisitions, especially in the last 15 months, not only in fire protection assets, but also key electrical contractors like we did in the Midwest and also in the Southeast, which is emblematic of our BKI acquisition.
And of course, we built organic capability here and build off long-term success in data center markets, and we are able to build these hyperscale on time, on budget and with speed.
It's important to note here that there's always changes in the data center market.
Projects get redesigned, they get moved.
They get delayed as they get redesigned, other ones get accelerated.
That was a routine course of business outside of the pandemic and really has little to do with the pandemic, in our case.
On the warehouse side, we continue to build out e-commerce supply chain, and we continue to see very strong demand on not only regular warehouses, we continue to see demand across cold storage.
This is especially true for our fire protection and sprinkler work.
In industrial manufacturing, we believe we are well positioned for electrical mechanical opportunities and millwright opportunities driven by the reshoring of supply chains to the Southeast and relocation from higher cost states and sites.
We do believe also that we'll have additional food processing opportunities.
Anecdotally, we won at least three jobs in the last four months, which would have been headed either to Mexico or overseas that are now being built in the Southeast.
On the healthcare side, we continue to see demand for our work, electrical, mechanical, fire protection and then eventually service.
Hospitals are looking to retrofit.
They're looking to build new facilities.
And they're looking to have more flexibility in their existing facilities and build new facilities.
We have grown backlog here.
We expect to continue to grow back on.
Now, look, this can be episodic.
Things come in and out on the big project side.
But the flip side of that is we're not doing as much service work as we typically have done in hospitals as they deal with the impacts of COO.
Long term, we expect to do more retrofit work.
People do things to be more flexible -- well think about it, we did a lot of work to create negative pressure environment through the pandemic in these hospitals.
We expect to continue to do that.
But -- and if you have a bigger casualty event, accidents, terrorist situations, they want to be able to do positive pressure.
So facilities are going to have to move between the 2.
And that's all about airflow and the kinds of work we do.
And then you're going to have to have enhanced Electrical Systems & Communication wiring in those facilities.
And we're uniquely positioned to help with those.
And we have great relationships with some of the biggest hospital systems in the country, and we helped them through the pandemic.
We helped them build some of their new facilities in the past, and we expect to do both in the future.
And I think you're starting to see the impact of that in our backlog.
On the water and wastewater site side, this, we think, is a good long-term market for us, especially in Florida.
And really there, they're looking for comprehensive construction services.
And in water and wastewater, many times, we serve as a prime contractor, bringing all trades and activities together.
Mechanical Services, we believe, has been a good market for us for a long, long time.
We have a terrific business.
Most of it rests in Building services some of our service operations rest in our Mechanical Construction segment.
And you can see that in our 10-Q.
We see growing demand stepping from maintenance deferrals.
We think there's going to be a lot of retrofit opportunities.
I'm going to cover both that and indoor air quality.
As we switch to page 14.
EMCOR has been a leader for a long time as you look at block one of HVAC capabilities.
HVAC is a big part of our business, and it can be up to one three or more of what we do in any given year.
If you look at it, we do new construction, of course, we can.
We could do big work.
We talked about that on some of those resilient markets on the page before, core, tenants fit out.
We're a great retrofit company.
We know how to do the energy retrofit work, we know how to engineer that energy retrofit work, and we know how to support and help all the ESCOs that are doing that energy retrofit work.
That equipment replacement, energy retrofit lighting upgrade, building control systems.
One of the things maybe we don't brag about enough is the capability that we have in that aftermarket of HVAC.
We're the leader there.
And we are the largest independent controls contractor on top of everything else.
And really what we seek to get to is building wellness, have the most efficient building, but have it be a place that's healthy.
Now as you move to Block two indoor our air quality, let's think about this at a high level.
Really the goal over the last 20 years.
And I've seen this from an OEM.
I've seen it from a service perspective.
I've seen it from a new construction perspective, has been to take in outside out of the building.
Outside air is inefficient, right?
In the summer with humidity, it causes an efficiency problem and the winter costs the same for obvious reasons.
And so we've worked real hard to take outside air out.
That all went by the wayside in the middle of March.
Now we're opening up air dampers that haven't been opened in a long time.
And actually, buildings are going back to 25 CFM per person, and that's cubic feet per minute.
And we had got that down to 15%.
And we had to safe and productive ways to do that, like demand control ventilation.
So what are we doing now on indoor air quality?
Well, a lot of it is, "hey, you've got to give people peace of mind", and you, as an owner, have to do everything possible to increase the wellness and indoor air quality of your building.
So how do you do that?
You do that through enhanced filtration.
We take things from a Merck 10 or 12 up to a 14 or 15.
You do that for UV Lamp Technology that gets better and better.
And this stuff actually works.
It reduces surface contamination.
And it increases airborne in activation, right?
So things pass-through the coil, pass across the air handler media.
And as a result, you make a cleaner.
Needle 0.5 polar ionization, we're one of the leaders in the implementation of that technology.
And as I talked about earlier, we spent a lot of time training on this all the way down through our technicians during the lockdown and the pandemic, and we were ready to go.
There's a recent case study here.
This is someone that has 240 buildings.
Mainly small packaged equipment.
So here, you have to attack it by getting into the mixing box.
And how do you do that?
You do that through UV because what you're trying to do, is get the surface contamination gone through UV lights.
We'll do this across 240.
We'll do this in 90 sites.
The goal is to demonstrate to the employees and actually have it happen as the indoor air quality gets better.
This was a large multi-state corporation with lots of sites.
And I've given a number that we thought it would be like a good medium-sized project.
This is actually much better than we thought it was going to be.
It's hard to quantify exactly what it will be, but it's something we can get in front of our customers with and help them drive productivity in their buildings by giving them a better workspace.
Now one of the things you have to think about is indoor air quality and efficiency work across purposes with each other.
I personally believe we've already had a good retrofit market.
That retro market is going to gain strength as we move through 2021 on the HVAC side.
And again, EMCOR, being the largest independent air conditioning contractor with a great retrofit capability, we'll clearly be in a position to help our customers balance into our quality against efficiency.
With that, I'm going to turn to the last two pages, 15 and 16, and I'm going to close out here.
Clearly, we have done much better than we expected when we withdrew guidance in April.
And then when we reinstated guidance with our second quarter earnings announcement, both of which we believe were the right thing to do.
Today, we are raising our guidance for earnings per share from continuing operations.
We will move to $5.90 to $6.10 non-GAAP adjusted earnings per share and revenues of around $8.7 billion.
In providing this revised guidance, we have assumed the following operating environment: First, we remain an essential service in most cases.
Second, we continue to execute productively in this environment.
Third, there are no significant shutdowns like we saw in March and April.
And for us, that means our sites, our projects are crafts.
Four, we expect to have continued strong performance from our Electrical and Mechanical Construction segments, Building Services and the U.K.
We still see pretty good opportunities that we are estimating and bidding and to date, we have seen no significant project deferrals outside of oil and gas, as Mark described it.
Now on the note, nonresidential market may move downward in the fourth quarter or continue to sort of be mixed.
We do expect that decline to be in the mid-single digits as we move into 2021.
This is still a big market.
And if you refer back to page 13, we have a lot of operating space in what we believe are resilient markets.
For industrial services, which is downstream, refining and petrochemical, for the most part, we do expect sequential improvement as we go from Q3 to Q4, but nothing significant for the balance of the year.
And as of today, we do expect the first quarter of 2021 to be better than the fourth quarter of 2020.
We have some visibility, not as much as we would typically have at this time.
However, we do not expect any significant contribution from this segment for the balance of the year.
Where we end up in this range now is largely a factor of job timing, completion and service demand.
As far as capital allocation, we will continue to return cash to shareholders for dividends and then we do expect to return to some level of share repurchase activity in the next few quarters.
We expect to continue to be a balanced capital allocator.
What I'm really excited about is we are rebuilding our pipeline of potential acquisitions and expect to start executing that pipeline in early 2021.
We expect those acquisitions to be similar to the acquisitions that we executed from 2018 to 2020, which really was a terrific period for us to grow our company through acquisition.
We certainly have the balance sheet to support such growth in our company.
And we, again, expect to remain balanced capital allocators.
| compname reports q3 earnings per share $1.11.
q3 earnings per share $1.11.
q3 revenue $2.2 billion versus refinitiv ibes estimate of $2.11 billion.
sees fy 2020 non-gaap earnings per share $5.90 to $6.10.
q3 non-gaap earnings per share $1.76.
sees fy 2020 revenue about $8.7 billion.
raising full-year 2020 guidance.
|
Joining me on the call today are Johnson Controls' Chairman and Chief Executive Officer, George Oliver; and our Chief Financial Officer, Olivier Leonetti.
In discussing our results during the call, references to adjusted earnings per share EBITA and EBIT exclude restructuring and integration costs as well as other special items.
Additionally, all comparisons to the prior year are on a continuing ops basis.
Let me kick things off with a brief update, spotlighting a few specific areas related to our strategic initiatives and Olivier will provide a detailed review of Q3 results and update you on our forward outlook.
Let's get started on Slide 3.
Another quarter of solid results with demand accelerating across most of our end markets as a robust recovery continues to expand.
Q3 represents our easiest comparison of the year, but I am encouraged to see the underlying sequential improvement experienced in the first half continue to accelerate in the third quarter, with many of our businesses back to operating at pre-pandemic volume levels.
Nonresidential construction markets continue to recover, led by the ongoing strength in retrofit activity tied to demand for healthy building solutions.
New construction is also beginning to show signs of stabilization and the inflection in order trends for our longer cycle project businesses sets us up well as we look to next year and beyond.
Our service business has recovered, and we continue to transform this business through our digital service strategy to drive higher levels of recurring revenue and an improved growth profile.
This recovery has not been without its challenges.
We have managed through significant headwinds related to persistent supply chain disruptions, component shortages, labor constraints and continued inflation.
While these dynamics have created some revenue pressure, which will continue near term, the pace and composition of order growth in the quarter provides confidence that we will remain on track over the medium and long term.
As you may recall, in an effort to mitigate the severe impact of the volume declines during the height of the pandemic, we implemented significant cost actions last year.
These actions provided a material boost to profitability in the prior year period and led to best-in-class decrementals.
Lapping that difficult comparison in managing the return of some of those variable costs, coupled with navigating current capacity constraints and supply disruptions, has resulted in significant margin pressure.
That said, we were able to deliver better-than-expected margin expansion in the quarter and remain on-track to meet our targets for the full year, which is a remarkable accomplishment in the current environment.
At the same time, we remain laser-focused on executing our strategy, which is driving continued share gains.
As we will discuss over the next few slides, we continue to advance our efforts to deliver innovative solutions to help customers enhance building performance and reduce costs, while achieving their net-zero carbon and renewable energy goals.
This will be accomplished through our ongoing digital transformation enabled by OpenBlue and accelerating our offerings to deliver the outcomes our customers need.
Continuing our trend to highlight a few notable achievements over the past quarter, recently, we launched the latest offering under our OpenBlue platform Net Zero Buildings as a Service.
I will spend more time on this announcement in a few minutes as this represents an important step forward in enabling our customers' achievement of decarbonization and sustainability commitments.
We have now filed our 200th U.S. patent application and received 90 U.S. patents for OpenBlue energy optimization innovations.
We announced another strategic partnership with DigiCert, which will allow us to leverage their IoT device manager, an industry-leading automated digital certificate platform to encrypt data and authenticate the identity of users, devices or services within a building.
This will further expand Johnson Controls' already robust capabilities around cybersecurity risk management, providing our customers peace of mind and resilient solutions that ensure hardware, software and communications remain trusted throughout the building life cycle.
Together with the announcement of our partnership with Pelion last quarter, OpenBlue solutions users will have confidence that their devices are safely and securely connected to the network.
About two weeks ago, we launched the Community College partnership program aimed at expanding and advancing associate degree and certificate programs in HVAC, fire and security and digital building automation systems across the U.S. Over the next five years, Johnson Controls will grant $15 million to nonprofit community colleges in support of academic programs that train and develop the next generation of skilled trades technicians.
In addition to the funding, Johnson Controls employees will be increasing their support through volunteer and mentorship programs and also provide a pathway for our student internships and entry-level employment opportunities.
Lastly, we are proud to have received additional recognition for our efforts to ensure we create a diverse and inclusive work environment, recently being named as one of the best companies for multicultural women by Seramount.
We are also proud to be a part of the full 2021 list of best employees for diversity as well as the Financial Times European Climate Leaders list, further demonstrating our commitment to sustainability.
Vijay is transforming our software organization, strengthening our engineering development processes and expanding the solution set of our OpenBlue platform.
We are excited to have Vijay on board.
He is already having an incredible impact internally, and you will hear more from him at our upcoming Investor Day.
Let's move to Slide 5 for a brief update on trends in our service business.
As we have shared with you over the past couple of quarters, accelerating growth in service has been a strategic initiative underway since well before the pandemic.
Ultimately, the actions we are taking are designed to drive 200 or 300 basis points of above-market growth, which would place us firmly in the mid-single-digit annual growth range for the entire $6-plus billion in revenues.
Our approach is multifaceted, simultaneously focusing on increasing our contractual service attach rate, reducing attrition and driving higher revenue per user while transforming our offerings through digital.
Enabling higher digital content and connecting our installed base compounds our ability to create higher levels of recurring revenue over time.
In the quarter, service revenue increased 11%, in line with the rebound we expected with double-digit growth across all three regions.
Order growth also accelerated, as expected, up 13%.
And our attachment rate year-to-date has now improved close to 400 basis points, already achieving our guidance range for the full year.
We expect to continue this pace going forward, again, aided by our digital services and solutions, which were up mid-teens in the quarter.
Please go to Slide 6.
I referenced our new OpenBlue offering, Net Zero Buildings as a Service back on Slide 4, and I thought I would spend a few minutes highlighting the importance of this launch.
Not only does this offering fulfill an immediate need as expressed by our customers, it also represents the next phase in the evolution of our digital, smart buildings offerings, which will drive our shift toward increased deployment of higher recurring as-a-service revenue models.
Our broad Building Systems portfolio and market-leading capabilities and expertise in ESCO projects combined with the OpenBlue software platform, uniquely positions Johnson Controls to provide customers with guaranteed outcomes and risk management models to achieve their emission reduction commitments.
Based on our high level of customer engagement and the extensive market-backed research conducted leading up to the development of this solution, the need for a trusted partner to deliver a one-source seamless road map to net-zero and the urgency to reduce carbon emissions is clear.
What is also clear is that digitally enabled solutions that tie together the IT and OT in the built environment are the only ways to provide these road maps.
And nearly $250 billion, sustainability and decarbonization is a once-in-a-generation opportunity and we are excited about our role in leading these critical trends.
Net Zero Buildings as a Service includes a full portfolio of sustainability offerings tailored to schools, campuses, data centers, healthcare facilities as well as commercial and industrial verticals.
It leverages a game-changing new solution, Net Zero Advisor, which delivers turnkey, AI-driven tracking and reporting of sustainability metrics and helps building operators ensure improved carbon reduction and renewable energy impacts of their buildings.
We also leveraged the full OpenBlue suite of connected solutions and services offered through flexible risk-sharing models that enable tailored deal structures where end users pay for outcomes rather than assets.
Turning quickly to Slide 7.
Just a few examples of customer wins tied to the theme of decarbonization and Net Zero.
I won't go through each of these.
But in every example, Johnson Controls is providing unique solutions to solve the outcomes our customers are looking for.
Some of these new relationships are borne out of our digital partner ecosystem while some are long-standing relationships where we are converting existing building automation systems to OpenBlue or advancing customers' ongoing sustainability initiatives.
In all of these, we are driving energy efficiency, reducing energy consumption, driving cost savings and emission reductions.
Our teams remain dedicated to achieving top-tier performance despite some of the short-term challenges we are facing.
We are watching closely the resurgence of COVID cases and the potential impacts renewed lockdowns and supply chain constraints may or may not have on project activity.
And from a supply chain perspective, we are confident in our ability to manage access to critical materials and components.
Although lead times and conversion cycles are stretching, we believe conditions will begin to improve over the next couple of quarters.
We are successfully leveraging our pricing capabilities to offset inflation, and we still expect to remain price cost positive for the year.
At the same time, we are making tremendous progress on our strategic initiatives to accelerate top line growth and improve profitability, including indoor air quality, decarbonization, smart buildings, digital services and our productivity program, and we continue to reinvest in our portfolio, both organically and inorganically.
We believe we are extremely well positioned to outperform throughout the next cycle.
Continuing on Slide 8.
Organic sales accelerated in Q3, up 15% overall, in line with the guidance we provided last quarter as growth in Global Products and our field businesses accelerated.
The strength in Global Products was across the board from continued high level of demand in residential end markets, including both our global HVAC equipment and security products to the anticipated rebound in commercial HVAC and Fire & Security.
Segment EBITA increased 21% versus the prior year and segment EBITA margin expanded 30 basis points to 16.2%.
Better leverage on higher volumes, the benefit of our SG&A actions and strong execution more than offset the significant headwind from the reversal of temporary cost reductions and a modest headwind from negative price cost.
EPS of $0.83 increased 24%, benefiting from higher profitability as well as a lower share count.
On cash, we had another strong quarter.
Free cash flow in the quarter was $735 million, flat versus the prior year despite the planned uptick in capex.
I will review further details of our performance later in the call.
Orders for our field businesses increased 18% year-over-year, accelerating at a faster pace than expected, led by continued strength in retrofit project activity, which we include in install, but also stabilization in new construction activity.
Service orders recovered above pre-pandemic level, up 13%, led primarily by improving conditions for our transactional service business.
Backlog grew 7% to $10 billion with service backlog up 5% and installed backlog up 7%.
Conversion rates in our service backlog continued to accelerate.
Our installed backlog flow is improving, particularly given the rebound in retrofit activity, which turns more quickly.
Turning to our earnings per share bridge on Slide 10.
Let me touch on a few key items.
Operations were a $0.16 tailwind versus the prior year, driven by higher volumes and favorable mix, partially offset by price cost and the reversal of prior year mitigating cost actions.
Just to further emphasize the magnitude of the headwinds from the temporary actions.
Excluding this impact, underlying incrementals in Q3 were just over 30%.
We're on track with our SG&A productivity program, which equated to a benefit of around $0.03.
Since we spoke last time, we have already begun taking some of the necessary actions to achieve the savings related to our COGS program, which will begin impacting the P&L in fiscal 2022.
We are well on-track to achieve our savings targets for fiscal '21 and beyond.
My commentary will also refer to the segment end market performance included on Slide 12.
North America revenues grew 8% organically with solid growth in both service and install.
Service revenues were higher in all domain, driven by a sharp rebound in our transactional service business, which increased nearly 30%.
Installed demand, which is the area of our business that was most impacted by supply chain disruptions, continues to be driven by shorter cycle retrofit and upgrade projects in addition to easier prior year comparisons.
By domain, commercial applied HVAC revenue grew mid-single digits, while Fire & Security increased low double digits in the quarter.
We had another strong quarter in performance infrastructure, which also grew revenues low double digits.
This business has a leading position in the ESCO market, which is well positioned to address customers' decarbonization needs.
Segment margin decreased 70 basis points year-over-year to 14.7% as North America experienced the most headwinds from the reversal of temporary cost given the majority of the action in the prior year related to furloughs and other employee compensation-related expense.
Orders in North America accelerated on a sequential basis and grew 18% versus the prior year with mid-teens growth in Fire & Security and performance infrastructure.
Commercial HVAC orders were up over 20% overall, driven by strong retrofit activity with equipment orders up over 50%.
Backlog to $6.2 billion increased 6% year-over-year.
Revenue in EMEALA increased 17% organically, led by strong recovery in installed activity.
Non-resi construction grew more than 25% in the quarter, with most verticals returning to 2019 levels, led by increased demand for energy-related infrastructure projects.
Fire & Security, which accounts for nearly 60% of segment revenues inflected sharply, growing at a mid-20s rate in Q3 and surfacing 2019 levels.
Industrial refrigeration grew 20% and commercial HVAC and controls grew high single digits.
By geography, revenue growth in Europe accelerated to nearly 25%, while the Middle East declined low double digits and Latin America increased 10%.
Segment EBITA margins increased 250 basis points, driven by volume leverage and the benefit of SG&A actions.
Orders in EMEALA accelerated further, increasing 22% in the quarter with strong growth in Fire & Security and Commercial HVAC.
APAC revenues increased 14% organically with install and service increasing by the same amount.
Commercial HVAC and controls revenue grew mid-teens, primarily driven by the ongoing recovery we are seeing in China.
EBITA margins declined 380 basis points year-over-year to 11.8% as the benefit of volume leverage was more than offset by the significant temporary cost mitigation actions taken in the prior year and geographic mix.
APAC orders grew 14%, driven by continued strength in Commercial HVAC in China and recovery in controls business in Japan.
Economic conditions outside of China remain mixed with uncertainty increasing as ongoing and renewed lockdown restrictions across parts of Southeast Asia, Australia and part of Japan following rise in COVID cases and continued delays in the rollout of vaccines.
Global Products revenue grew 21% on an organic basis in the quarter, in line with what we initially expected despite incremental headwinds related to COVID lockdown in Asia and the short-term supply chain restrictions.
In aggregate, we continue to gain share across most of our portfolio.
Our global Residential HVAC business was up 16% in the quarter, with strong growth in all regions.
North America resi HVAC grew mid-teens in the quarter, slightly ahead of our expectations, benefiting from a stronger sell-through demand, particularly in April and May.
Our JCH Residential HVAC business was up high teens, led by strong share gains in Japan and Taiwan as part of a successful effort to attain the number-one residential share position in those markets.
Although not reflected in our revenue growth, our iSense joint venture grew revenue 44% year-over-year in Q3, expanding our leading shares in China.
Commercial HVAC sales improved significantly up more than 20% with our indirect applied business up more 25%.
Light commercial industry up over 20%, led by the recovery in North America and VRF up high single digits.
Fire & Security products growth was above 30%, led by continued strength in our security business, which grew over 40% in the quarter.
Commercial fire detection and suppression products were up low to mid-20s on easier year comparisons and the stabilization in key vertical markets.
EBITDA margin expanded 140 basis points year-over-year to 20.9% as volume leverage, positive mix increased equity income and the benefit of SG&A actions more than offset the significant temporary cost actions taken in the prior year as well as current price cost pressure.
Turning to Slide 13.
As expected, corporate expense increased significantly year-over-year of an abnormally low level to $70 million.
For the full year, we now expect corporate expense to be in the range of $280 million to $285 million, slightly below the low end of the prior guide.
For modeling purposes, we have included an updated outlook for some of our below-the-line items.
I would point out that amortization expense now reflects the impact of Silent-Aire.
Turning to our balance sheet and cash flow on Slide 14, starting with the balance sheet at the top of the page.
Similar to last quarter, no significant changes versus the prior period other than the net reduction in cash due to the closing of the Silent-Aire transaction.
Our balance sheet remains healthy with leverage of roughly 1.8 times, still below our targeted range of 2 times to 2.5 times.
On cash, we generated $735 million in free cash flow in the quarter, bringing us to nearly $1.7 billion year-to-date.
This is a significant improvement compared to our normal year-to-date seasonality and has been driven by solid trade working capital management and the timing of capex and order payments.
We expect a much lower conversion level in the fourth quarter given the reversal of some timing benefits.
For the full year, we expect free cash flow conversion to be approximately 105%.
During the third quarter, we repurchased a little more than 5 million shares for roughly $340 million, which brings us to around 19 million shares year-to-date, completing our $1 billion program.
We expect to repurchase an incremental $350 million of shares in Q4.
For the full year, we're raising our guidance once again and now target adjusted earnings per share in the range of $2.64 to $2.66.
This puts the midpoint at the high end of our previous earnings per share guidance of $2.58 to $2.65.
Based on our strong performance year-to-date and the continued underlying momentum we are seeing in most of our end markets, we continue to expect organic sales growth in the mid-single digits.
Segment EBITA margins are tracking toward the high end of our most recent range, and we now expect 80 to 90 basis points of expansion for the full year, which includes a 10-basis point headwind related to the acquisition of Silent-Aire.
Based on the full year guide, Q4 adjusted earnings per share is expected to be in the range of $0.86 to $0.88, which assumes mid-single-digit organic revenue growth and 30 basis points of segment EBITA margin expansion.
We made the decision to host the event virtually.
Registration details will be available over the next couple of weeks.
| johnson controls international q3 adjusted earnings per share $0.83 from continuing operations excluding items.
q3 adjusted earnings per share $0.83 from continuing operations excluding items.
sees q4 adjusted earnings per share $0.86 to $0.88.
sees fy adjusted earnings per share $2.64 to $2.66 excluding items.
sees 2021 organic revenue growth up mid-single digits year-over-year.
|
slides for today's call are posted on our website, and we invite you to follow along.
Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, February 24, 2021.
Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call other than through filings made concerning this reporting period.
In addition, today's discussion will include references to non-GAAP measures.
Clean Harbors beliefs that such information provides an additional measurement and consistent historical comparison of its performance.
Starting on slide three.
We concluded 2020 with a strong fourth quarter.
Our Environmental Services segment outperformed our expectations, driven by a combination of factors, including the level of high-value waste in our disposal network, greater-than-expected COVID decontamination work and ongoing cost controls.
Total fourth quarter revenues were in line with expectations as our Safety-Kleen business remained constrained by the effects of the pandemic.
Adjusted EBITDA in Q4 increased to $136.1 million, which included $5.6 million in benefits from government programs, primarily from Canada.
For the full year, adjusted EBITDA grew by 3% to $555.3 million, with annual margins growing to 17.7%.
We generated record adjusted free cash flow of $265 million, a noteworthy accomplishment considering the economic disruption caused by the pandemic.
Without question, the success we achieved in 2020 is a direct result of the dedication, flexibility and perseverance of our exceptional team.
2020 was a challenging year on many levels.
Turning to our segment results, beginning with Environmental Services on slide four.
Revenue, while down year-over-year due to a market -- due to market conditions, was up on a sequential basis.
Typically, Q4 is a seasonally weaker quarter for us, but the $18 million increase from Q3 is evidence that many of our markets are on the road to recovery.
We also saw strong disposal and recycling volumes to close out the year.
Adjusted EBITDA grew by 13% from a year ago, with margins up nearly 400 basis points.
This was driven by a combination of business mix, cost savings and $3.9 million in benefits from government assistance programs in Q4.
Revenue from our COVID-19 decon work totaled $31 million in Q4.
For the full year, our team completed nearly 14,000 responses and was an essential resourcing and protecting our customers' people and facilities.
In Q4, we benefited from a record level of drums collected as well as some high-value complex waste streams we received into our network.
This resulted in an average price per pound increase of 16% from the year earlier period when we saw more bulk streams.
Incineration utilization in the quarter was 84% due to a higher-than-expected number of maintenance days.
Landfill volumes were down 37% in the quarter as the lack of remediation and waste projects opportunities intensified with the resurgence of the pandemic.
However, our strong base landfill business largely offset that decline with a 42% increase in our average price per ton.
Moving to slide five.
Safety-Kleen revenue was down 15% from a year ago, but was flat sequentially as the ongoing recovery offset normal year-end seasonality.
Vehicles miles driven had been on a nice upward trajectory throughout the summer, but plateaued a bit in Q4, with the COVID-19 surge resulting in some new local restrictions in areas such as California, and all across Canada.
Most of our core services in the SK branch business were down year-over-year as a result, but flat from Q3.
Safety-Kleen's adjusted EBITDA declined 21%, mostly due to the lower revenue and business mix.
This decline was partly offset by our cost reductions initiatives as well as the government assistance programs that provided $1.4 million of benefits in Q4.
Waste oil collections were 49 -- no, excuse me, were 49 million gallons in Q4 with a healthy average charge for oil, given the lack of available outlets for generators.
On the SK oil side, we saw typical seasonal softening of the demand for base oil and lube products.
However, due to lower production levels in the traditional refinery space, available base oil and lubricant supply shrank in the quarter, resulting in a rising price environment that should benefit us here in 2021.
Percentages of blended products and direct volumes came as expected and consistent with prior year.
Turning to slide six.
Looking back at 2020 from a capital allocation standpoint, our strategy due to the pandemic was focused on capital preservation, which served us well.
capex in Q4 was slightly higher than the prior year, but our full year spend was down from 2019.
Moving forward, we expect to focus on internal growth capital on our plants and other assets that we believe generate the best returns.
From an M&A standpoint, our opportunity pipeline is healthy, as businesses emerge from the pandemic, and we gain a clear light -- line of sight on our end markets.
We prudently increased our level of share repurchases in Q4 and had an active repurchase program for the year, and Mike will provide the detail on our buyback shortly.
Looking ahead, we're beginning 2021 in excellent shape, both operationally and financially.
The markets we serve are on an upward trajectory.
For our lines of business that have been held back by the pandemic, such as waste projects and remediation, we expect a measurable recovery this year.
In 2021, we expect to pursue growth opportunities through our core suite of offerings and by capitalizing on market conditions.
And Mike is going to talk about our new sustainability report in a moment.
But let me say that we expect to take full advantage of the growing market acceptance of our sustainable offerings in 2021 and beyond.
We provide a broad array of green solutions that go well beyond our role as the largest collector and recycler of waste oil.
Within Environmental Services, we entered the year with higher deferred revenue and given the availability of waste in the marketplace, expect strong incineration performance in 2021.
We anticipate our offerings within Industrial Services and Tech services to grow from last year.
We expect Field Services to generate $25 million to $35 million of COVID-related revenues in 2021.
Within Safety-Kleen, we remain below normal demand levels as we kick off 2021.
However, later this year, we anticipate a steady recovery in the SK branch business.
For Safety-Kleen Oil, our rerefineries are producing well.
And as I mentioned, pricing for both base oil and blended products is favorable to start the year.
We will continue to actively manage our charge for oil rates, while focusing on growing collection volumes to supply our rerefinery network and take advantage of market conditions for recycled fuel oil.
As I look at 2021, the underlying dynamics in both our operating segments remain positive, and we expect a strong sales growth year with healthy free cash flow as a result.
I anticipate another great year for the company in 2021.
Before I take you through the financials, let me comment briefly on our first ever sustainability report, which is available on the IR section of our website.
We're proud of this document, which we created based on the Sustainability Accounting Standards Board framework.
The document highlights the integral role that sustainability plays in our business decisions as well as our environmental, social and government goals and benchmarks for 2030.
The At a Glance page of the report shown on slide eight is an overview of some of the -- of our ESG benchmarks.
I want to reiterate the point that Alan made about ESG and sustainability as foundational to our business.
For many customers, we are their sustainability solution.
When companies generate potentially harmful byproducts, they call Clean Harbors to safely remove and dispose of them.
When they accidentally release chemicals into the environment, they call Clean Harbors to help clean it up.
When they have waste oil, solvents, precious metals or paint, they call Clean Harbors to recycle.
The new report also highlights the vital role our employees play in our performance.
We strive to create a diverse and inclusive culture, one that values the unique backgrounds, perspectives and experiences of our people.
We are committed to building a sustainable culture through training programs that enable our employees to have -- to enjoy long and successful careers at Clean Harbors.
I encourage everyone to take a look through the report.
It provides the detailed picture of how closely intertwined sustainability is with our entire organization, culture and business model.
We ended 2020 on a high note with another strong financial performance.
If you asked me back in April, when the pandemic began, what level of revenue, adjusted EBITDA and adjusted free cash flow we would have delivered this year, these would have not been the numbers.
Our Q4 adjusted EBITDA results exceeded the guidance we provided in November.
Revenue declined 9% year-over-year, but was up in the third quarter despite Q4 typically being a sequentially lower quarter due to seasonality.
Our efforts to control costs and grow our highest margin businesses, combined with some further government program assistance, resulted in 180 basis point improvement in gross margin.
Adjusted EBITDA grew 3% to $136.1 million.
Our Q4 adjusted EBITDA margin rising 190 basis points from last year speaks to the effectiveness of the actions we have taken this year.
We have improved our adjusted EBITDA margins on a year-over-year basis for 12 consecutive quarters.
For the full year, our adjusted EBITDA margins grew 17.7% -- grew to 17.7%.
If you excluded the $42.3 million of government assistance, those margins would have been 16.3% or a 50 basis point improvement from 2019.
SG&A total costs were down in the quarter based on our lower revenue and cost controls.
But on a margin basis, we're essentially flat.
For the full year, SG&A as a percentage of revenue was 14.3%, which beat our target of 14.5%.
For 2021, using the midpoint of our guidance range, we would expect SG&A to be up in absolute dollars from the prior year and essentially flat on a percentage basis.
Depreciation and amortization in Q4 was down to $71.4 million.
For the full year, our depreciation and amortization was $292.9 million, which was within our expected range.
For 2021, we expect depreciation and amortization in the range of $280 million to $290 million.
Income from operations in Q4 increased by 18%, reflecting a higher gross profit, cost controls and mix of revenue.
For the full year, our income from operations rose 10% to $251.3 million.
Turning to slide 10.
We conclude the year with our balance sheet in terrific shape.
Cash and short-term marketable securities at December 31 were $571 million, up nearly $40 million from the end of Q3.
Our debt was at $1.56 billion at year-end, with leverage on a net debt basis at 1.8 times, our lowest level in a decade.
Our weighted average cost of debt is 4.2%, with a healthy mix -- healthy blend of fixed and variable debt.
With the recent revolver we put in place, we have no debt maturities until 2024.
Turning to cash flows on slide 11.
Cash from operations in Q4 was $113.2 million.
capex, net of disposals, was up slightly to $43.6 million.
That combination resulted in adjusted free cash flow in Q4 of $69.6 million.
For the year, we hit our net capex target, excluding the purchase of our headquarters, with $165.6 million of spend.
That helped us deliver record annual adjusted free cash flow of $265 million, which is toward the high end of our guidance range.
For 2021, we expect net capex in the range of $185 million to $205 million, which is higher than prior year.
Our net capex as a percentage of revenue ranks as one of the lowest among our specialty waste peers.
During the quarter, we increased the level of our share repurchases as we bought back 500,000 shares at an average price just under $71 for a total buyback of $35 million.
In 2020, we repurchased slightly over 1.2 million shares of our authorized $600 million share repurchase program, we have just under $210 million remaining.
Moving to guidance on slide 12.
Based on our 2020 results and current market conditions, we expect 2021 adjusted EBITDA in the range of $545 million to $585 million.
That amount in 2021 should be about $16 million to $18 million compared with $18.5 million in 2020.
Looking at our guidance from a quarterly perspective, we expect Q1 adjusted EBITDA using our revised definition to be 5% to 10% below prior year levels given the record Q1 results we posted in 2020 prior to the pandemic taking hold and the deep freeze we are experiencing in the Midwest and the Gulf here in February.
Here is how our full year 2021 guidance translates from a segment perspective.
In Environmental Services, we expect adjusted EBITDA to decline in the mid-single digits on a percentage basis from 2020.
We expect to benefit from growth and profitability within incineration, a rebound in the majority of our service businesses, along with our comprehensive cost measures, but not enough to fully offset the decline in high-margin decontamination work as well as the large contribution from government assistance programs in 2020 that totaled $27.1 million in this segment.
For Safety-Kleen, we anticipate adjusted EBITDA to increase in the mid- to high single digits on a percentage basis from 2020.
Despite the fact this segment received $12.2 million in government assistance last year.
We expect a mild rebound in the branch business weighted toward the second half of the year post vaccination.
At the same time, we expect SK Oil to deliver a vastly improved performance in 2020, given the current base oil industry supply dynamics as well as our ability to aggressively manage our rerefining spread and collect more gallons of waste oil.
In our Corporate segment, we expect negative adjusted EBITDA to be flat with 2020, which includes $3 million of governance assistance.
For 2021, our EBITDA guidance assumes receiving $2 million to $3 million of Canadian government assistance.
We are not assuming any additional CARES money in 2021 at this time, but we are reviewing the new program.
Based on our EBITDA guidance and working capital assumptions, we now expect 2021 adjusted free cash flow in the range of $215 million to $255 million.
We believe this puts us in a great position to execute on our capital allocation strategy.
In summary, although the pandemic is still with us, we entered the new year with strong momentum in multiple service businesses and most importantly, across our facilities network.
Industrial production in the U.S. is back on the rise by all indications, particularly in the chemical space.
The Chemical Activity Barometer, published by the American Chemistry Council, show that industry levels have been climbing sequentially from May to January, and January was the first time in 10 months that the activity levels were above the prior year, which is a great sign for us.
In addition, our rerefinery business is off to a great start, given the current market conditions.
We expect some of the project and turnaround work that was pushed out in 2020 to benefit us this year and the overall sales pipeline remains strong.
While we are seeing COVID cases decline sharply in recent weeks, we anticipate continued opportunities for near-term decontamination work and disposal of vaccination waste volumes.
Overall, the number of favorable industry and regulatory trends should support our business moving forward.
And while we don't give specific revenue guidance, we certainly expect aline growth in 2021.
| sees 2021 adjusted ebitda in range of $545 million to $585 million, based on anticipated gaap net income in range of $105 million to $146 million.
performance in quarter was again led by our environmental services segment, where we achieved better-than-expected results.
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During the call, we will discuss our results for the fourth quarter and fiscal 2021 as well as our outlook for fiscal 2022.
In addition, a slide deck providing detailed financial results for the quarter is also posted on our website.
Despite operating in what remains an incredibly volatile environment, we delivered on our previously provided 2021 outlook for net sales, synergies, adjusted earnings per share and adjusted EBITDA.
2021 was our sixth consecutive year of organic revenue growth behind elevated demand and distribution gains.
This top line growth, combined with synergies we achieved from the Spectrum acquisition and interest expense savings translated into strong adjusted earnings per share and EBITDA growth.
In a few moments John will provide details on the fourth quarter and full year.
However, before he does some key headlines from our fiscal 2021 performance.
For the first time our Company exceeded $3 billion in net sales.
We also maintained top line momentum with organic sales growth of 7.3% including growth of nearly 17% in our auto care business.
Our battery and auto care businesses benefited from elevated demand and distribution gains in North America.
Auto care further benefited from the expansion in our international markets, reaching $100 million in sales in those markets for the full year.
We also delivered synergies of $62 million for the year, resulting in total synergies from the Spectrum acquisition in excess of $130 million, 30% higher than our initial estimate.
And we continue to invest in our brands, resulting in strong brand preference globally.
With more consumers selecting our battery brand, we gained 2.2 share point in the last 12 months.
This performance is a tribute to our team and their resiliency.
Since the beginning of the pandemic, we have consistently adapted in real-time to ensure business continuity and repositioned Energizer for the future.
The hard work of our global colleagues to produce and deliver products to our customers and consumers in a time of heightened demand and significant disruption has been impressive to witness on a daily basis.
In a moment, I will provide headlines for our 2022 outlook.
However, before I do I want to provide an update on a few key topics that will set the stage for the future.
First, our categories remain healthy and are showing solid growth when compared to pre-pandemic levels and we expect the consumer behaviors supporting that demand will continue for the foreseeable future.
Specifically in batteries, there are two drivers.
Devices owned per household are up mid single digits in the US and an increase in the amount of time those devices are being used.
Consequently, consumers are using more batteries, which has resulted in new buying patterns versus a year ago, including increased purchase frequency and spending per trip.
As a result, on a two-year stack basis without e-commerce, the global battery category has grown by 2.9% in value and 3.7% in volume.
In the near term, we will see the category decline as it did in the three months ending August 2021 where it was down 6.9% in value and 5.3% in volume due to comping elevated demand from a year ago.
However, as we look to the long term, we anticipate the category to experience flat to low single-digit growth, albeit on a higher base as the category has increased in size due to consumers' behavior during the pandemic.
Within the category, our iconic brands remain well positioned.
Our brands outpaced the category, resulting in a 2.2 share point gain versus last year as we increased distribution in the US and internationally with share gains in those markets representing 70% of our total battery revenues.
Turning to the auto care category.
Over the last five years the auto care category has shown consistent growth, a trend that continued in the latest 13 weeks with category value up 3.5% versus year ago and 16.3% versus 2019.
The growth is being driven by consumers continuing the do-it-yourself behaviors established during the pandemic, including higher levels of cleaning and renewed interest in car care as a hobby, a higher number of cars in the car park and an increase in the age of vehicles given the shortage of new vehicles and the recovery in miles driven given the increase in personal travel.
All of this increased US household penetration to nearly 75% with the resulting buy rate that is up 20% as consumers are buying the category more frequently and spending more per trip.
As we look ahead, we anticipate the auto care category will settle in at low single-digit growth once it has cycled through the COVID-related demand.
In the US, we continue to be the market leader in this large and growing category driven by our Armor All brand, which continues to have positive momentum due to the strength of our innovation and brand-building activities.
As I mentioned earlier, our efforts to leverage our geographic footprint and expand our auto care brands internationally are proving successful.
While the categories are showing resilience, the macro environment in which we are operating is volatile, which leads me to the next important topic around operating costs.
Costs related to commodities, transportation and labor, continue to rise.
We saw a significant escalation in these costs during the fourth quarter and we expect these headwinds to continue throughout 2022, resulting in over $140 million of increased input costs versus 2021.
In order to mitigate the impact of these costs, we have executed or planned pricing against roughly 85% of our business.
In addition to raising prices to cover input cost inflation, we have also strategically redefined our battery pricing architecture to reestablish relative value across pack sizes, resulting in a progressive rate increase on larger pack sizes.
Currently, we are exploring the opportunity for additional pricing opportunities across our business.
We expect these pricing actions, improved mix management and cost reduction initiatives to partially offset the impact on our gross margin rate.
As you all know, in addition to the challenges companies are experiencing related to increased costs, the global supply chain network is under pressure from increased demand and pandemic-related disruption.
Earlier this year, we made the decision to proactively build inventory to ensure we have product for the peak battery selling season and upcoming auto care resets.
The change is in response to both the potential for supply disruption we have seen in recent quarters and the higher level of in-transit inventory versus historical levels due to shipping delays and port congestion.
As such, our inventory at the end of fiscal '21 was up 42% versus the prior year.
This action has given us flexibility to avoid disruption and ensure we service our customers as reliably as possible in this environment.
With that backdrop, I'll turn to a high-level overview of our 2022 outlook.
The two headwinds I mentioned earlier, the decline in demand to more normalized level and inflationary cost trends have impacted our outlook.
In fiscal 2022 organic sales will be roughly flat with auto care growth and pricing actions across our businesses, offset by volume declines in battery as we comp prior year elevated demand in the first half of the year.
Despite our cost reduction initiatives and pricing actions, we expect to see gross margin rate erode, given the escalating costs resulting in year-over-year declines in EBITDA and EPS.
Given the macro environment, we are proactively exploring additional options to reduce our costs, enhance our mix as well as evaluate additional pricing to further offset these cost headwinds.
I will provide a more detailed summary of the quarterly financial results and then the highlights for fiscal 2021 before turning to our 2022 outlook.
As a reminder, we have posted a slide deck highlighting our key financial metrics on our website.
For the quarter reported revenue grew 40 basis points with organic revenue down less than 1% versus 6% organic growth in the prior-year quarter.
Robust demand and distribution gains in auto care delivered a 11.5% growth in the quarter, which offset the expected decline in battery.
We expect these difficult comparisons in batteries to continue for the first half of 2022.
Adjusted gross margin decreased 70 basis points to 37.7%.
The combination of $9 million in synergy benefits and the elimination of $19 million of COVID-related costs from the prior year did not fully offset inflationary cost pressures related to commodities, transportation and labor.
In addition category mix impacted our gross margin as our lower margin auto care business achieved significant growth relative to battery in the quarter.
Excluding acquisition and integration costs, SG&A as a percent of net sales was 14.3% versus 15.6% in the prior year.
The absolute dollar decrease of $9.4 million was driven primarily by a reduction in compensation costs.
In the quarter, we realized $9 million in synergies, bringing the total for 2021 to $62 million.
We have delivered over $130 million of synergies related to our battery and auto care acquisitions, well exceeding our initial targets.
Interest expense was $13.4 million lower than the prior-year quarter as we are benefiting from significant refinancing activity over the past 18 months.
During the fourth quarter, we entered into a $75 million accelerated share repurchase program.
Approximately 1.5 million shares were delivered in fiscal 2021 and we expect another 400,000 shares to be delivered in the first quarter of fiscal '22, bringing the total number of shares repurchased under the ASR program to approximately 1.9 million.
Now turning to the highlights for fiscal 2021.
As Mark mentioned, we delivered our full-year 2021 outlook for revenue, adjusted EBITDA and adjusted EPS.
Net sales grew 10.1%, including organic sales up 7.3% as we experienced robust growth in both the Americas and International and across all three product categories, batteries, auto care and lighting products.
Adjusted gross margin was down 100 basis points, as higher input costs were partially offset by synergies and the reduction of COVID-related costs incurred in 2020.
Interest expense, benefiting from significant refinancing activity, decreased $33 million.
Adjusted earnings per share increased 51% to $3.48 as higher sales, synergies and lower interest expense more than offset the higher input costs.
And adjusted EBITDA increased 10%.
At the end of 2021, our net debt was approximately $3.2 billion or 5.1 times net debt to credit defined EBITDA with nearly 85% at fixed interest rates, no near-term maturities and an all-in cost of debt below 4%.
Our adjusted free cash flow for 2021 was $203.5 million.
The decline versus the prior year primarily reflects working capital investments as we proactively invested in incremental inventory given the continued volatility in the global supply network and uncertainty around product sourcing, transportation and labor availability.
Now turning to our fiscal 2022 outlook.
As Mark discussed, our categories remain healthy and are showing solid growth when compared to pre-pandemic levels.
As we enter fiscal 2022, we are benefiting from significant pricing actions.
However, input costs continue to rise.
The outlook we are providing for next year reflects pricing actions that we have executed or planned as well as the assumption that our input costs remain at current levels for the full year.
Organic revenue is expected to be roughly flat with auto care growth and pricing actions across 85% of our businesses, offset by declines in battery as we comp prior year elevated demand in the first two fiscal quarters.
We also expect reported revenue will be negatively impacted by foreign currency headwinds of $20 million to $25 million at current rates.
As we have talked about for the last couple of quarters, input costs including raw materials, labor and transportation costs, are rising rapidly and supply chain networks continue to be stressed.
Last quarter I highlighted the potential for an additional 100 basis points of gross margin headwinds in 2022 if input costs did not improve.
And as of today, the trends have worsened.
While we expect the absolute dollar amount of these rising costs to be offset by the pricing actions and cost reduction efforts that our team has undertaken, we now project gross margin headwinds of approximately 150 basis points, based on current rates and assumptions.
These inflationary cost pressures, combined with the anticipated volume declines in battery in the first half of the year, are expected to result in adjusted earnings per share in the range of $3 to $3.30 and adjusted EBITDA in the range of $560 million to $590 million.
As we look at our capital allocation priorities during this volatile macro environment, we will continue to invest in our businesses and brands for the long term while returning cash to shareholders and paying down debt.
While 2021 was a solid year for Energizer and one that we are proud of, our focus today is on moving forward and working to further mitigate the cost headwinds we are facing while ensuring our products are available to consumers around the world.
| expect reported revenue will be negatively impacted by foreign currency headwinds of $20 million to $25 million at current rates for fiscal year 2022.
for the fourth fiscal quarter, strong auto care performance drove net sales growth.
sees fy 2022 adjusted earnings per share in range of $3.00 to $3.30.
sees 2022 organic revenue to be roughly flat.
energizer holdings - current operating environment remains very volatile.
will remain focused on offsetting headwinds through additional pricing and cost reduction opportunities in fiscal 2022.
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FNB's third quarter earnings per share was $0.34, representing an increase of 10% on a linked-quarter basis and bringing year-to-date earnings per share to $0.94.
Our performance across our core businesses led to record revenue this quarter of $321 million, up 18% on a linked-quarter annualized basis with strong underlying momentum visible on our loan growth, pipeline, fee income, and digital customer engagement.
Let's look at each one of these core building blocks starting with loan growth.
Our spot loan growth, excluding the impact of PPP forgiveness, is 8% annualized linked-quarter, driven by a strong pickup in lending activity in both the commercial and consumer portfolios.
Spot commercial loan growth totaled 7% annualized on a linked-quarter basis with positive growth in nearly every region across our footprint, notably the Pittsburgh, Cleveland, Harrisburg, and Raleigh region.
Consumer lending grew over 8% annualized linked-quarter, led by increases in residential mortgages and direct installment home equity.
As evidenced by the spot loan growth, our teams had a strong quarter, and overall loan production reached record levels as the economy continues to recover.
We saw healthy pipeline build and a slight increase in line utilization with the pipeline being up nearly 12% year-over-year.
In prior earnings calls, we indicated our expectation for improvement in loan demand and that is now materializing.
Commercial had record production in September and the consumer pipeline jumped 27% year-over-year.
Mortgage activity has slowed more recently because of the decline in refinance activity due to higher interest rates -- due to the higher interest rate environment.
In addition, revenues have decreased as margins have normalized.
Overall, we are optimistic that our total loan pipeline indicate a path for sustained growth.
As we have continued to execute our strategic plan, non-interest income reached a record $89 million with strong contributions from capital markets and wealth management, as well as solid SBA revenue.
Our emphasis on diversifying revenue streams has become even more important during the low-rate environment.
Through our efforts of enhancing our product suite and expanding our services, our non-interest income now comprises 28% of our total revenue.
Our clicks-to-bricks strategy, introduced several years ago, was designed to integrate our mobile, online, and in-branch channels for a seamless and convenient banking experience.
Our philosophy of continuing to invest in technology has resulted in many industry-leading offerings, including our e-store solution center, which features a retail shopping cart experience, our mobile app and our website with videos and substantial digital content.
After launching our new website at the beginning of last year, our website engagement has increased 13% year-to-date compared to the same period in 2020, which included increased usage due to COVID and PPP origination.
The platform we built with clicks-to-bricks has been extremely important, driving the increase in adoption and usage of digital channels.
We continue to make enhancements to provide our customers with the most flexible banking option as demonstrated by our online application functionality that enables customers to quickly and easily apply for multiple products, including consumer deposits, credit cards, and home equity and mortgage loans.
In May, we launched our digital applications for mortgages on our e-store.
And since then, 61% of all applications came through our digital channels, and those -- and of those applications, approximately 46% were submitted outside of normal business hours or on the weekend.
In addition, over half of our credit card applications were made digitally in the third quarter.
Online applications for small business loans and deposits, as well as auto loans will be available by year-end.
And next year, we plan to launch a single unified application for virtually all FNB loan and deposit products to make the shopping experience for multiple products even easier.
Our new interface will reduce customers' input by eliminating redundant application fields and expand our clients' capabilities to upload information in a secure portal to expedite approvals.
Broader use of e-signature and automated documentation and disclosures will also be added over time.
F.N.B. recently introduced a chatbot, which will apply artificial intelligence and automation to assist our customer service employees in supporting our customers.
The chatbot will identify policies and procedures and provide recommended scripting to address the Top 100 frequently asked questions.
We are excited about both the current and upcoming enhancements to our digital platform, which will continue to drive increased client engagement and client acquisition and improve our operating efficiency while differentiating F.N.B. in the marketplace.
Our credit portfolio ended the third quarter very well positioned, following continued positive results across all of our key credit metrics.
This solid performance was marked by further improvement in the level of delinquency and non-performing loans, reductions in rated credits, and low net losses for both the quarterly and year-to-date periods.
Additionally, improving trends across the broader economy and government stimulus have further contributed to these favorable results, including deferrals, which have reached an immaterial level of only 0.2% of total loans.
Let's now review some of the highlights for the third quarter.
The level of delinquency, excluding PPP balances, ended September at a very solid 71 basis points, a 9 bp improvement on a linked-quarter basis, reflecting a notable improvement in non-accruals within the commercial book.
The level of NPLs and OREO improved to end the quarter at 49 basis points, representing a 9 basis point reduction from the prior quarter's ex-PPP level.
The reduction in NPLs during the quarter totaled $18 million and when compared to the year-ago period when NPLs had reached their peak, declined by $68 million, representing a solid 38% year-over-year reduction.
Net charge-offs for the quarter were very low at $1.6 million or 3 basis points annualized, while year-to-date net charge-offs were solid at 7 basis points on an annualized basis.
We recognized a $1.8 million net benefit in the provision during the quarter following these improvements in our credit quality position.
This resulted in a GAAP reserve position that was down 1 basis point to stand at 1.41% with the ex-PPP reserve decreasing 6 bps to stand at 1.45%.
Our NPL coverage position further improved ending September at a very solid level of 317% following the noted reductions in NPLs during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts totaled 1.56%.
In closing, we are very pleased with the position of our portfolio moving into the final quarter of the year and the continued progress we've made to further reduce non-performing and rated credit levels.
We remain vigilant and attentive to any emerging risks in both the broader economy and within the markets in which we and our customers operate.
With the continued supply chain and labor disruptions, elevated input costs, and the evolving nature of the virus, our approach to managing and growing our loan portfolio in this highly competitive environment remains balanced and consistent with our time-tested credit principles that have served us well throughout the various economic cycles.
This foundation of sound and consistent underwriting, timely and comprehensive management of risk, and selectively pursuing opportunities that fit our desired credit profile will support our future growth objectives as we move ahead.
Today, I will discuss our financial results for the third quarter and provide guidance for the fourth quarter.
Overall, this was a strong quarter, and we are very pleased with the results.
Our continued strategic focus on diversified fee income contribution drove non-interest income to a record $88.9 million, up $9.1 million or 11% linked-quarter, leading to record pre-provision net revenue of $138 million on an operating basis and a return on tangible common equity reaching nearly 17%.
Our tangible book value per share reached $8.42, an increase of $0.22 or 2.6% on a linked-quarter basis.
Let's walk through the financials in greater detail, starting with the highlights on Slide 4.
Third quarter earnings per share increased to $0.34, up $0.03 over the prior quarter and $0.09 from the year ago quarter.
On a linked-quarter basis, total revenue reached a record of $321 million, an increase of $13.6 million or 4.4% and drove net income available to common stockholders to a record $109.5 million, an increase of $10 million or 10.2%.
When excluding PPP, which is more reflective of the underlying loan growth, period-end total loans increased $463 million or 7.8% annualized on a linked-quarter basis with commercial loans and leases increasing $289 million or 7.4% annualized and consumer loans increasing $173 million or 8.5% annualized, building on the strong growth generated in the second quarter of this year.
As Vince said, this loan growth was across the footprint with production levels 17% higher than last quarter and 45% higher than third quarter of 2020.
Let's continue with the balance sheet on Slide 7.
Reported average loans and leases totaled $24.7 billion with average commercial loans and leases decreasing $942 million, which was entirely due to lower average PPP balances as we saw an acceleration of forgiveness and ended the quarter at $694 million.
On the deposit side, average deposits totaled $30.8 billion, an increase of $0.3 billion or 1.1% primarily in non-interest-bearing deposit accounts.
We continue to see a shift in customers' preferences for more liquid accounts in the low interest rate environment as well as maintaining larger deposit account balances than before the pandemic.
In addition, we have also seen an acceleration of deposit accounts opened digitally.
Turning to Slide 8, net interest income totaled $232.4 million, an increase of $4.5 million or 2% from the prior quarter.
Moving to PPP contribution and purchase accounting accretion, net interest income increased $2.8 million or 1.4%, reflecting an increase in average loans, more favorable funding mix and lower deposit costs.
We are expecting a slight tailwind for net interest income, excluding PPP contribution as a significant portion of our loan growth occurred during the end of the quarter.
Reported net interest margin increased 2 basis points to 2.72%, reflecting higher PPP contribution of 23 basis points and a 5 basis point benefit from acquired loan discount accretion, which was offset by higher average cash balances that reduced the net interest margin 26 basis points.
Excess cash balances grew to $3.7 billion at quarter end, a 45% increase from June 30.
When excluding these higher excess cash balances, acquired loan discount accretion and PPP impact, net interest margin declined 2 basis points.
Now let's look at non-interest income and expense on Slides 9 and 10.
Record non-interest income totaled $88.9 million, increasing $9.1 million or 11.4% from the prior quarter with broad contributions from each of our fee-based businesses.
Capital markets income increased $5.5 million, reflecting very strong swap activity with solid contributions from commercial lending activity as well as contributions from loan syndication, debt capital markets and international banking.
Service charges increased $2 million, reflecting seasonally higher customer activity volumes.
SBA volumes and average transaction sizes continue to be strong with $2 million in premium income included in other non-interest income.
Also included in other non-interest income was a $2.2 million recovery on a previously written off other assets.
Reported non-interest expense increased $1.7 million or 0.9% to $184.2 million this quarter.
Excluding non-operating items, non-interest expense increased $3.4 million or 1.9%.
On an operating basis, the increase was driven by salaries and employee benefits increasing $2.9 million or 2.8% due to production and performance-related commissions and incentives, consistent with record levels of total revenue, which was driven by diversified strong contributions from our fee-based businesses.
Overall, we produced a strong quarter and believe we are well positioned for the fourth quarter.
Now, let's turn to fourth quarter guidance on Page 12.
We expect PPP forgiveness to be $300 million to $500 million.
With the PPP loan balances decreasing, we are estimating a range of $10 million to $15 million with a PPP contribution to net interest income compared to the third quarter's contribution of $27 million.
Excluding PPP contribution, we expect net interest income to be up low single-digits relative to the third quarter.
Continuing to benefit from our diversified revenue base, we expect non-interest income to be in the high $70 million to $80 million for the fourth quarter.
Non-interest expense is expected to be around $180 million on an operating basis, which is subject to normal production-related incentives and commissions as we close out the year.
We expect the effective tax rate to be between 19% and 19.5%.
Lastly, I would like to quickly review our full year 2021 guide given last quarter.
We believe we will meet our loan growth guidance of mid single-digits.
We expect full year GAAP revenue to be up year-over-year, which will impact the production-related incentives and commissions, bringing compensation related expenses slightly higher.
Full year provision is expected to continue its strong performance with incremental provision dependent on the level of loan growth.
Overall, we believe we will finish 2021 with solid earnings.
We're pleased to announce that Howard Bank integration is currently underway, and overall, everything is moving very smoothly.
We are impressed with Howard's employees and strong customer base, and look forward to working with them.
We are still expecting to close the transaction in early 2022.
F.N.B. was once again recognized for our best-in-class digital strategy, clicks-to-bricks.
We recently received a prestigious national award for our mobile banking experience.
Our continued productive investment in our top mobile offering will soon have a new look and feel with chat support, a credit center, mobile statements and F.N.B.'s proprietary mobile e-store enabling product, service and financial literacy to be available within the mobile app.
Other features include Snap-to-Pay, which enables customers to add a payee by taking a picture of their bill and F.N.B. express deposit, where for a fee, select customers would be offered immediate funds availability for mobile deposited items.
This quarter's performance demonstrates the dedication and drive of our employees.
It is because of each person's commitment to F.N.B. and our clients that we have been able to achieve record quarterly revenue.
| q3 revenue $321 million versus refinitiv ibes estimate of $306.9 million.
q3 earnings per share $0.34.
|
During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results.
3M's performance in the second quarter was strong as we posted organic growth across all business groups and geographic areas.
Our team executed well and delivered increased earnings, expanded margins and robust cash flow.
From a macro perspective, the global economy continues to improve, though uncertainty remains due to COVID-19 and heightened concern over the increase in Delta variant cases.
We saw ongoing strength in many end markets, including home improvement, oral care and general industrial, along with a pickup in healthcare electric procedures.
We continue to work to mitigate ongoing inflationary pressures and supply chain challenges, as well as end-market dynamics such as the semiconductor shortage impacting automotive build rates and electronics.
We are also beginning to see a decline in pandemic-related demand for disposable respirators, which I will discuss on the next slide.
Looking forward, we will stay focused on investing in emerging growth opportunities, improving productivity and advancing sustainability.
We are confident in our ability to continue executing well in the face of COVID-19 uncertainties and are raising our full-year guidance for organic growth to 6% to 9%, and earnings per share to $9.70 to $10.10.
In the second quarter, we delivered total sales of $8.9 billion.
We posted organic growth of 21% versus a 13% decline in last year's second quarter, along with earnings of $2.59 per share.
We expanded adjusted EBITDA margins to over 27% and increased adjusted free cash flow to $1.6 billion with a conversion rate of 103%.
Strong cash flow allowed us to further strengthen our balance sheet while returning $1.4 billion to shareholders through dividends and share repurchases.
I am proud of our team's execution in a dynamic environment.
We are finding new ways to innovate for customers and improve our operational performance.
In addition to our strong day-to-day execution, we are investing to capitalize on favorable market trends and serve emerging customer needs.
I want to share a few impactful examples.
In healthcare, our innovative PREVENA therapy incision management system is the first and only medical device indicated by the U.S. FDA to help reduce surgical site infections in high-risk patients, helping lower the costly financial burden of complications, delivering on both improved clinical outcomes and cost savings for the healthcare system.
In automotive electrification, we are building on 3M's long history in consumer electronics and now expanding our solutions for the future of transportation, including new display technologies for both electric and internal combustion engines, helping us drive above-market growth in our automotive business.
In home improvement, we are building out a suite of innovations to help consumers personalize their homes, including our fast-growing line of command damage-free hanging solutions, $500 million franchise that leverages our world-class adhesive platform with even greater opportunities ahead.
We have increased opportunities across our businesses to apply 3M science and drive long-term growth, and we will continue to invest and win in those areas.
As you all have seen, the ongoing impact of COVID-19 is highly variable across geographies.
Since the onset of the pandemic, we have increased our annual respirator production fourfold to $2.5 billion by activating idle surge capacity and building additional lines, while shifting 90% of distribution into healthcare to protect nurses, doctors and first responders.
One of our strengths is to quickly adapt to changing marketplace needs.
Global demand reached its peak in Q1 of this year, which included stockpiling from governments and hospitals.
We are now seeing a deceleration in overall healthcare demand and our adjusting production, increasing supply to industrial and consumer channels while continuing to prioritize healthcare workers in the geographies seeing increased COVID-19 cases and elevated hospitalization rates.
As we do this, we are reducing overall output to meet end-market trends.
Like we have in the past, we are prepared to rapidly increase production in response to COVID-19-related needs or future emergencies when needed.
As I reflect on the first half, I am pleased with our performance.
We delivered strong sales and margin growth, along with good cash flow while building for the future and advancing sustainability with significant new carbon, water and plastic commitments.
In the second half, in addition to investing in growth, productivity and sustainability, we also must navigate ongoing COVID-19 impacts and continue taking actions to address inflationary pressures and supply chain challenges.
We will do this by driving an unrelenting focus on operational performance, which includes improving service, quality, operating costs and cash generation.
That wraps up my opening comments.
Companywide second-quarter sales were $8.9 billion, up 25% year on year or an increase of 21% on an organic basis.
Sales growth, combined with operating rigor and disciplined cost management, drove adjusted operating income of $2 billion, up 40%, with adjusted operating margins of 22%, up 240 basis points year on year.
Second-quarter GAAP and adjusted earnings per share were $2.59, up 44% compared to last year's adjusted results.
On this slide, you can see the components that impacted both operating margins and earnings per share as compared to Q2 last year.
A strong year-on-year organic volume growth, along with ongoing productivity, restructuring efforts and other items, added 4.1 percentage points to operating margins and $0.89 to earnings per share year on year.
Included in this margin and earnings benefit were a few items of note.
First, during the quarter, the Brazilian Supreme Court issued a ruling that clarified the calculation of Brazil's federal sales-based social tax, essentially lowering the social tax that 3M should have paid in prior years.
This favorable ruling added $91 million to operating income of 1 percentage point to operating margins and $0.12 to earnings per share.
Next, as you will see later today in our 10-Q, we increased our other environmental liability by nearly $60 million and our respiratory liabilities by approximately $20 million as part of our regular review.
In addition, we also incurred a year-on-year increase in ongoing legal defense costs.
We are currently scheduled to begin a PFAS-related trial in Michigan in October, along with the next step in the combat arms year plug multi-district litigation with one trial in September and one in October.
And finally, during the second quarter, we incurred a pre-tax restructuring charge of approximately $40 million as part of the program we announced in Q4 of last year.
Second-quarter net selling price and raw materials performance reduced both operating margins and earnings per share by 140 basis points and $0.17, respectively.
This headwind was larger than forecasted as we experienced broad-based cost increases for chemicals, resins, outsourced manufacturing and logistics as the quarter progressed.
As a result of these increasing cost trends, we now forecast a full-year raw materials and logistics cost headwind in the range of $0.65 to $0.80 per share versus a prior expectation of $0.30 to $0.50.
As we have discussed, we have been and are taking multiple actions including increasing selling prices to address these cost headwinds.
As a result, we expect continued improvement in our selling price performance in the second half of the year.
However, given the pace of cost increases, we currently expect a third-quarter net selling price and raw materials headwind to margins in the range of 50 to 100 basis points, which we anticipate will turn to a net benefit in the fourth quarter as our selling price and other actions start catching up to the increased costs.
Moving to divestiture impacts.
The lost income from the sale of drug delivery in May of last year was a headwind of 10 basis points to operating margins and $0.02 to earnings per share.
Foreign currency, net of hedging impacts, reduced margins 20 basis points while benefiting earnings by $0.08 per share.
Finally, three nonoperating items combined had a net neutral impact to earnings per share year on year.
This result included a $0.06 earnings benefit from lower other expenses, that was offset by higher tax rate and diluted share count, which were each a headwind of $0.03 per share versus last year.
We delivered another quarter of robust free cash flow with second-quarter adjusted free cash flow of $1.6 billion, up 2% year on year, along with conversion of 103%.
Our year-on-year free cash flow performance was driven by strong double-digit growth in sales and income, which was mostly offset by a timing of an income tax payment of approximately $400 million in last year's Q3, which is traditionally paid in Q2.
Through the first half of the year, we increased adjusted free cash flow to $3 billion versus $2.5 billion last year.
Second-quarter capital expenditures were $394 million and approximately $700 million year to date.
For the full year, we are currently tracking to the low end of our expected capex range of $1.8 billion to $2 billion, given vendor constraints and the pace of capital projects.
During the quarter, we returned $1.4 billion to shareholders through the combination of cash dividends of $858 million and share repurchases of $503 million.
Year to date, we have returned $2.5 billion to shareholders in the form of dividends and share repurchases.
Our strong cash flow generation and disciplined capital allocation enabled us to continue to strengthen our capital structure.
We ended the quarter with $12.7 billion in net debt, a reduction of $3.5 billion since the end of Q2 last year.
As a result, our net debt-to-EBITDA ratio has declined from 1.9 a year ago to 1.3 at the end of Q2.
Our net debt position, along with our strong cash flow generation capability, continues to provide us financial flexibility to invest in our business, pursue strategic opportunities and return cash to shareholders while maintaining a strong capital structure.
I will start with our safety and industrial business, which posted organic growth of 18% year on year in the second quarter, driven by improving industrial manufacturing activity and prior pandemic impacts.
First, starting with our personal safety business, we posted double-digit organic growth in our head, face, gearing and fall protection solutions as demand in general industrial and construction end markets remains strong.
However, this growth was more than offset by a decline in our overall respiratory portfolio due to last year's strong COVID-related demand resulting in an organic sales decline of low single digits for our personal safety business.
Within our respiratory portfolio, second-quarter disposable respirator sales increased 3% year on year but declined 11% sequentially as COVID-related hospitalizations declined.
Looking ahead, we anticipate continued deceleration in disposable respirator demand through the balance of this year and into 2022.
Turning to the rest of safety and industrial.
Organic growth was broad-based, led by double-digit increases in automotive aftermarket, roofing granules, abrasives, adhesives and tapes and electrical markets.
Safety and industrial's second-quarter operating income was $718 million, up 15% versus last year.
Operating margins were 22.1%, down 130 basis points year on year as leverage on sales growth was more than offset by increases in raw materials, logistics and ongoing legal costs.
Moving to transportation and electronics, which grew 24% organically despite sustained challenges from semiconductor supply chain constraints.
Organic growth was led by our auto OEM business, up 76% year on year, compared to a 49% increase in global car and light truck builds.
This outperformance was due to several factors.
First, the regional mix of year-on-year growth in car and light truck builds were in regions where we have high dollar content per vehicle.
Second, a year-on-year increase in sell-in of 3M products versus the change in build rate.
Lastly, we continue to apply 3M innovation to vehicles, gaining penetration onto new platforms.
Our electronics-related business was up double digits organically with continued strength in semiconductor, factory automation and data centers, along with consumer electronic devices, namely tablets and TVs.
Looking ahead, we continue to monitor the global semiconductor supply chain and its potential impact on the electronics and automotive industries.
Turning to the rest of transportation and electronics.
Advanced materials, commercial solutions and transportation safety each grew double digits year on year.
Second-quarter operating income was $546 million, up over 50% year on year.
Operating margins were 22%, up 340 basis points year on year, driven by strong leverage on sales growth, which was partially offset by increases in raw materials and logistic costs.
Turning to our healthcare business, which delivered second-quarter organic sales growth of 23%.
Organic growth was driven by continued year on year and sequential improvements in healthcare electric procedure volumes as COVID-related hospitalizations decline.
Our medical solutions business grew mid-teens organically or up approximately 20%, excluding the decline in disposable respirator demand.
I am pleased with the performance of Acelity, which grew nearly 20% organically in the quarter as it helps us build on our leadership in Advanced Wound Care.
Sales in our oral care business more than doubled from a year ago as patient visits have nearly returned to pre-COVID levels.
The separation and purification business increased 10% year on year due to ongoing demand for biopharma filtration solutions for COVID-related vaccine and therapeutics, along with improving demand for water filtration solutions.
Health information systems grew high single digits, driven by strong growth in clinician solutions.
And finally, food safety increased double digits organically as food safety activity returns, along with continued strong growth from new product introduction.
Health care's second-quarter operating income was $576 million, up over 90% year on year.
Operating margins were 25.3%, up 880 basis points.
Second-quarter margins were driven by leverage on sales growth, which was partially offset by increasing raw materials and logistics costs, along with increased investments in growth.
Lastly, second-quarter organic growth for our consumer business was 18% year on year with strong sell-in and sell-out trends across most retail channels.
Our home improvement business continues to perform well, up high teens organically on top of a strong comparison from a year ago.
This business continued to experience strong demand in many of our category-leading franchises, particularly Command, Filtrete and Meguiar's.
Stationery and office grew strong double digits organically in Q2 as this business laps last year's COVID-related comparisons.
We continue to see strength in consumer demand for scotch branded packaging and shipping products, along with improved sell-in trends in Post-it Solutions and Scotch branded home and office tapes as retailers prepare for back to school and return to workplace.
Our home care business was up low single digits organically versus last year's strong COVID-driven comparison.
And finally, our consumer health and safety business was up double digits as we lap COVID-related impacts from a year ago, along with improved supply of safety products for our retail customers.
Consumer's operating income was $311 million, up 12% year on year.
Operating margins were 21%, down 160 basis points as increased costs for raw materials, logistics and outsourced hard goods manufacturing, along with investments in advertising and merchandising more than offset leverage from sales growth.
While uncertainty remains, we expect global economic and end-market growth to remain strong, however, continue to be fluid as the world wrestles with ongoing COVID-related impacts that we all see and monitor.
Therefore, there are a number of items that will need to be navigated as we go through the second half of the year.
For example, we anticipate continued sequential improvement in healthcare elective procedure volumes.
Also, we expect ongoing strength in the home improvement market and currently anticipate students returning to classrooms and more people returning to the workplace.
Next, we remain focused on driving innovation and penetration with our global auto OEM and electronics customers.
These two end markets continue to converge as highlighted by the well-known constraints in semiconductor chip supply.
This limited chip supply is expected to reduce year-on-year automotive and electronics production volumes in the second half.
As mentioned earlier, we expect demand for disposable respirators to wane and negatively impact second-half revenues by approximately $100 million to $300 million year on year.
Turning to raw materials and logistics.
As noted, we anticipate a year-on-year earnings headwind of $0.65 to $0.80 per share for the full year or $0.40 to $0.55 in the second half due to rising cost pressures.
We are taking a number of actions, including broad-based selling price increases to help mitigate this headwind.
And finally, the restructuring program we announced last December remains on track.
As part of this program, we expect to incur a pre-tax charge in the range of $60 million to $110 million in the second half of this year.
Thus, taking into account our first-half performance, along with these factors, we are raising our full-year guidance for both organic growth and earnings per share.
Organic growth is estimated to be 6% to 9%, up from the previous range of 3% to 6%.
We now anticipate earnings of $9.70 to $10.10 per share against a prior range of $9.20 to $9.70.
Also, as you can see, we now expect free cash flow conversion in the range of 90% to 100% versus a prior range of 95% to 105%.
This adjustment is primarily due to ongoing challenges in global supply chains, raw materials and logistics, which are expected to persist for some time.
Turning to the third quarter, let me highlight a few items of note.
First, we currently anticipate continued improvement in healthcare electric procedure volumes across most parts of the world.
Global smartphone shipments are expected to be down high single digits year on year, while global car and light truck builds, I expect to be down 3% year on year.
Relative to disposable respirators, we anticipate a year-on-year reduction in sales of $50 million to $100 million due to continued decline in global demand.
As mentioned earlier, we are anticipating a third-quarter year-on-year operating margin headwind of 50 to 100 basis points from selling prices, net of higher raw materials and logistic costs.
On the restructuring front, which I previously discussed, we expect a Q3 pre-tax charge in the range of $50 million to $75 million as a part of this program.
And finally, we expect higher investments in growth, productivity and sustainability in the quarter, along with higher legal defense costs as proceedings progress.
To wrap up, our team has delivered a strong first-half performance, including broad-based growth, good operational execution, robust cash flows and an enhanced capital structure.
With that being said, there's always more we can do and will do.
We continue to prioritize capital to our greatest opportunities for growth, productivity and sustainability, while remaining focused on delivering for our customers, improving operating rigor and enhancing daily management.
| 3m sees fy earnings per share $9.70 to $10.10.
q2 sales $8.9 billion versus refinitiv ibes estimate of $8.56 billion.
sees fy earnings per share $9.70 to $10.10.
q2 adjusted earnings per share $2.59.
qtrly transportation and electronics sales of $2.5 billion, up 28.1 percent in u.s. dollars.
expects 2021 total sales growth of 7 to 10 percent with organic local-currency sales growth in range of 6 to 9 percent.
|
First, I will provide a short review of the second quarter financial results.
Then I'll cover recent performance trends of our key business model before turning the call over to Gary and Vince for their remarks.
F.N.B. second quarter earnings per share totaled $0.31, representing an 11% increase on a linked-quarter basis.
Operating net income reached a record $101 million and total revenue increased to $308.
Our performance resulted in a return on tangible common equity of 16% and growth in tangible book value per share to $8.20, an increase of $0.19 or 2%.
The quarter's efficiency ratio of 56.8% improved due to the benefit of increased revenue and continued expense discipline as we achieved the 2021 operating cost savings floor of $20 million.
Our company remains well capitalized with an estimated CET1 ratio of 10.02% for the second quarter.
Second quarter revenues, supported by record wealth management revenues and strong contributions across a number of segments, including insurance, mortgage banking, capital markets and SBA lending.
Many of these areas have continued to benefit from our expansion into higher growth markets.
On a year-to-date basis, wealth management revenues increased over 6 million, as total wealth management and insurance revenues increased 26% and 8% respectively.
Looking at the balance sheet, on an annualized linked-quarter basis, F.N.B. demonstrated strong fundamental performance as we saw a pickup in lending activity that translated into a significant spot loan growth of 9% when excluding the impact of PPP loan.
On a spot basis, total deposits were flat with seasonal outflows and a decline in time deposit balance.
Non-interest bearing deposits grew to $10.2 billion at June 30 and now comprise a third of total deposits.
This brings our loan-to-deposit ratio to 82.4% providing F.N.B. with ample liquidity and a favorable funding mix moving forward.
Diving deeper into the Wholesale Bank's performance this quarter, we are encouraged that commercial loan activity has begun to pick up across the footprint and pipelines are healthy entering the second half of the year.
We have significant opportunities within the commercial pipelines in the Carolinas.
Pittsburgh and Mid-Atlantic markets, which reached the highest level in the last two years.
Additionally, strength in the total near-term pipeline, give us optimism for strong second half for commercial loan origination.
Consistent with our comments on the April call, activity levels around commercial pipelines, as well as consumers are encouraging given our goal to reach mid single-digit loan growth on a spot basis by the end of the year.
However, I'll note that commercial line utilization rate remain well below historical level.
We are optimistic that utilization rates could move higher in the second half of this year as remaining PPP loans are processed through the forgiveness period and the U.S. economy begins to accelerate as the supply chain for many industries improves.
As we discussed on the prior call, our mortgage banking business continues to see near record production volumes; however, gain on sale margins contracted across the industry during the quarter were reflecting the current market conditions.
In addition to mortgage banking, the overall consumer pipelines have grown significantly since the beginning of the year.
We have begun to experience lending growth across the consumer product set.
As economic activity has begun to pick up, we are experiencing increased loan demand in commercial and consumer banking and favorable credit trends.
Our results for the second quarter were favorable and we are very pleased with our credit portfolios position moving into the second half of the year.
Delinquency and non-performing levels decreased meaningfully during the quarter and our net losses remained low.
Positive momentum of the broader economy and continued reopening of businesses have further contributed to the favorable results for the quarter, particularly as some borrowers in the more sensitive industries and asset classes begin to show signs of recovery.
I'll cover that in greater detail later in my remarks.
But first, let's walk through our credit results for the second quarter and review some of those highlights.
The level of delinquency excluding PPP balances ended June at 80 bps, a 9 basis point improvement linked quarter, which was driven by broad improvements across all portfolios, notably commercial and [Indecipherable].
The level of NPLs and OREO also improved to end the quarter at 58 basis points, representing a 14 basis point decrease from the prior quarter's ex-PPP level.
Our NPLs decreased meaningfully down nearly $30 million during the quarter, which was driven primarily by a $21 million reduction in the commercial portfolio, including the resolution of a credit that was previously reserved for.
Net charge-offs for the quarter were very low at $3.8 million or 6 basis points annualized.
While year-to-date net charge-offs remained at a very solid 9 bps annualized.
Non-GAAP net charge-offs excluding PPP balances were 7 bps and 10 bps for the quarter and year respectively.
We recognized a $1.1 million net benefit in provision this quarter following broadly improving economic activity and positive credit quality results through June, resulting in a stable reserve position at 1.42% while the ex-PPP reserve stands at 1.51%.
NPL coverage also remains very favorable at 278% due to reduced NPL levels during the quarter.
Our total ending reserve position inclusive of acquired unamortized discounts totals 1.58%.
I'd now like to provide some additional color on our loan portfolio and give an overview of our approach to underwriting and managing risk as lending markets remain highly competitive.
I think quickly on loan deferrals, we ended June at a level of 0.7% of our core loan portfolio with these levels continuing to decline as new requests have essentially ceased and borrowers returned to contractual payment schedules.
Our banking teams have also remained actively engaged with our commercial customers to stay apprised of how the broader economy and emerging trends are affecting their operations, including the impact of supply chain disruptions, labor shortages and the general future outlook for their respective industries.
These factors are all taken into careful consideration during our underwriting and credit approval processes, which is consistent with our overall credit philosophy.
We were successful in closing a number of high-quality lending opportunities in the quarter with strong borrowers that fit within our desired credit profile and we will continue to approach transactions in this manner to help us meet our growth targets, while maintaining our desired risk profile.
In closing, we had a successful quarter marked by solid credit results and low losses, which has us favorably positioned moving into the second half of the year.
We made significant progress working down rated credits as indicated by a 15% reduction in classifieds, reflecting the tireless efforts put forth by our work out teams to reduce exposure to more sensitive industries and take risk off the table as economic conditions continue to improve.
As we look ahead to new lending opportunities, our core credit principles that have served us well throughout economic cycles remains front and center in all credit decisions we make including consistent and disciplined underwriting across the footprint, attentive and timely management of risk, and proactive portfolio management to further position us for the quarters ahead.
Today, I will discuss our financial results and current expectations.
As noted on Slide 5, first quarter earnings per share increased to $0.31,, up significantly from the prior and year ago quarters.
Looking at highlights for the quarter, on an operating basis, net income available to common stockholders increased $18.3 million or 22% to a record $101.5 million as total revenue increased $2.1 million or 0.7%.
Operating expenses were well controlled, down $5 million linked quarter.
We saw a negative provision for credit losses due to the improved credit metrics that Gary just discussed.
Linked quarter growth and operating PPNR of $7 million or 6% reflects the company's strong performance in the quarter even without provision benefit.
Now turning to Slide 7 to review the balance sheet.
Period-end loan balances excluding PPP increased $515 million or 9.1% annualized on a linked quarter basis.
Through organic growth with strong contributions from both commercial and consumer segments, the economy continues to rebound.
On an average balance basis, total loans decreased $56 million reflecting accelerated PPP forgiveness during the second quarter.
On the deposit side, average deposits increased $1.1 billion or 3.9% to over $30 billion, a record high with non-interest bearing deposits comprising 33% of total deposits.
On a spot basis, deposits were relatively flat, even the managed decline in higher cost time deposits.
Focusing on Slide 8.
Net interest income increased $5 million to $227.9 million as the PPP contribution increased $2.2 million -- $25 million [Phonetic], which was offset by $1.9 million decreased contribution of purchase accounting accretion to $5.0 million.
The underlying net interest income trends improved due to a more favorable balance sheet mix and our continued focus on reducing deposit costs in the lower interest rate environment was evidenced by our total cost of interest bearing deposits declining 7 basis points to 24 basis points.
Reported net interest margin decreased 5 basis points to 2.70% as earning asset yield declined 9 basis points, which was partially offset by the 6 basis point reduction in the cost of funds.
The yield on total loans and leases remain stable at 3.51%.
When excluding the higher cash balances, purchase accounting accretion and PPP impacts, the underlying net interest margin would be 2.71%, representing a 1 basis point increase compared to the first quarter 2021 and the second quarter in a row of improving underlying net interest margin.
Let's now look at non-interest income and expense on Slides 9 and 10.
Non-interest income totaled $80 million decreasing $3 million from record levels last quarter.
We achieved record wealth management revenue of $15 million through contributions across the geographic footprint and positive market impacts on assets under management.
SBA volume and average size of transactions increased during the quarter, driving SBA premium revenues to $2.6 million almost double the prior quarter.
Pipelines in this business remain solid and we expect near-term SBA premium revenues to be strong.
Mortgage banking operations income decreased $8.3 million as gain on sale margins tightened meaningfully in the second quarter 2021 throughout the industry.
Held for sale pipeline declined significantly elevated levels and the benefit for mortgage servicing rights impairment valuation recovery was $2.2 million lower than last quarter.
Non-interest expense decreased $2.4 million linked quarter on a reported basis.
When excluding $2.6 million of branch consolidation costs in the quarter, non-interest expense decreased $5 million or 2.7%.
On an operating basis, salaries and employee benefits decreased %5.3 million or 4.9%, primarily related to the timing of normal annual long-term stock awards recognized in the first quarter each year.
Outside services expenses increased $1.8 million reflecting increases from third-party technology providers, legal costs and other consulting engagements.
We are very pleased with this quarter's results with record operating net income, accelerating sequential loan growth, strong revenue growth, solid credit quality metrics, continued growth in tangible book value per share, increasing $0.19 per share to $8.20.
Now turning to our outlook for the third quarter of 2021.
Excluding PPP contribution, we would expect net interest income to be up slightly in the third quarter compared to the second quarter.
The level of PPP contribution will be a direct function of the modest forgiveness process during the quarter.
Our current thinking is that we will see around $500 million of forgiveness in the third quarter, which would translate into a $79 million reduction in net interest income contribution from PPP loans.
However, if the SBA approves forgiveness closer to second quarter levels, the reduction in PPP contribution would be smaller.
We expect non-interest income to be in the high $70 million area given the diversified nature of our non-interest income revenue streams.
We expect non-interest expense to be flattish compared to operating expenses in the second quarter.
Our provision for loan losses remains dependent on the level of loan origination activity and we are encouraged by the favorable credit trends observed during the first half of 2021.
Regarding our full year assumptions, our loan growth, total revenue and non-interest expense assumptions remain unchanged with current deposit growth reflecting the benefit of additional government stimulus as we continue to see increased liquidity and a loan-to-deposit ratio below historical levels.
I'd like to provide an update on the pending Howard acquisition.
We are excited to begin the integration process with the Howard team.
We are confident that our established leadership in the Mid-Atlantic market will work well with the talented bankers at Howard.
We share a deep culture of client and community service, which should allow for a seamless transition in the coming months for all of our stakeholders.
We also expect the conversion and integration to run smoothly as both organizations operate on common core system.
As discussed previously, our decision to selectively enter higher growth markets through a combination of de novo locations, loan production offices and strategic acquisitions has F.N.B well positioned today.
With the Howard merger, we will grow to the number 6 deposit share in the Baltimore MSA, while adding meaningful customer density to the Mid-Atlantic region, which covers Maryland, Washington DC and Northern Virginia.
Our long-term strategy is to best position our company in the markets where we have the ability to grow loans, low cost deposits and fee income organically through increasing our market share over the long term and expanding the universe of clients and prospects.
If you look at our market expansion strategy in the Mid-Atlantic, our four acquisitions since 2013 came in a lower relative acquisition cost with a weighted average price to tangible book of 1.5 times.
Our growth strategy in the Mid-Atlantic region provided access to a population of 10 million and more than 300,000 businesses with revenue greater than 100,000.
Since the end of 2015, our compounded annual organic loan growth for F.N.B in Maryland is 15%.
Furthermore, as a company overall, we have nearly doubled our annual non-interest income since 2015 from $162 million to $294 million, most of which has to do with our investment in products and services, but also bringing those capabilities into our expansion markets and broadening our client relationships.
Therefore, we are very excited about our long-term potential for growth as we offer our deep product suite to Howard's customer base.
Looking specifically at some of the transaction highlights.
The Howard franchise increases F.N.B. Baltimore deposits by $1.7 billion to $3.5 billion on a pro forma basis, while creating a combined organization of more than $41 billion in total assets.
Additionally, the transaction carries lower execution risk given the end market synergies.
We view the transaction as financially attractive with a 4% earnings per share accretion with fully phased-in cost savings and enhanced pro forma profitability metrics, which included 200 basis point improvement in the efficiency ratio and an internal rate of return greater than 25%.
Consistent with our approach to capital management, the transaction is expected to be neutral to CET1 at closing and includes minimal tangible book value dilution of 2%.
As I noted earlier, our TBV growth this quarter alone was 2%, essentially earning the TBV dilution back in one quarter.
Our M&A strategy hasn't changed from what we said in the last couple of quarters.
First and foremost, our focus is on organic growth.
But if opportunities arise, where the target is in market, has potential for significant cost saves and carries low execution risk with minimal tangible book value dilution, the potential acquisition becomes worthy of evaluation.
We are excited about the opportunities in front of us as our organization continues to flourish and evolve as a more diversified financial institution.
Last month, we were honored to be named as the Top Workplace in Northeast Ohio for the 7th consecutive year and our 30th Workplace recognition overall, which are based solely on employee feedback.
In closing, we are focused on continuing our commitment to advance our market position by gaining scale and operational efficiency and by cultivating a great culture and meaningful lasting relationships with our clients and communities while simultaneously creating value for our shareholders.
| compname reports q2 revenue $308 mln.
q2 non-gaap earnings per share $0.31 excluding items.
q2 revenue $308 million versus refinitiv ibes estimate of $305.2 million.
corp quarterly net interest income $227.9 million versus $227.96 million.
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Let's begin with the highlights on the Slide 4.
Our sales for the quarter were $296 million.
We had a significant headwind in our automotive segment, due to the ongoing supply chain disruptions, particularly the semiconductor shortage.
That shortage led to Auto OEM production slowdowns and some cases production shutdowns.
This in turn led directly to lower sales in our Automotive segment, especially in North America.
Helping to offset that auto headwind were near record sales in our Industrial segment.
There was strength in sales across all our industrial product categories, but in particular, we saw growth in electric vehicle busbars, commercial vehicle lighting and radio remote controls.
Respectively, these products are benefiting from the macro growth trends of electrification, e-commerce and automation.
The industrial sales in our portfolio relative our Automotive sales continue to grow.
As I mentioned, our team continuing to face supply chain challenges.
These include the ongoing semiconductor chip shortage, pandemic-related supply chain disruptions and port congestion, all of which are increasing costs and consequently negatively impacting margins.
Our team has worked diligently to mitigate these challenges, which in many cases require remedial actions such as expedited shipping and premium component pricing.
In addition, we are working relentlessly with our customers to share in the absorption of these costs.
The timing of these cost recoveries is not certain.
At this point, our expectation is that these conditions will last until the end of our fiscal year.
This extended period of demand recovery and margin pressure is a driver of our revised guidance for the full fiscal year.
The situation is fluid and our mitigation efforts are ongoing, but we are confident that we will continue to execute and meet our customers' requirements.
Ron will provide more detail on our guidance later in the call.
On the new order front, we were encouraged by the diversity of awards across key applications.
In addition to our traditional automotive market, we secured awards of cloud computing, commercial vehicle and EV applications.
Focusing on EV, last quarter, we reported that sales into EV applications were 16% of the consolidated sales.
This quarter, EV sales were again 16% of consolidated sales.
However, on a dollar basis, they were higher and in fact, we were a record for Methode.
Our expectation for that percentage for the full year continues to be in the mid-teens.
In the quarter, we further reduced debt, generated positive operating cash flow and continued to return capital to shareholders.
Our free cash flow was positive even though we invested in inventory to support our deliveries to customers and to help mitigate supply chain disruptions.
While our debt was down, we did have an increase in net debt as we utilized a portion of our available cash to execute a $35 million share buyback in the quarter.
We have now executed half of $100 million stock buyback authorization since it was announced last March.
Before I provide detail on our business awards, I want to provide some information on an existing program.
I can now share with you a little more detail on our largest truck center console program.
We expect a small portion of that sales from this program to start to roll off late this fiscal year, which was included in our original full-year guidance.
Then in fiscal 2023, we expect the bulk of the remaining truck program sales to roll off in the range of $90 million to $100 million.
The fiscal 2024 impact is negligible.
As I've mentioned in recent quarters, our business awards over the last couple of years have put us on track in aggregate to replace the sales from the roll off of this truck program.
Moving to Slide 5.
Methode had another solid quarter of business awards.
These awards continue to capitalize in key market trends like cloud computing and vehicle electrification.
The awards identified here represent some of the key business wins in the quarter and represent $25 million in annual sales at full production.
In non-EV automotive, we're awarded programs for lighting and user Interface applications.
In cloud computing, we saw demand for our power distribution products in data center applications.
In commercial vehicles where signs of an upcycle continue, we were awarded programs for exterior lighting solutions.
In EV, we want awards for switch, lighting and power distribution programs.
Overall, our business are delivering on our strategic priority to drive customer product and geographic diversity.
To conclude, despite the ongoing demand fluctuations and supply chain challenges, we are still in a position to deliver solid organic growth sales for fiscal 2022, while generating positive free cash flow.
Second quarter net sales were $295.5 million in fiscal year '22 compared to $300.8 million in fiscal year '21, a decrease of $5.3 million or 1.8%.
The year-over-year quarterly comparisons included a favorable foreign currency impact on sales of $2.8 million in the current quarter.
Sequentially, sales increased by $7.7 million or 2.7% from the first quarter of fiscal year '22.
The decrease in second quarter sales was mainly due to lower automotive sales, especially in North America as compared to the same period in fiscal '21, which benefited from the rebound from the depths of the impact of COVID-19 pandemic experience in our first quarter of fiscal year '21.
The sales decrease was partially offset by higher sales of electric hybrid vehicle products, which amounted to 16% of sales in the second quarter of fiscal 2022, which was in line with our previous communication at electric and hybrid vehicles sales would comprise a mid-teens percentage of our fiscal year '22 consolidated sales.
In addition, stronger commercial vehicle sales contributed to the robust industrial segment sales growth.
Second quarter net income decreased $11.1 million to $27.5 million or $0.72 per diluted share from $38.6 million or $1.01 per diluted share in the same period last year.
Net income was negatively impacted from decreased sales, the impact of higher materials and logistics costs and other operating costs in the efficiencies, due to the global supply chain shortages and logistics challenges, higher stock-based compensation cost, and lower other income, partially offset by lower restructuring costs and favorable foreign currency translation.
Second quarter gross margins were lower in fiscal year '22 as compared to fiscal year '21, mainly due to higher material and logistics costs, including freight and supply chain shortages and unfavorable product mix.
Fiscal year '22 second quarter margins were 23.4% as compared to 26.9% in the second quarter of fiscal year '21.
The negative impact of supply chain disruption and higher logistics costs, including freight on the second quarter fiscal year '22 gross margin was approximately 250 basis points.
Unfavorable product mix also impacted gross margins.
These higher costs that were experienced in the second quarter are expected to continue and further into fiscal year '22.
In addition, we had anticipated a degree of cost inflation in the remainder of the current fiscal year.
Fiscal year '22 second quarter selling and administrative expenses, as a percentage of sales, increased to 10.6% compared to 10.2% in the fiscal year '21 second quarter.
The minor fiscal year '22 second quarter percentage increase was achieved, but all to higher stock-based compensation, partially offset by lower professional fees and restructuring costs.
The second quarter of fiscal year '22 selling and administrative expenses percentage is in line with our historical norm, which should yield an efficient flow-through from gross margin to operating income.
In addition to the gross margin and selling and administrative items mentioned above, one other non-operational items significantly impacted net income in the second quarter of fiscal year '22 as compared to the comparable quarter last fiscal year.
Other income net was down by $1.7 million, mainly due to lower international government assistance between the comparable quarters and increased foreign exchange losses from remeasurement.
The effective tax rate in the second quarter of fiscal year '22 was 16.7% as compared to 16.5% in the second quarter of fiscal year '21.
The fiscal year '22 full-year estimate, which does not include any discrete items, is estimated to be between 17% and 18%, tightening the high end of the range down from 19% to 18%.
Shifting to EBITDA, a non-GAAP financial measure, fiscal year '22 second quarter EBITDA was $47.4 million versus $60.2 million in the same period last fiscal year.
EBITDA was negative negatively impacted by lower operating income and lower other income.
In the second quarter of fiscal year '22, we reduced gross debt by $12.3 million, and we ended the second quarter with $177.2 million in cash.
During the first six months of fiscal year '22, net debt a non-GAAP financial measure, increased by $39 million, mainly due to the share repurchases of $42.4 million and unfavorable working capital changes, especially related to inventory, which increased by nearly $26 million due to the supply chain-related challenges.
Regarding capital allocation on March 31, we announced a $100 million share repurchase program, which we executed nearly $35 million of purchases during the second quarter of fiscal year '22.
Since the authorization's approval, we purchased nearly 50 million worth of shares at an average price of $44.04.
Free cash flow, a non-GAAP financial measure as defined as net cash provided from operating activities, minus capex.
For the fiscal year '22 second quarter, free cash flow was $21.6 million compared to $36.7 million in the second quarter of fiscal year '21.
The decrease was mainly due to negative working capital changes, especially from the inventory items we discussed prior.
We experienced sequentially improved free cash flow in the second quarter of fiscal '22 as compared to the first quarter of fiscal '22.
We anticipate our proven history of generating reliable cash flows, which allows for ample funding of future organic growth, inorganic growth and continued return of capital to the shareholders.
In the second quarter of fiscal year '22, we invested approximately $5.4 million in capex as compared to $3.6 million in the second quarter of fiscal year '21.
The higher capex is in line with our expectation that capex in fiscal year '22 would be higher than the investment in the prior fiscal year.
We now estimate fiscal year '22 capex to be in the $45 million to $50 million range, which is lower than the prior estimates for the current fiscal year of $50 million to $55 million we provide earlier.
The decrease is simply the result of the timing of the cash outflows of approved projects as opposed to a concerted effort to slow or reduce the guidance of capital investment.
Investing for future organic growth and vertical integration remains a key priority from a capital allocation strategy perspective.
We do have a strong balance sheet, and we'll continue to utilize it by continuing investment in our businesses to grow them organically.
In addition, we continue to pursue opportunities for inorganic growth in a measured return of capital to the shareholders.
Regarding guidance, it is managed -- it is based on management's best estimates.
External events and the related potential impact on our financial results remain an ongoing challenge.
As Don mentioned in his remarks, we lowered our previously issued revenue and earnings per share guidance, largely due to the persistent headwinds from the ongoing negative impact of the chip shortage and logistics challenges.
As you recall in our September conference call, we noted that the persistent headwinds could call our performance to be below the midpoint of the ranges of our original guidance as a situation was fluid and would likely remain challenging.
These headwinds continue to adversely impact our second quarter results and will likely be with us for the remaining six months of our fiscal year.
The revenue range for full fiscal year '22 is between $1.14 billion and $1.16 billion, down from a range of $1.175 billion to $1.235 billion.
Diluted earnings per share range is now between $3 per share and $3.20 per share, down from $3.35 to $3.75 per share.
The range is due from the uncertainty from the supply chain disruption for semiconductors and other materials on both Methode and as customers.
From a sales perspective, lower sales could result from a supply disruptions to us or our customers, which could result in lesser demand for our products or our ability to meet customer demand.
Continued supply chain disruption would also negatively impact gross margins, due to additional costs incurred from premium freight, factory inefficiencies and a lesser extent, other logistic factors such as port congestion.
Higher costs for materials, freight and labor are a constant and a dynamic battle, and we remain uncertain as to when things will stabilize.
Don, that concludes my comments.
Matt, we are ready to take questions.
| q2 earnings per share $0.72.
q2 sales $295.5 million.
sees fy earnings per share $3.00 to $3.20.
sees fy sales $1.14 billion to $1.16 billion.
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During today's conference call, we'll make certain predictive statements that reflect our current views about 3M's future performance and financial results.
In a dynamic environment, our performance throughout 2021 has shown the skill of our people around the world, the resiliency of our business model and the relevance of our technologies.
In the third quarter and year to date, we have delivered broad-based organic growth across all business groups and geographic areas, along with good margins and strong cash flow.
Q3 organic growth was over 6% as we drove innovation across our market-leading businesses, with margins of 20% and earnings of $2.45 per share.
Geographically, growth in the quarter was led by the Americas, up 7%, with the United States up 6%.
Growth in APAC was 6%, with China up 3%, and Japan up 6%, while EMEA grew 4%.
With respect to the macro environment, overall end market demand remains strong, though the semiconductor shortage continues to impact many markets, most visibly in electronics and automotive.
As we navigate near-term uncertainty, we continue to invest in growth, productivity and sustainability, which I will discuss shortly.
We are also actively managing disruptions in the global supply chain with a relentless focus on customer service.
Looking at our performance through nine months, we have executed well and delivered 11% organic growth with all business groups above 10%, along with margins of 22% and earnings of $7.81 per share.
Today, we are updating full-year expectations for organic growth to a range of 8% to 9% and earnings per share to a range of $9.70 to $9.90, reflecting our results to date and ongoing supply chain challenges.
I would like to make a few comments on how 3M is actively managing those challenges.
As you know, many companies are facing supply chain disruptions.
the result of a convergence of issues, including the Delta variant, strong demand, energy, and labor shortages and extreme weather events.
For example, ocean freight costs have more than doubled over the last year and the number of containers on the water is up 70% because of port congestion.
Suppliers are challenged to provide consistent and predictable supply.
On any given day, we are working with more than 300 suppliers with critical constraints.
With manufacturing sites in 35 countries around the world and as a $5 billion annual exporter out of the United States, we are working tirelessly to serve our customers.
The cornerstone of 3M's response is our expertise and deep relationships across the supply chain, along with our local for local manufacturing and supply chain strategy, which helps us move with agility and keep our factories running.
We have daily meetings with suppliers to strengthen our planning, and in some instances, are strategically prioritizing geographies, end markets, and portfolios; hard but necessary decisions to ensure we meet the most critical needs of our customers.
We are moving product in different ways, such as expanding our use of rail, shipping out of more flexible ports, and increasing our use of charter flights by over 40%, while deploying new capabilities to better track our flow of goods in real time.
Maintaining talent is also key, and we are using several tactics to attract new workers while protecting the health and safety of all of our employees.
Some of our actions have impacted our productivity and gross margins, which Monish will touch on.
But we will do what is necessary to take care of customers.
The combination of strong demand along with supply chain challenges is also contributing to broad-based inflation.
We are taking multiple actions to help offset inflationary pressures, including price increases, dual sourcing and improving factory yields with more work to do.
Ultimately, the duration of these supply chain challenges is difficult to predict.
We remain focused on serving customers, managing backlogs and making good on our commitments, delivering the unique high-quality products that are the hallmark of 3M.
While we execute day to day, we are investing to drive long-term growth and capitalize on trends in large attractive markets.
In home improvement, for example, we have multiple $0.5 billion-plus franchises that keep families healthier and more productive, including our fast-growing Command damage-free hanging solutions and Filtrete home filtration products.
These brands leverage 3M's deep expertise in adhesives and nonwoven materials.
The same technology is helping drive success in our automotive business, which consistently outgrows build rates.
Auto electrification sales are up 40% year to date on the strength of new innovations including advanced display technologies as automobiles become the next consumer electronic device.
In healthcare, the biopharma market is growing more than 10% annually, with our business up more than 30% year to date as 3M Science has supported the unprecedented pace of advancement over the past 18 months to develop therapeutics and vaccines and scale manufacturing to help address the pandemic.
The fundamental strengths of 3M, our unique technology platforms, advanced manufacturing, global capabilities and leading brands position us to win, and we will continue to invest in these areas.
In a similar way, we are driving productivity by advancing digital capabilities across our operations, allowing us to expand our use of data and data analytics.
In sustainability, we have achieved 50% renewable electricity use in our operations, four years ahead of our timeline, on our way to 100%.
We are advancing the environmental goals we announced earlier in the year, making the investments to accelerate our ability to achieve carbon neutrality, reduce water use and improve the quality of water returned to the environment from our industrial processes.
In addition, we are proactively managing PFAS, making our factories and communities stronger and more sustainable.
In Cottage Grove, Minnesota, we recently announced that we are closing our incinerator and partnering with a leading disposal company to more efficiently manage our waste streams.
We just broke ground to add new filtration technology in Cordova, Illinois.
In Zwijndrecht, Belgium, we are working with government officials to resolve issues related to PFAS and we'll invest up to EUR 125 million over the next three years to improve water quality around our factory.
These proactive initiatives and others are accelerating 3M's ability to go beyond current regulatory standards and deliver on our commitments.
With respect to the PFAS strategic road map announced last week, 3M remains committed to working with the Biden administration, EPA and others in taking a science-based approach to managing PFAS.
Let me also touch on a few litigation updates.
Last week, we announced a collaborative agreement to resolve litigation related to PFAS near our facility in Decatur, Alabama.
The impact is included in our previously disclosed reserves.
On combat arms, there have been four bellwether trials so far, with six additional trials here in the fourth quarter.
We are early in this litigation, and we'll continue to actively defend ourselves, including through the appeal process.
As always, we encourage you to read our 10-Q for updates on all litigation matters.
To wrap up, we are driving strong results in a challenging environment, investing in attractive end markets and positioning 3M for continued growth.
I am proud of our 3M team, which is united by a common purpose, unlocking the power of people, ideas and science to reimagine what's possible and create what's next.
As I look back on the quarter, the 3M team demonstrated the resilience of our business model and the relevance of our technologies as we executed well in a very challenging environment, effectively navigating the supply chain disruption while serving and innovating for our customers.
Though manufacturing, raw materials and logistics challenges persisted throughout the quarter, we continue to invest in the business while driving operating rigor and managing costs.
Turning to the third-quarter financial results.
Sales were $8.9 billion, up 7.1% year on year, or an increase of 6.3% on an organic basis.
Operating income was $1.8 billion, down 6%, with operating margins of 20%, coming in at the top end of the range, which we had previously communicated in mid-September.
Third-quarter earnings per share were $2.45, which was similar to last year.
On this slide, you can see the components that impacted both operating margins and earnings per share as compared to Q3 last year.
Our strong year-on-year organic volume growth was more than offset by the headwinds resulting from the global supply chain challenges, investments in growth and sustainability, and litigation-related costs.
Combined, these impacts lowered operating margins by 1.4 percentage points and earnings per share by $0.02 year on year.
The restructuring program we announced in Q4 of last year remains on track.
As part of this program, we incurred a pre-tax restructuring charge of $50 million in the third quarter.
This charge was offset by the benefits we achieved this quarter.
Moving to price and raw materials.
As expected, increases in selling price gained traction as we went through the quarter, with year-on-year selling prices up 140 basis points in Q3 versus 10 basis points in Q2.
However, we continue to experience higher cost for raw materials, logistics and outsourced manufacturing, which outpaced the increase in selling prices.
Thus, third-quarter net selling price and raw materials performance reduced both operating margins and earnings by 130 basis points and $0.12 per share, respectively versus Q3 last year.
Looking at Q4, we expect our selling price actions to continue to gain traction as we work to mitigate the raw material and logistics inflationary pressures we have experienced throughout the year.
Next, foreign currency net of hedging impacts reduced margins 20 basis points and earnings by $0.01 per share.
Also, three other non-operating items impacted our year-on-year earnings per share performance.
First, lower other expenses resulted in an $0.08 earnings benefit.
Consistent with prior quarters, non-operating pension was a $0.05 benefit, along with a $0.02 benefit from net interest due to a proactive early redemption of debt.
Secondly, a lower tax rate versus last year provided a $0.09 benefit to earnings per share.
The tax rate was lower due to favorable adjustments this year related to impacts of U.S. international tax provisions.
Our year-to-date tax rate is 18.8%.
Therefore, we now expect our full-year tax rate in the range of 18.5% to 19.5% versus 20% to 21% previously.
And finally, average diluted shares outstanding increased 1% versus Q3 last year, lowering per share earnings by $0.02.
Third quarter adjusted free cash flow of $1.5 billion was down 29% year on year, with conversion of 107%.
Adjusted free cash flow year to date was $4.5 billion, which was similar to last year, with free cash flow conversion of 98%.
The decline in our year-on-year free cash flow performance was primarily driven by higher inventory balances due to strong customer demand, along with raw material inflation and more goods in transit as a result of the ongoing global supply chain challenges.
Third-quarter capital expenditures were $343 million and $1 billion year to date.
For the full year, we now expect capex investments in the range of $1.5 billion to $1.6 billion versus being at the low end of our prior range of $1.8 billion to $2 billion.
We continue to step up investments in growth, productivity and sustainability.
However, the pace of projects continues to be impacted by supply chain and vendor constraints.
During the quarter, we returned $1.4 billion to shareholders through the combination of cash dividends of $856 million and share repurchases of $527 million.
Year to date, we have returned $3.8 billion to shareholders in the form of dividends and share repurchases.
Our net debt position, strong cash flow generation capability and disciplined capital allocation continues to provide us financial flexibility to invest in our business, pursue strategic opportunities and return cash to shareholders while maintaining a strong capital structure.
I will start with our safety and industrial business, which posted organic growth of 6.1% year on year in the third quarter.
Organic growth was driven by continued robust industrial manufacturing activity, along with prior-year pandemic-related impacts.
First, our personal safety business declined 4% organically, up against a 40% pandemic-driven comparison a year ago.
Third-quarter disposable respirator sales decreased 7% organically year on year and 15% sequentially.
Looking ahead, we anticipate continued deceleration in disposable respirator demand through the balance of this year and into 2022.
Turning to the rest of safety and industrial.
Organic growth was led by double-digit increases in adhesives and tapes, abrasives and electrical markets.
In addition, closure and masking systems was up high-single digits, automotive aftermarket up low-single digits, while roofing granules declined against a strong comparison from last year.
Safety and industrial's third-quarter operating income was $620 million, down 20% versus last year.
Operating margins were 19.2%, down 650 basis points year on year as leverage on sales growth was more than offset by ongoing increases in raw materials, logistics, and litigation-related costs, along with manufacturing productivity impacts.
Moving to transportation and electronics, which grew 5.1% organically despite the continued impact of semiconductor supply chain constraints.
Our auto OEM business was flat year on year, compared to the 20% decline in global car and light truck builds.
This outperformance was due to a few factors: First, we continue to grow our penetration by driving 3M innovation onto new automotive platforms.
Second, we saw a notable increase in channel inventories at tier suppliers given the dramatic reductions in OEM's build forecast through the quarter.
Lastly, we benefited from a vehicle model mix standpoint as auto OEMs produce more premium vehicles which tend to have higher 3M contact.
Our electronics-related business declined low single digits organically, with declines across consumer electronics, particularly smartphones and TVs as OEMs faced production challenges due to ongoing semiconductor constraints and COVID-related impacts.
These declines were partially offset by continued strong demand for our products and solutions in semiconductor and factory automation end markets.
Turning to the rest of transportation and electronics.
Advanced materials and commercial solutions each grew double digits year on year, while transportation safety grew low-single digits.
Third-quarter operating income was $465 million, down 9% year on year.
Operating margins were 19%, down 320 basis points year on year, driven by strong leverage on sales growth, which was more than offset by increases in raw materials and logistics costs along with manufacturing productivity impacts.
Turning to our healthcare business, which delivered third-quarter organic sales growth of 3.3%.
Our medical solutions business declined low-single digits organically, impacted by the continued decline in demand for disposable respirators along with the pace of hospital elective procedure volumes, which came in at the low end of industry expectations of 90% to 95% for the quarter.
Sales in our oral care business grew low double digits year on year as dental procedures continue to be near pre-COVID levels.
The separation and purification business increased high single digits year on year due to ongoing demand for biopharma filtration solutions for COVID-related vaccines and therapeutics, Health information systems grew low double digits driven by strong growth in clinician solutions.
And finally, food safety increased double digits as food service activity returns.
Health care's third-quarter operating income was $529 million, up 7% year on year.
Operating margins were 23.5%, up 70 basis points.
Third-quarter margins were driven by leverage on sales growth, which is partially offset by the increasing raw materials and logistics costs, manufacturing productivity impacts, along with increased investments in growth.
Lastly, third-quarter organic growth for our Consumer business was 7.6% year on year with continued strong sell-in and sell-out trends across most retail channels.
Our home improvement business continues to perform well, up high-single digits on top of a strong comparison from a year ago.
This business continued to experience strong demand, particularly in our Command and Filtrete category-leading franchises.
Stationery and office grew double digits organically in Q3 as this business laps last year's COVID-related comparisons.
We also had strong back-to-school consumer demand and holiday-related sell-in for Scotch-branded packaging and shipping products, Post-it solutions and Scotch-branded home and office states.
Our home care business was up low single digits versus last year's strong COVID-driven comparison.
And finally, our consumer health and safety business was up high single digits as we lap COVID-related impacts from a year ago.
Consumer's operating income was $332 million, down 3% year on year.
Operating margins were 21.7%, down 260 basis points as increased cost for raw materials, logistics and outsourced hard goods manufacturing more than offset leverage from sales growth.
As we reflect on the macroeconomic environment, we expect demand to remain strong across most end markets.
However, uncertainty persists given the ongoing impacts of the pandemic along with a well-known global supply chain, raw materials and logistics challenges that all companies are working through.
Looking ahead, we remain focused on our customers and doing what is necessary to serve them as we continue to navigate the fluid environment.
We are increasing the bottom end of our expectations for organic growth.
We now project our full-year organic growth to be in the range of 8% to 9% versus a prior range of 6% to 9%.
With respect to earnings, we anticipate a range of $9.70 to $9.90 per share as compared to a prior range of $9.70 to $10.10.
And finally, we expect to continue to generate strong free cash flow.
Therefore, we are maintaining our free cash flow conversion range of 90% to 100%.
This updated outlook implies a wider than normal fourth-quarter range, accounting for ongoing impacts of COVID and the uncertain supply chain environment.
For example, from a growth perspective, the well-known constraints in semiconductor chip supply are impacting more and more end markets, most notably, automotive and consumer electronics as reflected in the lower production forecast for the year.
We anticipate global elective healthcare procedure volumes to stabilize with recent trends.
Relative to disposable respirators, we expect continued impacts from the decline in healthcare-related demand, along with elevated inventory levels in the industrial channel.
And finally, we expect our pricing actions to continue to gain traction as we work to mitigate raw material and logistics cost pressures.
As we have discussed, we are actively managing inefficiencies in global supply chains with a relentless focus on customer service.
Therefore, we are adjusting demand plans with greater frequency and as a result, incurring more manufacturing production changeovers along with expediting shipments.
All of these actions are impacting both cost and productivity, but we are taking the necessary steps to ensure we meet the most critical need of our customers.
We continue to make progress relative to December 2020 restructuring announcement.
To date, we have incurred over $240 million in pre-tax restructuring charges and anticipate an additional $25 million to $50 million in Q4.
We now expect total pre-tax restructuring charges of $300 million to $325 million versus our original expectations of $250 million to $300 million.
We expect the remaining actions under this program to be initiated by the first quarter of 2022.
In addition, we expect to incur higher costs related to our ongoing litigation matters, along with increases in our other indirect related costs like travel expense.
And finally, we continue to invest in the business for the long term, and therefore, anticipate increased investments in growth, productivity, and sustainability.
We have a very steady eye on the long term to deliver growth, margin and cash through strong operating rigor while continuing to navigate the uncertainty in the short run.
| compname reports q3 earnings per share of $2.45.
q3 earnings per share $2.45.
q3 sales rose 7.1 percent to $8.9 billion.
qtrly organic local-currency sales increased 6.3 percent.
updates full-year 2021 outlook.
sees fy total sales growth 9% to 10%.
sees fy earnings per share $9.70 to $9.90.
qtrly consumer sales of $1.5 billion, up 8.1 percent in u.s. dollars.
|
Going to Slide 2.
Today, we have on the call, Drew DeFerrari, our Chief Financial Officer; and Ryan Urness, our General Counsel.
Now moving to Slide 4, and a review of our first quarter results.
As we review our results, please note that in our comments today and in the accompanying slides, we reference certain non-GAAP measures.
We refer you to the quarterly report section of our website for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.
Now, for the quarter.
Revenue was $727.5 million, a decrease of 10.7%.
Organic revenue excluding $3.9 million of storm restoration services in the quarter declined 11.1%.
As we deployed 1 gigabit wireline networks, wireless/wireline converged networks and wireless networks this quarter reflected an increase in demand from two of our top five customers.
Gross margins were 14.8% of revenue, reflecting the continued impacts of the complexity of a large customer program.
Revenue declined year-over-year with other large customers and the effects of winter weather in the first half of the quarter.
General and administrative expenses were 9.2% and all of these factors produced adjusted EBITDA of $44.1 million or 6.1% of revenue.
And adjusted loss per share of $0.04 compared to earnings per share of $0.36 in the year ago quarter.
Liquidity was strong at $477.4 million and operating cash flow was $41.5 million.
Finally, during the quarter we issued $500 million in 4.5% senior notes due in April 2029, and resized and extended our credit facility through April of 2026.
These two transactions leave the company solidly financed as we look forward to better performance.
Now going to Slide 5.
Today, major industry participants are constructing or upgrading significant wireline networks across broad sections of the country.
These wireline networks are generally designed to provision 1 gigabit network speeds to individual consumers and businesses, either directly or wirelessly using 5G technologies.
Industry participants have stated their belief that a single high capacity fiber network can most cost-effectively deliver services to both consumers and businesses, enabling multiple revenue streams from a single investment.
This view is increasing the appetite for fiber deployments and we believe that the industry effort to deploy high capacity fiber networks continues to meaningfully broaden our set of opportunities.
Increasing access to high capacity telecommunications continues to be crucial to society, especially in rural America.
The wide and active participation in the completed FCC RDOF auction augurs well for dramatically increased rural network investment, supported by private capital that in the case of at least some of the participants is expected to be significantly more than the FCC subsidy.
We are providing program management planning, engineering and design, aerial and underground and wireless construction and fulfillment services for 1 gigabit deployments.
These services are being provided across the country in numerous geographic areas to multiple customers, including customers who have initiated broad fiber deployments, as well as customers who have resumed broad deployments.
These deployments include networks consisting entirely of wired network elements as well as converged wireless/wireline multi-use networks.
Fiber network deployment opportunities are increasing in rural America, as new industry participants respond to emerging societal incentives.
We continue to provide integrated planning, engineering and design, procurement and construction and maintenance services to several industry participants.
Macroeconomic effects and potential supply constraints may influence the near-term execution of some customer plans.
Broad increases in demand for fiber optic cable and related equipment may impact delivery lead times in the short-to-intermediate term.
In addition, the market for labor is tightening in some regions of the country, particularly for unskilled, semi-skilled new hires.
It remains to be seen how geographically broad these conditions will be and how long they will persist.
Despite these factors, we remain confident that our scale and financial strength position us well to deliver valuable service to our customers.
Moving to Slide 6.
During the quarter, organic revenue decreased 11.1%.
Our top five customers combined produced 68.2% of revenue, decreasing 23% organically.
Demand increased for two of our top five customers.
All other customers increased 31.9% organically.
AT&T was our largest customer at 21.4% of total revenue or $155.6 million.
AT&T grew 0.9% organically.
This was our first quarterly organic growth with AT&T since our July of 2019 quarter.
Revenue from Comcast was $131.1 million or 18% of revenue.
Comcast was Dycom's second largest customer and grew organically 10.7%.
Verizon was our third largest customer at 12.6% of revenue or $91.5 million.
Lumen was our fourth largest customer at 485.8 million or 11.8% of revenue.
And finally, revenue from Windstream was $32.1 million or 4.4% of revenue.
Windstream was our fifth largest customer.
This is the ninth consecutive quarter where all of our other customers in aggregate, excluding the top five customers, have grown organically.
In fact, the 31.9% organic growth rate with these customers is the highest growth rate in at least nine years.
Of note, fiber construction revenue from electric utilities was $47 million in the quarter or 6.5% of total revenue.
This activity increased organically 92.1% year-over-year.
We have extended our geographic reach and expanded our program management network planning services.
In fact, over the last several years, we have meaningfully increased the long-term value of our maintenance and operations business, a trend which we believe will parallel our deployment of 1 gigabit wireline direct and wireless/wireline converged networks, as those deployments dramatically increase the amount of outside plant network that must be extended and maintained.
Despite this overall industry trend, we were recently notified by customer representing less than 5% of our revenue that it had decided to in-source a portion of the construction and maintenance services that are currently provided for them by us as well as a number of other suppliers.
They expect to implement this decision during the fourth calendar quarter of 2021.
After this initiative is fully implemented, we expect to continue working for this customer in several markets under new contracts and perform other work on an ongoing basis.
Although it currently appears at lower levels of activity.
Now, going to Slide 7.
Backlog at the end of the first quarter was $6.528 billion versus $6.81 billion at the end of the January 2021 quarter, decreasing approximately $282 million.
Of this backlog, approximately $2.746 billion is expected to be completed in the next 12 months.
Backlog activity during the first quarter reflects solid performance as we booked new work and renewed existing work.
We continue to anticipate substantial future opportunities across a broad array of our customers.
From various electric utilities, fiber construction agreements in Arizona, Oklahoma, Missouri, Arkansas, Mississippi, Indiana, Kentucky, Tennessee, Georgia, and North Carolina.
For Ziply fiber, construction and maintenance agreements in Washington, Oregon, and Idaho.
For Charter, a fulfillment agreement covering Washington, Nevada, Montana, Wisconsin, Massachusetts, Connecticut, New York, North Carolina, South Carolina, Alabama, and Georgia.
From Frontier, locating services agreement in California.
And for Consolidated Communications, a construction services agreement in New Hampshire.
headcount increased during the quarter to 14,331.
Going to Slide 8.
Contract revenues for Q1 were $727.5 million and organic revenue declined 11.1%.
Adjusted EBITDA was $44.1 million or 6.1% of revenue.
Gross margins were 14.8% in Q1 and decreased 169 basis points from Q1 '21.
This decrease resulted from the impact of a large customer program as well as margin pressure from revenue declines for other large customers compared to Q1 '21.
Margins were also impacted by the adverse winter weather conditions experienced in many regions of the country during the first half of the quarter.
G&A expense increased 112 basis points, reflecting higher stock-based compensation and administrative and other costs.
Non-GAAP adjusted net loss was $0.04 per share in Q1 '22, compared to net income of $0.36 per share in Q1 '21.
The variance resulted from the after-tax decline in adjusted EBITDA, offset by lower depreciation, lower interest expense, and higher gains on asset sales.
Now going to Slide 9.
Our financial position remains strong.
Over the past four quarters, we have reduced notional net debt by $185.2 million.
During Q1, we issued $500 million of 4.5% senior unsecured eight-year notes due April 2029.
We repaid $105 million of revolver borrowings and $71.9 million of term loan borrowings, and we resized and extended our senior credit facility through April 2026.
Cash and equivalents were $330.6 million at the end of Q1.
$58.3 million is expected to be used to repay our convertible notes due September 2021.
We ended the quarter with $500 million of senior unsecured notes, $350 million of term loan, no revolver borrowings, and $58.3 million principal amount of convertible notes.
Our capital allocation prioritizes organic growth followed by opportunistic share repurchases and M&A within the context of our historical range of net leverage.
As of Q1, our liquidity was strong at $477.4 million, and we continue to maintain a strong balance sheet.
Going to Slide 10.
Operating cash flows have remained strong and totaled $41.5 million in the quarter.
The combined DSOs of accounts receivable and net contract assets were at 128 days, an improvement of eight days sequentially from Q4 '21.
Capital expenditures were $28.6 million during Q1 net of disposal proceeds, and gross capex was $31.6 million.
Capital expenditures net of disposals for fiscal 2022 are expected to range from $105 to million to $125 million, a reduction of $40 million when the midpoint as compared to the midpoint of the prior outlook.
This deferral reflect short-to-medium term manufacturer supply constraints.
Going to Slide 11.
For Q2 2022, the company expects contract revenues to range from in-line to modestly lower as compared to Q2 2021, and expects non-GAAP adjusted EBITDA as a percentage of contract revenues to decrease compared to Q2 2021.
We expect the year-over-year gross margin pressure of approximately 200 basis points from the impact of a large customer program and from revenue declines for other large customers that are expected to have lower spending in the first half of this calendar year.
We expect approximately $8.7 million of non-GAAP adjusted interest expense for the components listed as well as $0.7 million for the amortization of the debt discount on convertible notes for total interest expense of approximately $9.4 million during Q2.
We expect the non-GAAP effective income tax rate of approximately 27% and diluted shares of $31.3 million.
Moving to Slide 12.
Within a recovering economy, we experienced solid activity and capitalized on our significant strengths.
First and foremost, we maintained significant customer presence throughout our markets.
We are encouraged with the emerging breadth in our business.
Our extensive market presence has allowed us to be at the forefront of evolving industry opportunities.
Telephone companies are deploying fiber to the home to enable 1 gigabit high speed connections, increasingly rural electric utilities are doing the same.
Cable operators are deploying fiber to small and medium businesses and enterprises.
A portion of these deployments are in anticipation of the customer sales process.
Deployments to expand capacity as well as new build opportunities are under way.
Dramatically increased speeds to consumers are being provisioned and consumer data usage is growing, particularly upstream.
Fiber deployments enabling new wireless technologies are under way in many regions of the country.
Customers are consolidating supply chains, creating opportunities for market share growth and increasing the long-term value of our maintenance and operations business.
As our nation and industry recover from the COVID-19 pandemic, we remain encouraged that a growing number of our customers are committed to multi-year capital spending initiatives.
We are confident in our strategies, the prospects for our company, the capabilities of our dedicated employees and the experience of our management team.
| q1 adjusted non-gaap loss per share $0.04.
for quarter ending july 31, 2021, expects contract revenues to range from in-line to modestly lower versus last year.
for quarter ending july 31, sees non-gaap adjusted ebitda as a percentage of contract revenues to decrease versus last year.
|
These factors are detailed in the company's financial reports.
You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data.
Our core performance measures are non-GAAP measures used by management to analyze the business.
For the fourth quarter, the largest difference between our GAAP and core results stems from restructuring charges which are primarily noncash as well as noncash mark-to-market losses associated with the company's currency hedging contracts.
With respect to mark-to-market adjustments, GAAP accounting requires earnings translation, hedge contracts, and foreign debt settling in future periods to be mark-to-market and recorded at the current value at the end of each quarter, even though these contracts will not be settled in the current quarter.
For us, this reduced GAAP earnings in Q4 by $63 million.
To be clear, this mark-to-market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth, and our future shareholder distributions.
Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty it provides.
We've received one $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
A reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com.
You may also access core results on our website with downloadable financials in the interactive analyst center.
Today, we reported an outstanding finish to the year.
Each of our segments grew sales and profits year over year and we continue to progress our strategic initiatives.
For the fourth quarter, sales were $3.3 billion, up 11% sequentially, and 17% year over year.
Our operating margin expanded 500 basis points year over year to 19.4%.
Operating income grew 18% sequentially and 58% year over year.
EPS of $0.52 cents was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the fourth quarter, $948 million for the full year, and we finished the year with $2.7 billion in cash on our balance sheet.
It goes without saying, 2020 was an incredibly difficult year.
We joined the rest of the world to confront the pandemic, economic uncertainty, and social unrest.
Throughout the year, we focused on our customers and executed on strategic priorities while protecting our people.
For more perspective on our performance, I'll share three observations: first, we demonstrated our ability to adapt rapidly and remain resilient in the face of uncertainty; second, our more Corning content strategy clearly contributed to our growth and our performance against our end markets; and finally, throughout this difficult period, we're embracing the opportunity to make a difference wherever we are with what we had to contribute.
Now, I'll expand on my first observation.
Our decisive actions and strong operational execution have resulted in continued leadership in the capabilities that make Corning distinctive.
Like many companies, we focused on bolstering our financial strength, reducing production levels and operating costs, carefully managing inventory, reducing capital expenditures, and pausing share buybacks.
However, it's not about what we cut but what we kept.
While we adjusted production, we didn't reduce capacity keeping us positioned to meet increasing demand when the economy improved.
We continued to make strategic investments and advance major innovations with our customers to capture the growth playing out across our market-access platforms.
And we developed multifaceted programs to protect our talent and preserve our capabilities.
Our first-half actions generated significant cost savings in the second half of the year.
And as the economy started showing signs of green shoots, we effectively adjusted our operations, keeping pace as demand started to recover in many of the markets we serve.
Our results tell the story.
Our sales were down 12% in the first half as most economies were impacted by pandemic-related lockdowns.
But in the second half, we improved sales 24% over the first, while growing operating income, 122%, returning to year-over-year growth and generating very strong free cash flow.
For the year, we generated almost $1 billion of free cash flow and our balance sheet remains very strong.
We expect this strong momentum to continue heading into 2021.
We will continue to adapt and focus on execution as we have proven that our approach is working.
Turning to my second observation.
In all the industries we serve, important market trends continue to offer new challenges that Corning is just uniquely qualified to address and new opportunities to integrate more Corning content into our customers' products.
In this difficult year, we have proven that this is an especially powerful value creation letter.
We aren't relying exclusively on people buying more stuff, we're putting more Corning into the products that people are already buying.
In the fourth quarter, this strategy paid off as we grew sales year over year in every one of our businesses.
At the top were specialty materials with sales up 20% year over year, and environmental technologies up 19% year over year, both significantly outperforming their end markets.
Last quarter, I described our innovations in mobile consumer electronics.
Looking at how we're investing to create additional revenue streams and capture content opportunities.
Today, our focus on our automotive market access platform.
The auto industry is undergoing major disruptions.
Automakers are designing cleaner and safer vehicles while featuring technology that provides immersive experiences were uniquely suited to address these trends.
And for us, the opportunities are large.
In the range of $100 per car in Corning content, we're collaborating with more OEMs and we're offering more solutions to help move the industry forward.
Let's look at two of our biggest successes right now starting with our automotive glass solutions business.
We're building strong momentum.
Our advantaged solutions are enabling the very rapid shift toward in-vehicle displays that are interactive, that are integrated, and shaped.
We're collaborating with industry leaders across the auto ecosystem, including Visteon, LGE, BOE, and VIA Optronics to accelerate the adoption of our patented 3D ColdForm technology which enables lower-cost-shaped auto interiors.
Our large-scale facility in Hefei, China is now fully operational and servicing our growing demand.
And we continue to see strong adoption of our technology by auto OEMs. Our recent proof point is the new Mercedes-Benz Hyperscreen dashboard display, which features a Gorilla Glass cover nearly 5 feet wide.
Similarly, in environmental technologies, in a year when a global pandemic temporarily shut down OEM production, our proprietary gasoline particulate filter business still grew sales year over year.
When we introduced GPF, we said our technology increased our content opportunity per car by three to four times.
Like most of our innovations, it started with the customer challenge.
Europe and China are addressing fine particular pollution with new emissions regulations.
We applied our expertise in ceramic science with our advanced manufacturing capabilities and extrusion to rapidly develop filters that efficiently trap ion particulates.
And today, we're effectively helping automakers reduce these harmful emissions, meet new regulations, and produce some of the cleanest gasoline vehicles you can buy.
Demand for our GPF has grown quickly.
And with our market-leading product, we continue to win the majority of platforms awarded to date.
We're well on our way to building a $0.5 billion business.
We're actually ahead of schedule, and the content opportunity continues to grow.
We expect our GPF technology to migrate beyond Europe and China as other regions focus on improving air quality.
And many new car models will soon be required to get even closer to near-zero particulate emissions.
In response, we recently introduced our next-generation GPF, featuring enhanced filtration capabilities.
They're launching in upcoming models as automakers prepare for the next wave of regulations.
Across our markets, we see a similar content story playing out as we respond to key industry challenges with more Corning solutions.
Let me share some other accomplishments across our market-access platforms.
In life sciences, pandemic-related demand has highlighted our strength in the industry.
And we achieved major milestones toward building a significant Valor Glass franchise in 2020.
At the start of the year, we entered a long-term supply agreement to provide Valor Glass vials for a portion of the currently marketed Pfizer drug products.
Soon after, we were awarded $204 million in funding from the U.S. government to substantially expand domestic manufacturing capacity for Valor vials.
Today, we're supplying Valor Glass to several leading COVID vaccine manufacturers.
We produce millions of Valor vials and shipped enough for more than 100 million doses, supporting multiple vaccine developers.
In our life sciences segment, the global health fight is driving strong demand for our consumable products.
We're supporting the development of treatments in vaccines, as well as mass testing efforts.
We received $15 million from the U.S. government to expand domestic capacity for robotic pipette tips which are used for COVID diagnostic testing.
BioNTech recently recognized our contribution to their successful COVID vaccine development.
Turning to mobile consumer electronics.
We launched the toughest Gorilla Glass yet, Victus.
And it's already featured on six Samsung devices.
Corning also invented the world's first transparent color-free glass-ceramic which is featured on the front cover of the latest iPhone.
Apple and Corning partnered to develop and scale the manufacturing of Ceramic Shield.
It offers unparalleled durability and toughness.
I noted that specialty materials sales were up 20% year over year in Quarter 4.
They were up 18% for the full year in a smartphone market that declined 7%.
In optical communications, we returned to growth and we expect this growth to continue as customers increase spending to support growing bandwidth requirements.
In 2020, we introduced new and innovative solutions that help speed the deployment of 5G.
We launched our outdoor 5G-ready connectivity solutions, featuring compact easy-to-install terminals that can be deployed in any conceivable architecture.
Operators can actually save up to $500 per terminal location, dramatically lowering installation cost and speeding up deployment.
We're also collaborating with Verizon to enable 5G millimeter-wave indoor deployments for their enterprise customers.
We're also working with Qualcomm Technologies to deliver indoor networks that are 5G ready, easy-to-install, and affordable.
And we're collaborating with EnerSys to simplify the delivery of fiber and electrical power to small-cell wireless sites.
Retail demand for TV and IT products remains strong.
Demand for large-sized TVs continues to grow.
75-inch sets were up more than 60% for the full year.
Large TVs are most efficiently made on Gen 10.5 plants.
Corning is well-positioned to capture that growth with its Gen 10.5 plants in China including the two newest Gen 10.5 facilities in Wuhan and Guangzhou, which are now expanding production to meet customer demand.
Ramping these sites has been no small feat in the midst of a pandemic.
We are very proud of our innovative and dedicated expert engineering teams that rose to a host of unprecedented challenges to start-up tanks in both facilities.
Looking ahead, Corning's long-term growth drivers and content opportunities are strong in each of our markets.
And we believe some secular trends could accelerate as consumer lifestyles continue to change in the aftermath of the health crisis.
And that leads to my third observation.
We're living through the kind of moment that tends to bring true character to light.
At Corning, our values are evident in our actions.
We've unleashed our capabilities to help combat the virus.
And we're proud to be creating life-changing technologies that contribute to keeping people safe and help society address the challenges of the pandemic.
We also recognize, in these unprecedented times, that we have the opportunity to share resources and leadership on a range of important issues.
We've launched racial and social quality programs, and our Unity Campaign supports vital human services and emergency relief in our communities around the world.
In conclusion, on all fronts, Corning is executing well.
We're delivering outstanding results and making important progress across our strategic priorities.
I am confident that we are entering the year with solid momentum and we expect to grow in 2021.
Our more Corning strategy will continue to drive outperformance across the diverse industries that we serve.
We're not just counting on consumers buying more cars, TVs, or smartphones to grow.
And I'm excited about how we're bringing our capabilities to bear in optical and life sciences, as operators expand their networks and we continue to support vital drug and vaccine development.
We feel good about our fourth-quarter results.
On a year-over-year basis, we grew sales and earnings.
We expect to grow again in the first quarter, and we expect to grow for the full year, driven by improving markets and our more Corning strategy.
We are building a bigger, stronger company that delivers sustainable results while remaining agile in our ability to respond to changing market factors.
Now let me walk you through our fourth-quarter performance.
In the fourth quarter, we grew sales 11% sequentially and 17% year over year to $3.3 billion, exceeding expectations.
Excluding the consolidation of Hemlock Semiconductor, sales grew 11% year over year, with every segment growing sales and net income.
Specialty materials and environmental technologies deli -- delivered particularly strong year-over-year sales growth, up 20% and 19%, respectively, both outperforming their underlying markets.
Optical communications returned to year-over-year growth, and we expect that growth to continue.
Our operating margin was 19.4%.
That is an improvement of 500 basis points on a year-over-year basis.
We grew operating income 18% sequentially and 58% year over year.
EPS of $0.52 was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the quarter.
Cumulative free cash flow for the full year was $948 million.
We ended the year with a cash balance of $2.7 billion.
We entered 2021 in an excellent financial position.
Now let's review the business segments.
In display technologies, fourth-quarter sales were $841 million, up 2% sequentially and 6% year over year.
And net income was $217 million, up 11% sequentially and 21% year over year.
Retail demand for TV and IT products remain strong remained strong during the promotional season in Q4.
Display's full-year sales were $3.2 billion, and net income was $717 million.
Our full-year price declines in 2020 were mid-single-digits.
The glass market and our glass volume were up mid-single-digits for the year.
The retail market was more robust than the industry -- than the industry expected, resulting in panel supply being tight for the second half of 2020.
Panel makers ran at high utilizations and the industry drew down inventory to satisfy demand.
These dynamics also resulted in glass supply being tight, and more recently in shortage due to a power outage at a competitor's glass plant.
Now let's look at 2021.
We expect the TV and IT retail markets to remain strong.
We remain confident that large-size TVs will continue to grow, and we are well-positioned to capture that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing.
We expect the glass market to grow a mid-single-digit percentage in 2021.
We expect glass supply to remain tight in the upcoming quarters.
As a result of these supply/demand dynamics, we are experiencing a very favorable pricing environment.
We expect Q1 2021 glass prices to be flat with Q4 2020.
This is significantly better than the sequential declines we've seen in any other first quarter over the last decade.
Glass prices for some customers in some gen sizes may actually see a sequential increase.
We believe the following three factors will continue to drive the favorable pricing environment for the upcoming quarters: first, we expect glass supply to continue to be tight; second, our competitors continue to face profitability challenges at current pricing levels; and third, display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Glass prices must support acceptable returns on these investments.
In optical communications, fourth-quarter sales were $976 million, up 8% year over year and 7% sequentially.
Our year-over-year growth can be attributed to broad improvements in demand for both carrier and enterprise customers.
Fourth-quarter core net income of $141 million was up 127% year over year, and 23% sequentially.
The improvement was driven by the incremental volume and favorable cost performance.
We have returned to growth in optical communications, and we expect that growth to continue.
Bandwidth demand is increasing and users are demanding higher performance connections.
We're seeing positive statements from customers on increasing investments in their optical networks.
Our sales and order rates are picking up, and we're ready to capture demand as it materializes.
We are confident we will grow sales in optical communications for the year.
We continue to monitor and evaluate market demand signals to determine the magnitude of growth, and we'll keep -- we'll continue to keep you updated as we go through the year.
In environmental technologies, fourth-quarter sales were $445 million, up 19% year over year and 17% sequentially, ahead of expectations as markets continue to improve and GPF adoptions continued in China.
Net income was $93 million, up 45% year over year and 35% sequentially, driven by strong operational performance globally and successful ramping of additional GPF capacity in China.
For the full year, sales were $1.4 billion and our performance was better than the underlying market.
Net income was $197 million.
While our full-year 2020 sales were certainly impacted by COVID-19, we are recovering faster than the market by increasing our content for both the automotive and diesel end markets.
Despite severely -- severely challenged markets we saw year overgrowth in GPF sales.
Strong GPF adoption continues in Europe and in China, where the China 6a regulation is being implemented nationwide this month.
We are ahead of our original timeframe to build a $500 million GPF business.
Specialty materials had an outstanding fourth quarter and a full year.
Q4 sales of $545 million were up 20% year over year, full-year sales were $1.9 billion, up 18% year over year, despite a 7% decline in the smartphone market, driven by strong demand for our premium cover materials and our other innovations.
Net income was $423 million, up 40% from 2019 on higher sales volume and strong cost performance.
The importance of computing and connectivity were amplified during the pandemic.
Our new product innovations, including Ceramic Shield and Gorilla Glass Victus, as well as our EUV products in the semiconductor market were important contributors to our strong performance.
Now before I get to our life sciences results, I'd like to note something of great importance to us.
Throughout the pandemic, our life sciences market access platform has applied its broad capabilities and full product portfolio to help the world combat the pandemic.
From our traditionally research-focused consumables to our bioproduction products to our transport media and, of course, our Valor Glass, we're playing a vital role in the development and supply of test kits and vaccines.
Now, let's look at our segment results.
Life sciences fourth-quarter sales were $274 million, up 7% year over year and 23% sequentially, driven by strong demand for COVID-related products, including bioproduction products used in clinical trials.
Net income was $42 million, up 11% year over year and 50% sequentially.
In summary, we successfully navigated a very challenging year.
We strengthened our balance sheet, established growth in the second half, and generated a free cash flow of $948 million for the year.
As we look ahead, we have strong momentum coming into 2021 and expect year-over-year growth to accelerate in the first quarter.
Specifically, we expect core sales of $3.0 billion to $3.2 billion, compared to $2.5 billion in the first quarter last year, and earnings per share of $0.40 to $0.44, which is double last year's first-quarter earnings per share at the low end of the range.
For the full year, we expect growth in sales and earnings and we anticipate generating more free cash flow in 2021 than in 2020.
And we will share more with you as the year progresses.
Let's turn to our commitment to financial stewardship and prudent capital allocation.
Our fundamental approach remains the same.
We will continue to focus our portfolio and utilize our financial strength.
We generate very strong operating cash flow, and we expect that to continue going forward.
We will continue to use our cash to grow, extend our leadership, and reward shareholders.
Our first priority for our use of cash is to invest in our growth and extend our leadership.
We do this through RD&E investments, capital spending, and strategic M&A.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
In 2021, we expect capex similar to 2020, as we have the capacity in place to meet higher sales.
Now, we'll invest more if we require capacity to support additional growth, any additional capital investment would be supported by a customer commitment.
We'll keep you updated as we go throughout the year.
Given our expected strong free cash flow generation in 2021, we expect to increase our distributions to shareholders.
That includes reinstating opportunistic share repurchases sometime this year.
In closing, we're very pleased with our strong close to 2020, highlighted by growing sales and profitability.
We continue to focus on a rich set of opportunities.
Our businesses are fundamental to the long-term growth drivers in the industries they serve, and our more Corning strategy continues to deliver sales outperformance relative to our end markets.
And I look forward to sharing our progress as the year goes on.
With that, let's move to Q&A.
Operator, we're ready for the first question.
| q4 core earnings per share $0.52.
qtrly core sales of $3.3 billion, up 11% sequentially and 17% year over year.
in display technologies, q4 sales were $841 million, up 2% sequentially and 6% year over year.
expect year-over-year growth to accelerate in q1 of 2021.
optical communications q4 sales were $976 million, up 7% sequentially and 8% year over year.
expect core sales of $3.0 billion to $3.2 billion for q1 of 2021.
sees q1 earnings per share of $0.40 to $0.44.
|
I'm here today with Pat McHale and Mark Sheahan.
Our conference call slides have been posted on our website and provide additional information that may be helpful.
Sales totaled $470 million this quarter, an increase of 14% from the fourth quarter last year and an increase of 12% at consistent translation rates.
Net earnings totaled $115 million for the quarter or $0.66 per diluted share.
After adjusting for the impact of excess tax benefits from stock option exercises, net earnings totaled $106 million or $0.61 per diluted share.
Gross margin rates increased 130 basis points from last year's fourth quarter.
Realized pricing and foreign currency were favorable in the quarter.
Mix was also favorable as we saw the margin impact of sales growth in our higher-margin industrial segment more than offset the continued strength in our lower margin Contractor segment.
Operating expenses increased $7 million in the fourth quarter as compared to a year ago due to increases in sales and earnings based expenses and higher product development costs.
The reported income tax rate was 11% for the quarter, down 5 percentage points from last year, primarily due to an increase in tax benefits related to stock option exercises.
After adjusting for the effect of stock option exercises, our tax rate for the quarter was 18%, slightly lower than the fourth quarter last year due to additional foreign income taxed at lower rates.
Cash flow from operations totaled $131 million in the fourth quarter and $394 million for the full year.
Discretionary cash outflows in the quarter included the final repayment of $125 million of the $250 million borrowed on the revolving credit facility in the first quarter.
We also made a voluntary contribution of $20 million to our U.S. pension plan.
For the full year 2020, dividends paid totaled $117 million and capital expenditures were $71 million.
A few comments as we look forward to 2021.
Based on current exchange rates and the same volume and mix of products and sales by currency, the effect of exchange is currently expected to benefit sales by 2% and earnings by 6% for the full year, with the most significant impact coming in the first half.
Unallocated corporate expenses are projected to be $30 million and can vary by quarter.
The effective tax rate for the year is expected to be 18% to 19%.
Capital expenditures are expected to be $115 million, including $80 million for facility expansion projects.
We may make share repurchases in 2021 by opportunistic open market transactions or short-dated accelerated share repurchase program.
Finally, 2021 will be a 53-week year with the extra week occurring in the fourth quarter.
The second quarter in a row, the Contractor segment exceeded 30% growth and ended the year with record sales and earnings.
Contractor grew in all regions during the quarter and for the year.
Residential construction activity remains solid and the home improvement market robust.
Contract North America saw strong out-the-door sales in both propane and home center and we continue to work hard to maintain adequate channel inventory.
The Industrial segment grew mid-single digits for the quarter, but still ended the year down 10%.
Compared to the previous three quarters, activity improved in some key end markets like spray foam, electronics, and battery.
Access to industrial facilities remains limited but coating activity has improved.
The Asia-Pacific region was up versus last year's Q4, which was particularly weak.
Price realization, solid factory performance, and good expense management combined with improved sales resulted in strong Industrial operating earnings for the quarter.
Process segment sales declined 10% for both the quarter and the year.
A number of markets in our Process segment remained challenged, particularly those related to the vehicle lubrication or oil and gas sectors.
Heading into 2021, we expect challenging end market conditions to remain in place in our Industrial and Process segments for at least the first half of the year as lockdowns persist and access to customers remains limited.
Our outlook for the Contractor segment remains positive as favorable conditions continue and demand has been solid to start the year.
From the sales team to the shop floor, the Contractor team worked incredibly long hours, maintained a positive attitude, and were committed to doing whatever it took to get the job done.
Culture matters and they are winners.
We exited the year with momentum and look forward to the fight again this year.
| quarterly earnings per share $0.66; adjusted earnings per share $0.61.
|
On the call today are William Eccleshare, Chief Executive Officer of Clear Channel Outdoor Holdings, Inc.; and Brian Coleman, Chief Financial Officer of Clear Channel Outdoor Holdings, Inc., who will provide an overview of the third quarter 2021 operating performance of Clear Channel Outdoor Holdings, Inc. and Clear Channel International BV.
And Scott Wells, Chief Executive Officer of Clear Channel Outdoor Americas, will participate in the Q&A portion of the call.
These statements include management's expectations, beliefs and projections about performance and represent management's current beliefs.
There can be no assurance that management's expectations, beliefs or projections will be achieved or that actual results will not differ from expectations.
During today's call, we will provide certain performance measures that do not conform to Generally Accepted Accounting Principles.
They provide a detailed breakdown of foreign exchange, segment revenue, adjusted EBITDA and adjusted corporate expenses, including the impact of share-based compensation and restructuring charges, among other important information.
For that reason, we ask that you view each slide as William and Brian comment on them.
We delivered very strong results during the third quarter and we entered the fourth quarter with continuing business momentum that we capitalized on the broad base recovery we are seeing across our markets.
Advertisers are returning to launch new campaigns and rebuild brand awareness.
This rebound, together with new advertisers discovering our medium for the first time, is driving growth in many of our markets ahead of 2019 revenue levels in both our digital and traditional assets.
Our consolidated revenue in the third quarter increased 33.3% over the prior year.
Excluding FX, consolidated revenue was $590 million, up 31.8% over the prior year.
America's revenue was $319 million, up 42.6%, in line with our guidance and 97% to 2019 revenue.
Europe revenue was $256 million, up 18.2%, which was slightly ahead of our guidance and 97% of 2019 revenue, both excluding FX.
As we have highlighted on past calls, we have a resilient business that has consistently demonstrated its ability to bounce back from macro disruptions.
We are clearly seeing this occur and we are very pleased with how our business is performing in the current quarter.
And it is with that confidence in our business and liquidity position that we've repaid the $130 million outstanding balance of the revolving credit facility.
Coming out of COVID, advertisers are embracing out-of-home as they recognize the enhanced capabilities we have built into our platform.
The power of our assets is only matched by our team of talented and dedicated people and the deep relationships they have maintained across the industry throughout the pandemic.
Given the expansion of our digital footprint and the related strategic investments in both data analytics and programmatic that we have made in our platform, advertisers are now utilizing an even stronger set of tools that will allow them to expand this relationship through highly creative addressable and measurable solutions.
We are meeting our customers where they are by building on the very best features of out-of-home and elevating what we can do for advertisers and their brands in a compelling manner.
And so, this is an exciting time for our business as we execute on our vision to expand our share of total advertising spend.
As we focus on delivering profitable growth, we also remain committed to reducing our overall indebtedness, strengthening our balance sheet and elevating our ability to benefit from the operating leverage in our model.
As part of this effort and as momentum builds in our business, we will continue to evaluate disposition opportunities in line with our strategic goals and in the best interest of our shareholders.
Now let me provide a brief update on each of our business segments, beginning with Americas.
Based on the information we have for the fourth quarter, we expect Americas revenue to be in the range of $360 million and $370 million, which is above the $345 million we reported in the 2019 comparable period, reflecting the strong momentum in our business as we close out the year.
In the current quarter, we are continuing to experience a notable uptick in demand with a strong volume of RFPs.
National is increasing over the prior year at a slightly faster rate than local.
Based on our current revenue bookings, all our small and most medium-sized markets are pacing above Q4 2019.
We still haven't fully rebounded in a few markets in California, including San Francisco, although LA, which is our largest market is now above 2019.
In our larger markets, in addition to LA, New York, Miami and Dallas are also exceeding 2019 levels, with Houston and Boston plays behind.
I would also highlight a promising rebound we are seeing in airports across the country.
We believe our success is distributed to our teams doing a better job of servicing our customer needs and matching them to the best asset types.
For example, our traditional sales team is now selling our airport inventory.
We should note at this point, inflation and supply chain issues are not materially impacting our business, but we are of course keeping an eye on macro trends on how they are playing out.
Our digital billboards business, which continues to lead the recovery, is central to our long-term growth strategy.
We deployed 17 new digital billboards in the third quarter, giving us a total of more than 1,500 digital billboards across the United States.
We are and we remain at the forefront in driving innovation in the out-of-home industry.
We've built a dynamic platform that delivers mass broadcast level reach, along with the sophisticated insights similar to the digital display platforms with the ability to target consumers on the move.
Our RADAR solutions continue scaling up and opening new opportunities, including with major CPG brands.
Recently, we were able to match individual consumer behaviors using our RADARProof attribution tool with household purchase data from an ID resolution partner, LiveRamp.
In the CPG world, this advancement matters as households, rathan than individuals, often are the decision makers in this product category.
So we can now measure the household impact of exposure to our out-of-home advertising.
For example, in separate campaigns for a snack brand, a sports beverage and new packaged food brand, we delivered household sales insights about the consumers buying these products and how out-of-home attracts new customers to these brands.
RADARProof also demonstrates the ability of out-of-home exposure tin increase the lifetime value of repeat brand purchases, a key metric for consumer packaged goods brands.
Further, through our strategic expansion into the programmatic space, we continue to see a notable uptick in brands experimenting with programmatic and we are positioned to participate in this opportunity.
For instance, these innovations are evident in our recent campaign for Twitch and Mediahub Global to promote their second annual streamable gaming event.
The campaign won best use of programmatic with digital out-of-home this year as part of Adweek's Annual Media Plan of the Year Awards.
Our commitment to technology in improving the buying process and enhancing our ability to demonstrate attribution are key drivers of performance in our Americas business.
And I believe Scott and his exceptional leadership team should be proud of their work in delivering such a strong performance as the business emerges from the pandemic.
Turning to our business in Europe, based on the information we have today, we expect fourth quarter segment revenue to be between $335 million and $350 million, which is in line with Europe's top-line performance in the fourth quarter of 2019 of $349 million.
All amounts exclude movements in FX.
Similar to the US, in Europe, we are demonstrating the resilience of our platform and its ability to rapidly return to growth.
As we've noted in the past, about two-thirds of our European revenue comes from roadside assets.
This has benefited our performance in the current environment, given that we have limited exposures in the transit sector, which has of course seen a greater impact from COVID.
This is most evident in the UK where we have continued to deliver revenue ahead of 2019.
For the last six months, UK revenue has been ahead of 2019, led by the strength of our street furniture footprint and from the benefits of both new contracts and further development and investment in digital roadside inventory.
Overall, we are continuing to benefit from pent-up demand across Europe, although orders are still coming in later than pre-COVID.
Based on current trends, our pipeline across CPG and retail, our largest verticals, is looking strong with fashion and beauty also looking healthy.
Our digital expansion is also a central part of our growth strategy in Europe.
We added 314 digital screens in the third quarter for a total of over 16,900 screens now live, including digital screens in the UK, Italy and Ireland.
And we are further elevating the value proposition of our digital footprint through the roll out of our RADAR suite of solutions, which is now gaining traction in all of our major European markets.
For example, in Spain, we are now able to target campaigns based on online behavior in addition to physical store visits and we are having significant success using the tool in the auto category where brands are able to efficiently target likely car buyers.
In addition, we recently completed the launch of our programmatic offering, LaunchPAD in Italy.
And we are now executing on our programmatic strategy across the Europe, allowing brands to connect at the right time with consumers through multiple touch points, planned real-time digital out-of-home campaigns and control exactly when, where and at what times the ads are deployed.
We are also continuing to selectively pursue contract tenders that meet our strategic objectives in multiple markets.
In Sweden, we won a seven-year contract to operate the advertising related to a public buy program in the center of Stockholm, consisting of 350 static and digital panels in prime locations, further strengthening our footprint across the city.
So in summary, we are executing at a high level across every facet of our strategic plan.
The recovery continues to gain momentum and we are seeing good progress in our business in the current quarter.
Coming out of the pandemic, we are well positioned to maximize our performance as we leverage our digital expansion and the investments we are making in our data analytics and programmatic resources, which is broadening the universe of advertisers we can pursue and strengthening our growth profile.
As William mentioned, we continued to see a strong rebound in our business as reflected in our third quarter results and outlook for the fourth quarter and we continue to manage our cost base, including negotiating rent abatements in some of the markets most affected by COVID-19, as well as strengthening our capital structure.
Moving on to the results on Slide 4.
In the third quarter, consolidated revenue increased 33.3% to $596 million.
Excluding FX, revenue was up 31.8%.
Consolidated net loss in the third quarter was $41 million compared to a consolidated net loss of $136 million in the prior year.
Adjusted EBITDA was $136 million in the third quarter, representing a substantial improvement over the prior year, which was $31 million.
Excluding FX, adjusted EBITDA was $135 million in the third quarter.
The Americas segment revenue was $319 million in the third quarter, up 42.6% compared to the prior year and in line with the guidance we previously provided in July.
Revenue was up across all of our products, most notably print billboards, digital billboards and airport displays.
Digital revenue rebounded strongly and was up 68.4% to $115 million.
National local continue to improve with both up 43%.
Direct operating and SG&A expenses were up 15.8%.
The increase is due in part to a 15.3% increase in site lease expense, driven by higher revenue combined with higher compensation cost driven by improvements in our operating performance.
This was partially offset by lower credit loss expense related to our recovery from COVID-19.
Segment-adjusted EBITDA was $139 million in the third quarter, up 96.7% compared to the prior year with segment-adjusted EBITDA margin of 43.6%, above our guidance in Q3 2019 results due to temporary savings, including site lease savings primarily related to airports as well as lower spending and a reduction in the credit loss expense.
This slide breaks out our Americas revenue into billboard and other and transit.
Billboard and other, which primarily includes revenue from billboards, street furniture, spectaculars and wallscapes, was up 37.6%.
Transit was up 82.7%, with airport display revenue up 88.7% to $43 million in the third quarter.
Airport revenue was helped by the return of airline passenger traffic and the new Port Authority of New York and New Jersey advertising and sponsorship contracts.
Digital revenue rebounded strongly in Q3 and was up 59.5% to $91 million and now accounts for 33.4% of total billboard and other revenue.
Non-digital revenue was up 28.7%.
Please note that as I comment on the percentage change from the prior year, all percentages are excluding movements in foreign exchange.
Europe revenue was $263 million in the third quarter.
Excluding movements in foreign exchange, revenue was $256 million, up 18.2% compared to the prior year, ahead of the guidance we provided in our second quarter earnings call.
As you may remember, in Q3 2020, restrictions were lifted and the business bounced back quickly, which created tougher comps than in the second quarter.
Revenue in the third quarter was up across most of our products, primarily street furniture and retail displays and in most countries.
Digital revenue was up 39.3% to $89 million, excluding FX, a strong performance driven in large part by the rebound in the UK.
Direct operating and SG&A expenses were up 6.4% compared to the third quarter of last year.
The increase was largely driven by a $13 million increase in cost related to our restructuring plan to reduce headcount.
As a reminder, costs related to our restructuring plan are not included in adjusted EBITDA.
Site lease expense declined 3.7% to $99 million, excluding FX, driven by negotiated rent abatements.
Segment adjusted EBITDA was $30 million excluding movements in foreign exchange in the third quarter as compared to negative $8 million in the prior year.
Moving on to CCIBV.
Our Europe segment consists of the businesses operated by CCIBV and its consolidated subsidiaries.
Accordingly, the revenue for our Europe segment is the same as the revenue for CCIBV.
Europe segment adjusted EBITDA, the segment profitability metric reported in our financial statements does not include an allocation of CCIBV's corporate expense that are deducted from CCIBV's operating income and adjusted EBITDA.
CCIBV revenue increased $46 million during the third quarter of 2021 compared to the same period of 2020 to $263 million.
After adjusting for a $6 million impact from movements in foreign exchange rates, CCIBV revenue increased $39 million.
CCIBV operating loss was $26 million in the third quarter of 2021 compared to $38 million in the same period of 2020.
Let's move to Slide 9 and a quick review of other, which includes Latin America.
Note, this is the first quarter that the prior year results do not include our China business.
Latin America revenue was $15 million.
Excluding movements in foreign exchange rates, it was $!
4 million in the third quarter, up $7 million compared to the same period last year.
Direct operating expense and SG&A from our Latin American business were $14 million, up $1 million compared to the third quarter in the prior year.
Latin America adjusted EBITDA rounded to zero in the third quarter.
Now, moving to Slide 10 and a review of capital expenditures.
Capital expenditures totaled $33 million in the third quarter, an increase of approximately $6 million compared to the prior year period as we ramped up our investment in our Americas business.
Now onto Slide 11.
Clear Channel Outdoors' consolidated cash and cash equivalents totaled $600 million as of September 30, 2021.
Our debt was $5.7 billion, up $166 million, due in large part to the refinancing of the CCWH senior notes in February and in June.
Cash paid for interest on debt was $52 million during the third quarter and $264 million year-to-date.
Our weighted average cost of debt was 5.5% as of September 30, 2021, 60 basis points lower than the prior year.
Additionally, as William mentioned, given our improved outlook for both our business and liquidity position, we repaid the $130 million outstanding balance under the company's revolving credit facility with cash on hand on October 26, resulting in a corresponding increase in excess availability under such revolving credit facility.
Finishing with our guidance on Slide 12.
Again, as William noted, for the fourth quarter of 2021, Americas segment revenue is expected to be in the range of between $360 million and $370 million, which is above the $345 million reported in Q4 2019.
Segment-adjusted EBITDA margin is expected to return to close to Q4 2019 levels of $42.3%.
Q4's adjusted EBITDA margin is expected to benefit from the top-line improvement, but also from one-time items including site lease savings and temporary cost savings.
Our Europe segment revenue is expected to be in the range of between $335 million and $350 million, which is in line with Europe's revenue in Q4 2019 of $349 million.
Both the guidance and Q4 2019 consolidated revenue are based on 2020 exchange rates and exclude China.
Our consolidated Q4 revenue guidance is $715 million to $740 million, which is in line with or better than our Q4 2019 consolidated revenue of $717 million.
As noted above, guidance in Q4 2019 consolidated revenue are based on 2020 exchange rates and exclude China.
Additionally, we expect cash interest payments of $123 million in the fourth quarter of 2021 and $319 million in 2022.
We expect consolidated capital expenditures to be in the $150 million to $160 million range in 2021.
Lastly, we are once again increasing our guidance for liquidity as of December 31, 2021, including unrestricted cash and availability under the company's credit facilities.
We expect liquidity of approximately $525 million to $575 million, a $50 million increase from the guidance provided in July.
This is reflective of our improved performance and our businesses.
The guidance also includes a near-term acquisition pipeline of approximately $20 million to $25 million that we could potentially close by year end that represents small selective tuck-in billboard acquisitions in the Americas.
Please keep in mind that liquidity could vary based on timing of cash receipts and/or payments at year-end.
That concludes my remarks.
As I make the transition into the new role of Executive Vice Chairman at the close of the year, and Scott moves to take over as CEO, I am confident that we will continue to build on the momentum we're seeing in our business.
We are leading the digital transformation of our industry, innovating our platform and strengthening our ability to serve a large universe of appetizers.
We're coming out of COVID with a stronger and more dynamic platform supported by an energized worldwide team focused on growth and execution.
As we continue to invest in our technology, while carefully managing our costs, we remain focused on driving profitable growth and evaluating all avenues to delever our balance sheet, including dispositions.
It's been a pleasure to have met so many of you and have to engaged in conversations with you regarding our industry, our company and the direction of the global advertising market.
You remain of course in very good hands with Scott and the management team as they continue to execute on our plan to fully surface the growth potential and intrinsic value of our assets.
And now, let me turn over the call to the operator for the Q&A session.
| clear channel outdoor holdings q3 revenue rose 33.3% to $596.4 million.
q3 revenue rose 33.3% to $596.4 million .
sees q4 revenue $715 million to $740 million.
|
With me is Bruce Caswell, President and Chief Executive Officer; and Rick Nadeau, Chief Financial Officer.
Please remember that such statements are only predictions.
Actual events and results may differ materially as a result of the risks we face, including those discussed in Item 1A of our annual report on Form 10-K.
Management uses this information in its internal analysis of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons.
And with that, I'll hand the call over to Rick.
Revenue for the first quarter was in line with our expectations.
Our revenue growth was principally driven by new work related to the COVID pandemic response where Maximus continues to play an integral role in contact tracing, disease investigation, vaccination support, unemployment insurance programs and other key initiatives.
For the first quarter of fiscal 2021, our COVID response work contributed approximately $160 million in revenue.
As expected, top and bottom line growth were offset by ongoing impacts of the global pandemic tied to program changes on volume-based contracts that were implemented at the direction of our customers.
As we discussed last quarter, these changes, including halting Medicaid redeterminations in the United States, are designed to ensure that beneficiaries have uninterrupted access to vital government benefits during this global health crisis.
Total company operating margin was 9.3% for the first quarter of fiscal 2021.
Diluted earnings per share were $1.03 per share.
Both operating margin and earnings were in line with our expectations with some variability by segment.
Our operations outside the United States delivered results favorable to our expectations, which offset lower operating income from the U.S. Federal Segment due to the timing of finalizing a contract which will now be recorded in the second quarter.
Let me review segment financial results in our typical order starting with U.S. Services.
First quarter revenue in the U.S. Services Segment increased 23.3% to $384.9 million.
While revenue growth was driven by an estimated $114 million of COVID response work, the operating margin was depressed by temporary program changes and lower revenue from performance based contracts as a result of the global pandemic.
Operating margin for the U.S. Services Segment was 16% for the first quarter.
As discussed last quarter, we continue to experience a significant revenue and profit headwind resulting from lower volumes on some of our largest Medicaid programs.
As a reminder, many state customers are currently utilizing enhanced U.S. federal matching funds for Medicaid.
However, they must adhere to certain conditions, including a pause in Medicaid redeterminations to ensure beneficiaries have continued access to vital healthcare services during a global public health crisis.
Those redeterminations are a significant level of activity within certain programs we operate.
Our full year expectations for the U.S. Services Segment remain unchanged with a 16.5% to 17.5% full year margin predicted.
Revenue for the first quarter of fiscal 2021 for the U.S. Federal Services Segment increased 10.6% to $405.2 million.
The Census contract contributed $60 million, which was $10 million less than the prior year.
Excluding the Census contract, organic growth for this segment was 13.5% and driven principally by an estimated $46 million of revenue from COVID response work as we continue to provide needed support to government in responding to the pandemic.
This includes work with the IRS supporting the Cares Act, which, as a reminder, is the first time the IRS has used contracted agents on this large of a scale.
The U.S. Federal Services Segment had approximately $4 million of revenue and profit shift out of the first quarter due to a delay in executing a contract.
It has been signed, and we will record the benefit in the second quarter of fiscal 2021.
The operating margin was 7.5%, which was slightly short of our expectations for a strong first quarter in this segment.
Our full year expectations for the U.S. Federal Services Segment remain the same with a 6% to 7% full year margin predicted.
Looking to the second quarter, including the aforementioned $4 million of revenue and profit we will recognize, the segment's margin is expected to step down.
This illustrates how we continue to have more overall variability in results due to the pandemic.
We are pleased to have secured COVID-response work to backfill some of the temporary shortfalls created by reduced volumes, revenue and profit from accretive performance-based contracts.
Revenue for the first quarter of fiscal 2021 for the Outside the U.S. Segment increased 11.5% to $155.4 million.
Organic growth, excluding the effects of currency, was at 4.8%.
Operating income for the segment in the first quarter of fiscal 2021 was positive $4.5 million for an operating margin of 2.9%.
The better-than-expected results for the quarter was primarily due to job placement activities in Australia, driven by a seasonal spike in demand for qualified job seekers.
As Australia started to emerge from the pandemic during our first quarter, employers needed to quickly fill many retail and travel-related jobs during the busy holiday and travel season.
The Australian team did an extraordinary job in successfully managing this influx of demand, but we view this seasonal spike as unique to the first quarter of fiscal 2021.
We continue to see strong demand for employment services in all of our international operations.
We have had positive developments since our last earnings call related to increasing demand and rising volumes for employment services.
We anticipate that volumes from current programs, most notably in Australia, and supplemented by new work, will drive revenue growth in the second half of fiscal 2021.
It is important to note that the new work consists of outcomes-based arrangements for employment services.
They are designed to ensure that contractors can be held accountable and incentivized to achieve the job placement and retention outcomes that matter to government.
This new employment services work drives our revenue estimates upward, but these programs are expected to generate losses in their early stages.
However, we target operating margins within our desired corporate average over the life of such programs.
We presently estimate that these start-ups will put the Outside the U.S. Segment in a loss position in the second quarter with steady improvement through the remainder of the year.
We now expect that the segment will be approximately breakeven for fiscal 2021.
Maximus enjoys a long history, strong reputation and demonstrated success in delivering employment services.
We believe the investment required will position us for favorable economics over the life of the contracts, which outweighs the temporary adverse impact in profit for the remainder of fiscal 2021.
We believe such programs are a good avenue to create substantial long-term shareholder value.
Let me turn to cash flow items and the balance sheet.
We had no draws on our corporate credit facility at December 31, 2020, and $132.6 million of cash and cash equivalents.
Cash from operations and free cash flow of $98.1 million and $89 million, respectively, were strong and contributed to our already strong balance sheet.
DSO was 75 days at December 31, 2020, compared to 77 days at September 30, 2020.
Let me touch briefly on capital allocation.
While we generally operate under an essential provider designation, we remain aware of budget pressures impacting our customers.
However, with our corporate credit facility and the aforementioned strong cash flows and balance sheet, liquidity is not a concern.
We continue to have a bias toward M&A as a means to drive long-term organic growth.
Our M&A program continues to evaluate prospects while we remain prudent stewards of capital and selective in our evaluations.
Our strong balance sheet and good cash from operations provides us good access to capital to fund acquisitions.
We remain committed to future quarterly cash dividends and share repurchases will continue to be made opportunistically.
While it is still early in the year, recent awards, scope increases and contract extensions have provided us with cautious optimism as we consider our full year guidance.
As a result of these positive developments, we are raising our full year guidance for fiscal 2021.
For the full year, we expect revenue will now range between $3.4 billion and $3.525 billion for fiscal 2021, driven by new work in support of government's ongoing response to COVID.
Additionally, we expect diluted earnings per share will range between $3.55 and $3.75 for fiscal 2021.
Our fiscal 2021 cash from operations are projected to now be between $350 million and $400 million and free cash flow between $310 million and $360 million.
Our expectations for our effective income tax rate is between 25.75% and 26.50% and for weighted average shares to be between 62.1 million and 62.2 million.
As we have long said, we often experience fluctuations in our quarterly financial results, which has only been exacerbated by the pandemic.
However, the management team aims to provide as much transparency into our work as reasonably possible.
So based on what we know today, we still expect a decrease in revenue and earnings for the second quarter of fiscal 2021 compared to the first quarter.
Current second quarter consensus estimates show revenue of $773 million and diluted earnings per share of $0.73.
At the present time, we expect to be above consensus revenue and earnings estimates for the second quarter.
Consequently, fourth quarter consensus revenue of $875 million and diluted earnings per share of $1.02 are above our current expectations.
While the new COVID-response work is providing a short-term positive tailwind, it has shorter periods of performance than our core contracts.
As we have cautioned previously, there is no assurance that the tailing off of the positive impacts of the COVID-response work will coincide with the return of our core contracts to previous volume and performance levels.
Our bottom line continues to be somewhat tempered by unfavorable headwinds related to the pandemic and the temporary changes on mature core programs, most notably in the United States and United Kingdom.
The result has been a reduction in accretive revenue, which continues to temper operating income margins and diluted earnings per share.
We anticipate that as we emerge from the pandemic, many of these programs will begin to return to historical volume levels.
Factors such as the end of the Public Health Emergency declaration in the United States and when we resume face-to-face assessments in the United Kingdom are particularly important to the pattern of expected recovery.
The effects of budget challenges, further relief packages and other changes in policies or legislation are some, but not necessarily all, factors that can impact our assumptions for fiscal 2021 and beyond.
I would like to end by saying that Bruce and I are proud of the team at Maximus for remaining on track to deliver solid performance this fiscal year.
Following the outbreak of COVID, there were many unknowns that we had to work through.
Unknowns remain, and we are not free from the impacts of the pandemic, but we have a solid footing, which gave us the confidence to raise guidance.
Last month, Maximus announced the planned retirement of our friend and trusted colleague, Rick Nadeau.
David Mutryn, Senior Vice President of Finance, will assume the role of CFO effective December 1, 2021.
I look forward to working with both Rick and David over the next nine months as we continue to execute our corporate strategy.
With the election of President Biden, we're cautiously optimistic regarding the stated policy initiatives from the administration and the potential favorable tailwinds that may be created for companies like Maximus.
The administration has already taken actions to increase access to affordable insurance for Americans through the Affordable Care Act and Medicaid.
Over the course of the administration, we will likely see a meaningful increase in funding for social welfare programs and, of course, public health programs.
Improving access to affordable healthcare is a top priority of the Biden administration, and the President has advocated building upon the Affordable Care Act, among other measures, to broaden coverage options for Americans.
Additionally, as we navigate through the pandemic, we believe we will see further policy initiatives that strengthen the public health infrastructure and a corresponding effort to more broadly support vulnerable populations.
President Biden has already expressed intent to tackle these challenges, and indeed, many of his early executive orders look to expand the public health workforce to provide vital services to individuals.
While it's still early days in the Biden administration, we're cautiously optimistic that the areas we have seen emphasized thus far will be reflected in subsequent budget and legislative priorities that set the stage for capitalizing on opportunities to partner with government in helping to achieve their policy initiatives.
Our COVID response work is a prime example of the demonstrated value of our services and the relationships we've developed with our clients.
In a time of unprecedented challenges, we are grateful to have earned the opportunity to provide needed assistance.
These contracts have served as a revenue driver, offsetting some of the unfavorable impacts on operations that are experiencing a pandemic-related temporary slowdown or pause.
Initially, our COVID work centered around more immediate pandemic-driven needs, such as contact tracing, disease investigation and unemployment insurance programs.
Our work has expanded as government demand has increased into new areas.
We launched efforts to support states in responding to public questions about vaccination registration, scheduling and administration quickly, efficiently and equitably.
We have hired several thousand employees to support these state and local efforts.
At the federal level, as you know, we also operate the CDC help line, known as CDC Info.
We recently added another 150 individuals as we scale up our operations yet again to answer questions regarding vaccinations.
Supporting several states and the CDC, we are the most experienced government partner in the market to provide vaccine administration citizen services.
Additionally, our U.S. Federal Services Segment scaled up to 3,200 agents from 1,500 to support the IRS with the next round of the economic incentive payments.
Further, in order to improve the user experience and drive efficiency, we implemented our interactive virtual agent system in response to the increased demand.
As Rick noted, we are also experiencing increased demand for our employment support services around the globe.
The economic impacts of the global pandemic have left many unemployed and in need of vital support in finding work.
It's important to remember that the pace at which different countries are emerging from the pandemic varies widely.
Some countries have progressed further in managing the spread of the pandemic and are now turning their attention to tackling the many residual challenges, including the economy and unemployment.
Maximus has a proven track record in delivering employment services and an earned reputation as a trusted long-term partner who delivers outcomes that matter.
Our continued investments support our position as a partner of choice over the long term, outweighing any temporary and short-term profit impacts in fiscal year 2021.
While the COVID work itself is comparatively short-term in nature, crisis support itself has a longer trajectory.
While this pandemic was certainly unprecedented, this is not our first nor our last call to action in a time of public health or economic crisis.
We will continue to be there to support our clients and citizens in times of need with critical services and solutions.
Our work is portable, adaptable from agency to agency and department to department, whether it's the IRS, CDC, FEMA, state health departments or others around the world.
We adapt from crisis to crisis, whether a global health pandemic, a natural disaster or economic challenges.
Along with the launch of Maximus Public Health, we view our capabilities in contingency planning for our government customers and the rapid implementation of citizen assistance services as a core competency and elemental to the long-term relationships that underpin our business.
Looking outside of the pandemic, I have previously talked about our solutions that are authorized under the Federal Risk and Authorization Management Program, or FedRAMP.
Our FedRAMP certifications meet the most stringent security requirements of federal agencies as we aim to deliver innovative and cost-effective cloud-based solutions that support mission objectives and provide the highest quality of citizen services, thereby transforming the user experience.
We fielded a survey of government technology leaders across federal, state and local agencies to gain insights about where agencies are in their cloud adoption journey and how they perceive the use of FedRAMP authorized cloud solutions to support their modernization and transformation initiatives.
The vast majority of respondents recognized benefits from moving to a FedRAMP authorized solution beyond adhering to mandates.
This survey further affirmed our solid positioning to provide a range of FedRAMP secured cloud solutions as well as our clients' demand for this service.
I will now turn to new awards and pipeline as of December 31.
For the first quarter of fiscal 2021, signed awards were $594 million of total contract value at December 31.
Further, at December 31, there were another $1.14 billion worth of contracts that had been awarded but not yet signed.
Let's turn our attention to our pipeline of addressable sales opportunities.
Our total contract value pipeline at December 31 was $31.6 billion compared to $33.0 billion reported in the fourth quarter of fiscal 2020.
Of our total pipeline of sales opportunities, 71.1% represents new work.
I want to reiterate the continued difficulty in predicting the impact that the global health pandemic may have on our pipeline, timing of new work and return to previous operational levels.
However, our strong reputation, flexibility and agility has cemented our position as a go-to partner for government.
We have navigated administration transitions for decades, and we firmly believe that the foundation is laid for continued opportunities to assist governments through these extraordinary times.
I wanted to wrap up my comments today reflecting on the events and protests that occurred in January at the U.S. Capitol in Washington, D.C. and in other areas of the country.
Like many of you, I was shocked and saddened by these events.
Maximus engages in the bipartisan political process in order to better understand our government clients' long-term goals.
Our Board's Nominating and Governance Committee has oversight of the company's policies pertaining to political contributions and compliance.
We remain committed to the fundamental principle of our engagement in the political process, which is, and will continue to be, to never support or fund candidates or elected officials who encourage or support violence against the Government of the United States.
The macro trends for our business remain unchanged.
As the pandemic has underscored, governments around the world need better solutions to deliver on policy priorities that can change rapidly.
Social welfare programs that reflect long-term societal commitments and priorities, increasingly face rising demand, shifting demographics and unsustainable program costs.
Maximus is well positioned to address these challenges and be a transformative partner.
We offer scalable, cost-effective and operationally efficient services for a wide range of government programs.
We continue to believe our portfolio mix of core business, new adjacencies and new growth platforms will allow us to achieve a healthy growth trajectory for years to come.
And with that, we will open the line for Q&A.
| q1 earnings per share $1.03.
raises fiscal 2021 guidance due to covid-response work.
fiscal 2021 revenue expected to range between $3.400 billion and $3.525 billion.
sees fiscal 2021 diluted earnings per share to range between $3.55 and $3.75 per share.
fy cash from operations are expected to range between $350 million and $400 million.
sees fy free cash flow between $310 million and $360 million.
|
For financial information that has been expressed on a non-GAAP basis.
We've included reconciliations to the comparable GAAP information.
At our Securities Analyst Meeting last month, we shared our plans to continue building a stronger HP, one that deliver sustained revenue, operating profit, earnings per share and free cash flow growth.
This quarter's results reflect our continued momentum against this plan and they give us great confidence in our future.
Let me talk through the details.
In Q4, revenue grew 9% to $16.7 billion.
Non-GAAP earnings per share grew 52% to $0.94 and we generated more than $900 million of free cash flow, while returning $2 billion to shareholders through share repurchases and dividends.
Our Q4 results are a great finish to an exceptional year.
For the full year, we grew revenue 12% to $63.5 billion and generated $1.7 billion of incremental non-GAAP operating profit.
Non-GAAP earnings per share grew 66%.
This means that we exceeded our value creation plan target for non-GAAP operating profit and EPS, a full year ahead of plan.
And we returned a record $7.2 billion to shareholders, while continuing to invest in strategic growth opportunities across the business.
Our Q4 and full year performance shows our company on its front foot and hitting its stride.
Long-term, secular trends such as hybrid play to our competitive strength.
Our leadership across our market and the innovation agenda we are driving are enabling us to turn these trends into tailwinds.
We are making organic and inorganic investments to drive profitable growth.
We are accelerating our transformation, building new digital capabilities while also reducing structural cost and driving efficiencies.
The progress we are making against our priorities is creating a more growth-oriented portfolio.
At our Analyst Day, I shared that we expect our five key growth areas to grow double-digit and generate over $10 billion in revenue in fiscal '22.
These businesses collectively grew 12% this quarter.
This includes more than 30% growth for our Instant Ink business, as well as more than 20% growth for our industrial graphics portfolio.
We see our key growth areas becoming a bigger part of overall revenue and profit mix moving forward.
We are driving this growth, even as we continue to navigate a complex and dynamic operational environment that include robust demand and persistent supply constraints.
The actions we have been taking to mitigate industrywide headwinds are paying off.
There is no quick fix, but we are strengthening our operational execution and making continued progress quarter by quarter.
And I just want to say how proud I am of the way our teams are stepping up.
It has not been easy, but the challenges we have faced have not deterred us from driving our business forward.
And the fact that we delivered double-digit revenue and profit growth for the year gives us confidence as we enter 2022.
Let me now talk about the strength we see across each of our business units.
In Personal Systems, there continues to be very strong demand.
Year revenue and operating profit each grew double-digit in Q4.
And our discipline execution and pricing strategy allowed us to effectively manage cost and component headwinds.
A big part of our success is the improved mix we are driving given our leadership in the commercial PC market.
As more offices reopen, we led our shift toward Windows based commercial products where we saw the strongest demand and highest profitability.
We continue to see a significantly elevated order backlog.
As I shared last month, we expect component shortages, particularly in IC to persist into at least the first half of '22.
The operational actions we outline in our Q3 call are generating positive results.
We continue to increase our direct engagement with Tier 2 and Tier 3 suppliers.
We have expanded long-term agreements to secure capacity and our digital transformation initiatives are enabling greater real-time visibility to optimize our speed, agility and mix.
This work remains a daily priority and we expect our trajectory to continue to improve.
We're also creating important innovation that we design for all team's hybrid.
This includes a new lineup of Windows 11 devices that enable premium computing experiences for work and home.
We are also expanding into valuable adjacencies.
Last quarter, we introduced HP Presence, the world's most advanced video conferencing system.
This is a large opportunity that will continue to grow as our digital and physical worlds converge.
Seven out of 10 companies are already investing in technologies that improve hybrid work experience for their employees.
HP presence combined our hardware, software, imaging and peripheral capabilities to create a more immersive experience, so that distributed teams can truly feel they are in the same room even if they are not.
You will see us continuing to innovate and expand our presence in the growing highly collaboration space.
We also delivered another quarter of double-digit device as a service revenue growth.
This included the launch of new digital services to help commercial customer simplify the complexity of hybrid IT environment.
And following the close of our Teradici acquisition, we launched our lineup of new Z by HP, Teradici, and NVIDIA Omniverse subscription offers to enable high performance remote collaboration.
Turning to Print, we grew revenue 1% in the quarter.
This was primarily driven by our disciplined pricing strategy, as well as our continued growth in services and subscriptions, which offset expected volume declines, driven by limited supply.
Like others in the industry, we continue to operate in a supply constrained environment, driven by COVID-related disruption and other logistics issues.
Against this backdrop, demand for our print hardware and supplies remained strong.
The fact is we had more hardware orders that we could fulfill in the quarter.
And as we said last month, we expect this to impact Print growth in fiscal year '22.
This is not stopping us from advancing our strategic priorities.
We continue to grow our HP+ Plus portfolio globally, including a rollout to our Envy in 5000 -- 7000 series that is designed for families working, learning and creating new memories from home.
Importantly, it is built with sustainability in mind and made from over 45% recycled plastic content.
We are also growing our digital services to enable hybrid office printing.
Our great example is this quarter's launch of HP Managed Print Flex, our new cloud first MPS subscription plan for hybrid work environment.
In Q4, we drove double-digit growth of MPS revenue and total contract value and this supports our Workforce Solutions momentum.
We're increasingly integrating our offerings across Print and Personal Systems to meet new customer needs and unlock new growth opportunities.
Our recently launched HP work from home service is a great example of how we are leveraging our diverse portfolio to win in the hybrid office.
As I mentioned earlier, we are also driving industrial graphics and 3D printing growth.
In industrial graphics, we drove double-digit revenue growth in the quarter and have built a healthy backlog of industrial presence.
This continues a positive recovery trend from prior-year quarter.
We also continue to see a mix shift toward more productive industrial process with significant growth in labels and packaging.
And in 3D, our focus on high-value end-to-end applications is paving the way for entirely new growth businesses.
Our molded fiber, footwear and orthotics initiatives are on track.
Our progress against our strategic priorities is also driving strong cash flow and we continue to be disciplined toward of capital.
We have our robust returns based approach that we are applying to every aspect of our capital allocation.
We will continue to invest in areas where we see growth opportunities, while continuing to return capital to our shareholders.
We believe our share remains undervalued and we are committed to aggressive reported levels of at least $4 billion in fiscal year '22.
We also expect M&A will continue to play an important role.
Specifically, we plan to pursue deals that accelerate our strategies and drive profitable growth.
And we are making ongoing progress against our sustainable impact agenda.
ESG is a driver of long-term value creation for all stakeholders.
And we continue to pursue an ambitious agenda.
The latest example is our expanded partnership with World Wildlife Fund.
We are working to restore, protect and improve the management of nearly 1 million acres of forest landscape.
This supports our focus on making every page printed forest positive [Phonetic].
To sum up, our portfolio is innovative and resilient.
Our strategy is driving sustained revenue, operating profit, earnings per share and free cash flow growth.
We are returning highly attractive levels of capital to shareholders and we are confident in the fiscal year '22 guidance that we shared at our Analyst Day.
We are entering the new year from a position of great strength and I look forward to continuing to share our progress.
Marie, over to you.
It's good to be back together and it was great to connect with so many of you following our Analyst Day.
I want to start by building on something Enrique said a moment ago.
Q4 was a strong finish to a very strong year.
It builds on our proven track record of meeting or exceeding the goals we set and it underscores our confidence in our FY '22 and long-term financial outlook.
Let me begin by providing some additional color on our results, starting with the full year.
Revenue was $63.5 billion, up 12%.
Non-GAAP operating profit was $5.8 billion, up 42%.
We grew non-GAAP earnings per share even faster, up 66% to $3.79.
This continues our trend of growing non-GAAP earnings per share every year since separation.
Our $4.2 billion of free cash flow was consistent with our full year guidance and adjusting for the net Oracle litigation proceeds and we returned a record $7.2 billion to shareholders.
That's a 172% of free cash flow.
What's especially important to note is how well balanced our performance is.
We are growing our top and bottom line.
We are returning capital to shareholders and investing in the business.
We are accelerating new growth businesses and driving efficiencies.
This reflects the company geared toward both short and long-term value creation as we enter a new period of growth for HP.
This is supported by our Q4 numbers.
Net revenue was $16.7 billion in the quarter, up 9% nominally and 7% in constant currency.
Regionally, in constant currency: Americas declined 4%, EMEA increased 15% and APJ increased 18%.
As Enrique mentioned, supply chain constraints continue to impact both Print and Personal Systems revenue and this was particularly impactful to our print hardware results this quarter.
That said, demand remain strong as hybrid work creates sustained tailwinds.
Gross margin was 19.6% in the quarter, up 2 points year-on-year.
The increase was primarily driven by continued favorable pricing including currency, partially offset by higher costs.
Non-GAAP operating expenses were $1.9 billion or 11.5% of revenue.
The increase in operating expenses was primarily driven by increased investments in go-to-market and innovation.
Non-GAAP operating profit was $1.3 billion, up 28% and non-GAAP net OI&E expense was $64 million for the quarter.
Non-GAAP diluted net earnings per share increased $0.32, up 52% to $0.94 with a diluted share count of approximately 1.1 billion shares.
Non-GAAP diluted net earnings per share excludes Oracle litigation gains, defined benefit plan settlement gains, non-operating retirement related credits, partially offset by restructuring and other charges, amortization of intangibles, acquisition-related charges, other tax adjustments.
As a result, Q4 GAAP diluted net earnings per share was $2.71.
Now, let's turn to segment performance.
In Q4, Personal Systems revenue was $11.8 billion, up 13% year-on-year.
Total units were down 9% given the expected supply chain challenges and lower chrome mix.
The fact we still grew revenue double digits in this environment reflected the strength of demand and positive impact of our big shift toward mainstream and premium commercial.
Drilling into the details, Consumer revenue was down 3% and commercial was up 25%.
By product category, revenue was up 13% for notebooks, 11% for desktops and 39% for workstations.
We also continue to drive double-digit growth across peripherals and services.
Personal Systems delivered $764 billion in operating profit with operating margins of 6.5%.
Our margin improved 1.4 points, primarily due to continued favorable pricing, product mix and currency, partially offset by higher cost including commodity costs and investments in innovation and go-to-market.
In Print, our results reflected continued focus on execution and the strength of our portfolio as we navigated the supply chain environment.
Q4 total print revenue with $4.9 billion, up 1%, driven by favorable pricing in hardware and growth in services, partially offset by a decline in supplies.
Total hardware units declined 26% due to consumer replenishment last year in Q4 and increased manufacturing and component constraints.
We expect these Print hardware constraints to extend at least into the first half of 2022.
By customer segment, consumer revenue was down 6%, with units down 28%.
Commercial revenue grew 19%, with units down 12%.
Consumer demand remain solid.
However, revenue across both home and office was constrained by the current supply and factory environment.
The commercial recovery should further progress with a double-digit hardware revenue growth with triple-digit increases in Industrial printing hardware.
We expect to see a continued gradual and uneven recovery in commercial extending into FY '22.
Supplies revenue was $3.1 billion, declining 2% year-on-year, driven primarily by prior year channel inventory replenishment.
We also saw steady normalization of ink and toner mix, partially offset by favorable pricing.
We saw continued momentum in our contractual business.
As we discussed at our Analyst Day, this is a key part of our broader services strategy.
Instant ink delivered double-digit increases in both cumulative subscriber growth in revenue.
We also drove growth in managed print services revenue and total contract value with strength in both renewals and new TCV bookings.
Print operating profit increased $117 million to $830 million and operating margins were 17%.
Operating margin grew 2.2 points, driven primarily by favorable pricing and improved performance in industrial including graphics 3D, partially offset by unfavorable mix at higher cost including commodity costs and investments in innovation and go-to-market.
Now let me turn to our transformation efforts.
As we completed the second year of our cost savings program, we have now delivered more than 80% of our $1.2 billion gross run rate structural cost reduction plan and we continue to look at new cost savings opportunities.
Transformation is not only about cost savings, but about also creating new capabilities and long-term value creation.
I'd like to highlight is our ongoing digital transformation.
By leveraging our new digital platforms, we are enhancing our capabilities and transforming the way we operate to deliver new solutions to our customers.
With this capability, we recently launched Wolf Pro Security, a new subscription service that enables customers to digitally manage their software on an annual subscription basis.
The structural cost savings with our transformation efforts are enabling us to invest in these types of strategic growth drivers and we see many more opportunities like this to drive business enablement through additional software services and solutions offerings.
Let me now move to cash flow and capital allocation.
Q4 cash flow from operations was $2.8 billion and free cash flow was $0.9 billion after the additional adjustment for the net Oracle litigation proceeds of $1.8 billion.
The cash conversion cycle was minus 25 days in the quarter.
This deteriorated 4 days sequentially as lower days payable outstanding and higher days sales outstanding was only partially offset by the decrease in days of inventory.
For the quarter, we returned a total of $2 billion to shareholders, which represented 210% of free cash flow.
This included $1.75 billion in share repurchases and $219 million in cash dividends.
For FY '21, we returned a record $7.2 billion to shareholders or a 170% of free cash flow.
Looking ahead to FY '22, we expect to continue aggressively buying back shares at elevated levels of at least $4 billion.
Our share repurchase program, combined with our recently increased annual dividend of a $1 per share, has us on track to exceed our $16 billion return of capital target set in our value creation plan.
Looking forward to Q1 and FY '22, we continue to navigate supply availability, logistics constraints, pricing dynamics and the pace of the economic recovery.
In particular, keep the following in mind related to our Q1 and overall fiscal 2022 financial outlook.
For Personal Systems, we continue to see strong demand for our PCs, particularly in commercial, as well as favorable pricing.
We expect solid PS revenue growth to continue into fiscal '22 with the shift to higher growth categories, including commercial, premium and peripherals.
We expect PS margins to be toward the high-end of our 5% to 7% long-term range.
In Print, we expect solid demand in consumer, a continued normalization in mix as commercial gradually improves through 2022 and disciplined cost management.
We expect Print margins to be toward the high end, about 16% to 18% long-term range.
For Personal Systems, we expect the component shortages, as well as manufacturing port and transit disruptions will continue to constrain revenue due to the ongoing pandemic in many parts of the world.
In Print, we expect similar, but more acute challenges, particularly with regard to factory disruptions and component shortages.
We expect these challenges across PS and Print to persist at least through the first half of 2022.
Furthermore, normal sequential seasonality doesn't apply for FY '22 and we expect our revenue performance to be more linear by quarter, particularly driven by PS.
In addition, we expect a slight headwind year-on-year, approximately $20 million per quarter from corporate Investments and other.
Taking these considerations into account, we are providing the following outlook: we expect growth quarter non-GAAP diluted net earnings per share to be in the range of $0.99 to $1.05 and first quarter GAAP diluted net earnings per share to be in the range of $0.92 to $0.98.
We expect full year non-GAAP diluted net earnings per share to be in the range of $4.07 to $4.27 and FY '22 GAAP diluted net earnings per share to be in the range of $3.86 to $4.06.
For FY '22, we expect free cash flow to be at least $4.5 billion.
Overall, I feel very good about our performance and our outlook.
So let me hand it back to the operator.
| q4 non-gaap earnings per share $0.94.
q4 gaap earnings per share $2.71.
q4 revenue rose 9.3 percent to $16.7 billion.
sees q1 gaap earnings per share $0.92 to $0.98.
sees q1 non-gaap earnings per share $0.99 to $1.05.
sees fy 2022 non-gaap earnings per share $4.07 to $4.27.
sees fy 2022 gaap earnings per share $3.86 to $4.06.
|
Our results were released after yesterday's market close.
2020 was quite the year.
Obviously, COVID-19 was the main headline for everyone and of course we were no exception.
COVID had a big impact on the first half of our year by sharply driving down prices and forcing a government-mandated shutdown in Mexico, which impacted us at our Palmarejo mine.
Of course, prices have strengthened considerably since their April lows and Mexico allowed mining to resume in the second quarter.
And together with solid production and effective cost and balance sheet management, we delivered a strong second half of 2020, which Mick and Tom will talk more about shortly.
I first want to take a minute to recognize our people for how they've risen to the occasion over the past 12 months.
We've asked a lot of everyone and our entire organization has responded incredibly well to the challenges.
I can't help but have immense pride for how well our culture has served us, the talent we've attracted, the ESG leadership we've established and the overall performance we delivered during such an unprecedented year.
Now starting off on Slide 3 and 4.
There were a lot of highlights and accomplishments last year that led to adjusted EBITDA jumping over 50%, to $263 million and free cash flow climbing to $49 million.
For starters, we achieved production guidance at all of our sites and unit costs were at or below full year guidance ranges at each of our primary gold operations.
Palmarejo's results were truly remarkable, the way they ramped back up mid-year and really never looked back.
And Kensington and Wharf also had fantastic years with both operations breaking their previous free cash flow records.
Rochester finished the year much stronger than it started, with fourth quarter silver production increasing nearly 40%, and gold production up almost 50% quarter-over-quarter.
And just to add a bit more color on Rochester, the big highlight last year was kicking off the expansion and providing the details of this project late in the year.
The updated mine plan reflects a reserves-only 18-year mine life with an NPV of $634 million and an anticipated IRR of 31%.
Production rates are also expected to double, driving average free cash flow to over $100 million per year.
Until this expansion is completed late next year, Rochester will remain in a state of transition while we balance near-term performance with gathering and applying key learnings to ensure Rochester's long-term success.
During this time, we'll also remain focused on further expanding Rochester's silver and gold reserves beyond the 58% and 65% growth we saw last year.
It was the largest drilling program in our history, and it was wildly successful.
Gold reserves grew by over 20%, and silver reserves increased by over 40% to the highest levels in Company history.
We've now dramatically increased our overall average mine life from just over seven years in 2015 to well over 12 years currently.
And with over $65 million allocated to exploration this year, we expect to see this number extend out even further.
These investments in exploration rank among our most attractive capital allocation priorities and should help drive higher returns on invested capital going forward.
On top of our reserve success, we made a new discovery in Southern Nevada called C-Horst, located in the Crown district, which has the potential to become a significant asset for the Company.
We included several recent drill holes in yesterday's release from C-Horst, including one that was over 216 meters, averaging just about 1 gram per ton of oxide gold.
An aggressive drilling program has already begun at C-Horst this year.
And we plan to invest approximately $10 million to continue growing this new discovery.
Another big success from last year's exploration program was the substantial resource growth at Silvertip in British Columbia.
With only around half of the assays back at the end of the year, total resource tons increased over 40% and we more than tripled the strike length of the high-grade deposit to over 3.5 kilometers.
We plan to invest roughly $14 million in exploration at Silvertip this year, aimed at further expanding the resource and beginning to convert some of this material to reserves.
I'm sticking with Silvertip for a minute.
We ended 2020 feeling confident in the resource and in our ability to continue expanding Silvertip's mine life with further drilling.
We also have identified and expect to lock down the flow sheet for a straightforward 1,750 ton a day process plant that can reliably deliver consistent recoveries and generate high-quality concentrates.
The team is now focused on optimizing capital costs, the mine plan and operating costs to incorporate everything we learned from last year's PFS.
We're also working through how best to slot in a potential expansion and restart to maximize the likelihood of success without distracting us from our Rochester expansion.
Our goal is to end the year with a solid, compelling business case to justify a decision to move forward at silver tip.
Our three-year outlook reflects strong returns and a step change in production and cash flow.
If you didn't get a chance to listen to our Investor Day in December, I encourage you to go to our website, look at the materials or watch the replay to find out more about our culture, strategy and outlook.
Before passing the call to Mick, I want to quickly highlight Slides 18 and 19 which provide a good high-level overview of our deep-rooted community relationships.
We strive to maintain strong relations with all of our partner communities and other local stakeholders with the goal of a mutual long-term prosperity.
Wow, what a great quarter and a strong finish to the year.
Building on our momentum, we expect to deliver another strong year from our operations in 2021.
Now taking a look at Slide 6 and 7 and beginning with Palmarejo.
Strong results during the second half helped us finish the year on a high note, despite being down for roughly 45 days in the second quarter.
Full-year gold production finished above the high end of its guidance range, while silver production was in line with expectations.
Additionally, the team did an excellent job balancing operating and financial results during the year which resulted in the unit costs for both gold and silver to come in below the low end of their guidance ranges.
Together, these great accomplishments helped to generate nearly $93 million of free cash flow; Palmarejo's largest free cash flow year since 2017.
Looking at the year ahead, we plan to increase our mining and throughput rates to help offset some lower grades and expect Palmarejo to have another great year in 2021.
Turning over to Rochester.
We're going to see positive results from our revised stacking plan, which leverages inter-lift liners to maximize the placement of HPGR-crushed ore on shallower portions of the leach pad.
This strategy directly led to higher production during the second half of 2020, helping us to achieve the low end of our production guidance for both silver and gold.
Unit costs came in slightly higher than expected, largely due to additional cyanide dosing as well as higher metallurgical outside services costs for modeling the test work and the consultant support, we used to drive the improvement program in the second half.
Going forward, we are continuing to focus on performance enhancements and driving sustained improvements in our results.
Before moving on, I want to quickly highlight two important items for Rochester in 2021.
We plan to swap out the existing secondary crusher in the second quarter to further optimize gradiation of crushed material at higher throughput rates.
This will give us the opportunity to dial in the new unit before it goes into the expanded crusher corridor as part of POA 11.
We also plan to begin crushing over liner material for the new Stage VI leach pad during the second half of the year and we have solid plans for both of these projects to mitigate some of the operational impacts.
It's important to remember that we are effectively using inter-lift liners and the existing crushing circuit as a full-scale test bed to optimize performance, helping to derisk our ability to achieve the expected results from the expansion in the coming years.
Switching over to Kensington.
2020 was an excellent year for the operation.
The team's diligent focus and efforts helped us achieve our full year production and cost guidance, which led to a record $60 million of free cash flow.
We expect another strong performance from Kensington in 2021, aided by the inclusion of Eureka and Elmira into the operation's production profile.
Lastly, at Wharf, the team did a great job accomplishing their goals for the year, and achieved guidance by producing over 93,000 ounces of gold at an average cost around $890 per ounce.
More importantly, Wharf generated $73 million of free cash flow, shattering its previous record by over 25%.
Looking ahead, we plan to move some additional tons during 2021.
While this is expected to result in marginally higher costs, we anticipate Wharf will have another great free cash flow year.
With that, I'll pass the call over to Tom.
Slide 5 highlights our fantastic financial results.
As Mitch and Mick mentioned, strong performances from Palmarejo, Kensington and Wharf, along with higher realized prices led to significant improvements in our annual financial results.
Margin expansion from top line growth and prudent cost management helped us generate over $260 million in adjusted EBITDA and nearly $150 million in operating cash flow.
Both metrics were over 50% higher year over year.
These results showcase the power of our portfolio, especially during the second half of 2020 when our assets generated $86 million of free cash flow.
The strong second half more than offset the slower start to the year, leading to nearly $50 million of free cash flow in 2020, our highest annual figure since 2017.
Looking ahead, as highlighted on Slide 15, we issued our 2021 guidance consistent with our recent Investor Day outlook.
These guidance ranges signal another solid year of operating cash flow and EBITDA.
I do want to flag that we are anticipating a relatively weaker first quarter, driven by, one, our mine plans, production profile and buildup of inventories on our leach pad; secondly, timing of tax payments in Mexico combined to be roughly $30 million to $35 million of cash outflow; and third, annual incentive payouts across the Company.
Turning over to Slide 13, I wanted to emphasize a few key takeaways from our balance sheet.
We bolstered our financial flexibility during the fourth quarter by fully repaying our revolving credit facility borrowings and expanding the capacity of the revolver to $300 million.
Together with our significantly improved cash position, this led to nearly $360 million of liquidity at the end of the year.
Looking at our leverage levels, both total debt and net debt-to-EBITDA decreased steadily during 2020.
Particularly, our key leverage metric, net debt-to-EBITDA was cut in half year-over-year ending 2020 at 0.7 times.
We are targeting a net debt-to-EBITDA ratio of under 2 times, while maintaining at least $100 million of liquidity over the next two years as we complete major construction at Rochester.
By using a combination of cash on hand, operating cash flow and debt capacity, we are confident in our game plan, leaving us very well positioned to fund this phase of significant capital investment.
I'll now pass the call back to Mitch.
Slide 14 shows our top priorities for 2021.
And by following this road map, we believe we can deliver solid results over the short, medium and long term from our balanced portfolio of North American precious metals assets.
With that, let's go ahead and open it up for any questions.
| full-year 2021 capital expenditures, sustaining are expected to be about $80 million - $100 million.
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Both are now available on the Investors section of our website, americanassetstrust.com.
We recently released our 2019 annual report that we prepared during the first quarter of 2020 prior to the COVID-19 pandemic.
The theme of our annual report was being grateful.
During these unprecedented times, we are even more grateful, great for our colleagues, investors, banking relationships, research analysts and our families and our great portfolio.
We are grateful for the first responders and healthcare workers on the front lines and the research taking place to find a grateful find a vaccine.
We are grateful for all the little things in life that we have often taken for granted.
One thing is certain that together, we will get through this period of history.
This question is how we will be impacted and what we will look like on the other side, we are not immune from the pandemic.
We too feel the bumps and bruises along the way, which Bob will talk about in more detail.
But overall, our expectations and confidence is that our high-quality portfolio in Coastal West Coast markets, combined with a low leverage balance sheet, will pull us through this period in history and come out better on the other side.
Reducing the dividend is heart breaking for me.
It's not the track record that we wanted.
And we've done it with regret and humility.
But in the absence of caution during these periods of times, the Board thought it was the thing to do.
We will ask the Board of Directors to reconsider making up the shortfall in subsequent quarters as soon as we can see the retail sector starting to rebound.
Following Bob Barton, our EVP and Chief Financial Officer, and will end with a quick update on the office leasing success that Steve Center, our Vice President of Office Properties is seeing.
From an operations perspective, in early March, we quickly mobilized to implement our business continuity and crisis management plans to help protect the health and safety of our employees, tenants and vendors and to maintain consistent open communications, both internally and to our stakeholders.
Our entire employee base continues to either work remotely or on-site at one or more of our properties.
Employees are generally only on site, if necessary, to either maintain critical building systems, ensure any essential businesses that are properties are properly accommodated and to provide resident services at our multifamily properties with skeleton rotating crews when feasible.
Each of our properties remain open and operating, while following all local, state and federal directives and mandates.
Across the board, we have increased security and implemented additional health and safety protocols at our properties.
However, we have scaled back other property management services to be more in balance with the current needs of those essential tenants that are opening, which we expect will help reduce property operating expenses.
Additionally, we have determined to delay most nonessential building improvement in common area projects, except for work already under contract.
As expected, we have received a myriad of rent relief request.
The vast majority from our retail tenants, many of which we believe to be opportunistic in nature.
The majority of such requests are from restaurants, salons, fitness centers, gyms and apparel stores.
Not all tenant requests will ultimately result in rent modification agreements nor are we foregoing our contractual rights under our lease agreements.
However, for those tenants that we agree to modifications or concessions, we may support them during the short term, in ways that we believe will benefit us over the longer term.
We are also asking for some cash or other consideration from our tenants as part of the modifications or concessions.
Finally, we have begun preparing our return to office plans in each of our office markets so that we can quickly disseminate such information to our employees and tenants once regulatory authorities begin to lift or relax, stay at home orders and implement market-specific restrictions.
Last night, we reported first quarter 2020 FFO of $0 56 per share and net income attributable to common stockholders of $0.20 per share for the first quarter.
As previously disclosed, we withdrew our 2020 guidance on April three due to the uncertainty that the pandemic would have on our existing guidance.
At the time we withdrew our 2020 guidance, we believe that we are on track, approximately a $7.6 million reduction in our dividend distribution from Q1.
The Board decided to do this out of an abundance of caution due to the uncertainty during this pandemic, even though we believe our balance sheet and current liquidity remains strong.
There is actually some science or math that supports the reduction that was made in the dividend.
What we did was to multiply each sector's cash net operating income by the percentage of cash collected on April rents billed through April 15.
Office is 49% of our cash NOI, and we had collected approximately 90% of April billings.
Retail is 31% of our cash NOI, and we had collected 43% of our April billings.
Multifamily is 12% of our cash NOI.
And and we had collected 92% of our April billings.
We have won 369 room hotel in our portfolio, which has been the number one performing Embassy Suites hotel in the world since we opened the doors in December 2006.
It is known as the Embassy Suites Waikiki that sits on a retail podium referred to as Waikiki Beach Walk.
The Embassy Suites Waikiki is 5% of our cash NOI, which is currently running on a skeleton crew with a minimal occupancy ranging from 5% to 15% based on Hawaii shelter in place order that has been issued through May 31.
Accordingly, we are not expecting any increased occupancy until this order has been lifted.
When you add these percentages up, it is approximately 68% of cash NOI and applied to a $0.30 dividend, it supports a revised dividend of approximately $0.20 per share.
We also believe that from a risk perspective, diversification is a plus and lessens the impact from uncertain times like this.
It is also worth noting that since our board determined our dividend in April, we have seen an uptick in April rent collections.
Such that we have now collected approximately 94% of office rents, 47% of retail rents, including the retail component of Waikiki Beach Walk and 94% of multifamily rents that were due in April 2020.
Other than our One Embassy Suites hotel that represents approximately 5% of our NOI, our retail sector, which represents approximately 31% of our NOI is obviously feeling the most impact with approximately 47% of April billings collected.
Approximately 24% of our retail tenants are considered to provide essential services and remain open during this period of time, and the balance of tenants are considered to provide nonessential services, which we are working with to create a positive outcome for both parties.
We expect the second quarter will be the most difficult, but we believe that we are well prepared with a strong balance sheet and strong.
As we look at our balance sheet and liquidity at the end of the first quarter, we had approximately $402 million in liquidity comprised of $52 million of cash and cash equivalents and $350 million of availability on our line of credit, and only one of our properties is encumbered by our mortgage.
Our leverage, which we measure in terms of net debt-to-EBITDA was 5.6 times at the end of Q1.
Our focus is to maintain our net debt-to-EBITDA at 5.5 times or below.
Our interest coverage and fixed charge coverage ratio ended the quarter at 4.3 times.
Additionally, in early April, we drew down $100 million out of the $350 million revolving line of credit, under our line of credit for working capital and general corporate purposes and to ensure future liquidity given the COVID-19 pandemic.
And finally, with respect to the $250 million of unsecured debt maturities that come due in 2021, we have options to extend the $100 million term loan up to 3 times with each such extension for one year period, subject to certain conditions.
And the remaining $150 million unsecured Series A notes do not mature until October 31, 2021.
We have continued to drive brands and further stabilize our office portfolio.
We ended the quarter at over 94% leased with only 9% of the office portfolio expiring through the end of 2021.
City Center Bellevue remains 99% leased, but we continue to expand and extend our existing customers at much higher rates.
We completed a full floor renewal with a major financial firm at a starting rate that is approximately 66% above the ending rate.
Portland has also remained very strong for us.
Our Lloyd District office buildings remain 100% leased.
We recently completed a full floor lease with an energy-related company with a start rate approximately 28% above the ending rate of the prior customer.
Similar to the 830 building at Oregon Square, we are currently redeveloping the 710 building, a 33,276 square-foot building that we hope to deliver in early 2021.
In addition, due to the increased demand from our existing customers, as well as other tenants in the market, we are in the early stages of design development of two new office buildings on the two remaining blocks at Oregon Square, which we will continue to evaluate pending market conditions.
At First & Main, we succeeded in Gate Bridge.
The fully renovated approximately 102,000 square-foot building will provide an 85,000 square foot contiguous opportunity to hopefully be delivered in mid-2021.
Finally, our San Diego portfolio stands at approximately 92% leased versus the overall Class A market at 89% leased.
two of the 14 buildings at Torrey reserve represents 65% of our San Diego vacancy.
Both have renovations and design development, and we are aggregating spaces into larger blocks, which are scarce in UTC and Del Mar Height.
Solana crossing now stands at over 95% leased.
And Torrey point is on track to be 97% leased with a recent expansion of one customer, a pending expansion of another and AAT's move later this year.
The two existing towers of La Jolla Commons stay 99% leased.
Additionally, we hope to have a building permit in the next few months for building three, and we will evaluate commencing construction as market conditions continue to evolve.
That said, we remain bullish long-term on the UTC market.
Direct vacancy in Class A buildings in UTC is just 3.3%, with only 0.5% of sublease space vacant, and we expect continued significant new demand driven by both life science and technology users.
| withdrew its full year 2020 guidance that was previously issued on october 29, 2019.
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We reported solid financial results that were propelled by our ongoing diversification efforts.
Sales in the third quarter were $122 million, up 8% compared to the same period in 2020.
Customer demand remains robust, while supply challenges persist, especially for transportation products.
Third quarter gross margin was 37.3%, up 490 basis points from 32.4% in the third quarter of 2020.
EBITDA margin of 21.7% was up 270 basis points from 19% in the same period last year.
Third quarter adjusted earnings per share of $0.46 were up 35% from $0.34 in the third quarter of 2020.
Later, Ashish Agrawal, our CFO, who is with me for today's call, will speak to the GAAP performance.
Operating cash flow of $21 million was down from $26 million in the third quarter of 2020.
New business awards of $179 million were solid and up from $127 million in the same period last year.
Ashish will take us through the Safe Harbor statement, Ashish.
To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available in the Investors section of the CTS website.
I will now turn the discussion back over to our CEO, Kieran O'Sullivan.
In the third quarter, our sales increased 8% to $122.4 million versus the prior period.
Demand from customers remains strong, but not surprisingly, revenue has been dampened by persistent supply chain constraints reverberating throughout the global economy, especially for automotive products, where we saw sales decline in the third quarter.
Excluding sales from the acquisition of Sensor Scientific, sales were up 6% organically.
Importantly, the SSI acquisition continues to deliver solid growth, and we're pleased with the performance of our temperature acquisitions and the momentum we are building to scale this platform.
We are benefiting from the richness of our customer base, in particular, in transportation end market.
As a result, we performed better than the overall market as our teams excelled in-sourcing initiatives globally, including the qualification of alternative sources.
Gross margin for the third quarter was 37.3%, up 490 basis points from the 32.4% in the prior year.
As we gain momentum from the advancement of our diversification strategy that I will talk about more in just a minute.
EBITDA margin of 31.7% was up 270 basis points from 19% in the third quarter of 2020.
We continue to be impacted by rising commodity prices as well as increased freight costs.
That said, we've been working alongside our customers to offset or share these cost increases.
While inflationary pressures negatively impacted our earnings for the third quarter, we remain confident in our ability to navigate this dynamic environment.
Third quarter adjusted earnings per share of $0.46 were up 35% from $0.34 in the same period last year.
New business awards of $179 million were solid and up from $127 million in the same period last year.
We added two new industrial customers in the quarter, one for an RF filter application and the other for a temperature-controlled crystal component applied in a GPS application.
Our long-term strategy centers on diversifying our end market profile by expanding our range of technologies, products, customers and geographic reach.
This diversification will also enhance the quality of our earnings.
We made tremendous progress on this front with the non-transportation related revenue moving closer to 50% of total revenue during the third quarter of 2021.
As a reminder, historically, our non-transportation related revenue was roughly 1/3 of sales, and our movement toward 50% of revenues is a meaningful shift that advanced our business across the board.
As we move forward, we will continue to strategically grow our transportation business, while at the same time continue to increase the growth rate of non-transportation revenues.
We are well positioned in multiple end markets that offer attractive growth prospects.
In the industrial space, we are seeing good traction in inkjet printing related to packaging and ceramic tile printing.
We continue to expand our applications in cold and hot temperature sensing.
In flow measurement, we have developed transducer applications in an area where we see good growth opportunities.
In medical, we see strong mid to long-term growth driven by traditional ultrasound technologies.
Additionally, with intravascular ultrasound applications, we are in sample qualification phases with potential customers, expanding our offering of temperature sensors in the medical market is a priority for us.
In aerospace and defense, our growth in undersea Sonar is expanding as we develop samples with new European customers where we expect future growth.
More recently, we provided samples for testing in underwater unmanned vehicle applications.
We are working on new material formulations, which we expect to provide solid tailwinds for next-generation products and new applications.
In transportation, the move toward hybrid and electric vehicles as well as increased sensor content with passive safety and future E-brake applications presents a tremendous opportunity.
Importantly, except for the smart actuator, the rest of our portfolio is agnostic to the propulsion system, which allows us to be flexible to meet the needs of our customers.
Overall, across all end markets, demand remains robust, in particular, in transportation, which we expect to continue given the historic low days on hand of vehicle inventories.
As I highlighted last quarter, some automotive customers have confirmed demand through 2022.
Order intake in the non-transportation end market was again strong in the third quarter.
We remain cautious of potential inventory buildup in various end markets, but most likely will not see this as an issue in the first half of 2022.
As I mentioned earlier, non-transportation sales now account for nearly 50% of our revenue, supported by our efforts to diversify the business.
With a very challenging supply chain environment, our teams worked creatively and diligently to secure parts and adapt with speed to support our customers.
Whilst transportation sales are lower than the previous quarter, we performed better than the outlook we provided in the last quarterly update.
We expected the third quarter to be the most challenging from a supply chain perspective.
The supply challenges and some customer shutdowns will likely persist for the balance of this year.
We expect an improving trend in 2022.
We also expect demand for automotive products to be robust in the year ahead as supply chain constraints improve.
In the accelerator module product lines, we had large wins with two existing Japanese customers.
We also had accelerator wins with customers in China and North America.
For passive safety sensors, we secured a win with a North American OEM and were awarded a Chassis Right Height Sensor program with a Japanese OEM.
Moving to Megatronics, a customer for actuator products, extended an existing platform for an additional year where products being supplied to all regions.
two of the awards this quarter were electric vehicle wins, one with a European OEM, and one with a Japanese OEM.
Bookings and sales for 2-wheeler applications were consistent with prior quarters.
Our non-transportation end market performed strongly in the third quarter.
Sales in industrial advanced from robust demand for temperature products across pool and spa, where we had two large awards, and we received multiple awards for HVAC applications.
Our focus on extending into the hot side applications is gaining momentum, and we will begin shipments to a new customer later this year.
Also, in industrial with wins for an EMC product, measurement transducers and a frequency product.
We renewed contracts with two customers for an application in musical instruments and end use market, which continued to gain sales growth throughout the pandemic environment as consumers shift to dedicating more of their time to leisure products.
Momentum in our medical end market continues to improve in a more consistently positive direction.
We had several wins from aiding drug delivery to next-generation medical ultrasound applications.
Also, for medical we secured temperature sensing awards with existing customers ranging from incubators to critical freezer and disposable applications.
We are working with new customers sampling medical ultrasound and temperature sensing products.
In defense, we had several undersea sonar wins and extended an RF filter program for a GPS anti-jamming application.
As I mentioned earlier, we are testing samples with new customers and expanding new advanced material formulations for next-generation products.
We had various smaller wins for RF and 10 applications and continue to develop frequency solutions to support millimeter wave technology for 5G applications.
Operationally, Ashish will provide more color on the savings we anticipate from our restructuring activities, we are tracking close to the target range.
We are nearing the end of our ERP implementation journey and the rollout of the SAP system, though we will continue to optimize our learnings and capabilities from these important initiatives.
Our balance sheet is strong, which is bolstered by strong solid cash flow generation, continues to be a competitive advantage as we advance our diversification strategy.
In the third quarter of 2021, we delivered operating cash flow of $21 million.
As we look to capital deployment, our emphasis remains firmly on supporting organic growth investments and using our financial strength to advance on M&A in alignment with our strategic priorities.
We also remain committed to returning cash to shareholders.
This past quarter, we repurchased approximately 148,000 shares for slightly less than $5 million as part of our previously announced stock buyback program.
We continue to strengthen our M&A pipeline in an environment where activity is at record highs.
From an M&A perspective, our strategy centers on enhancing our technology and product capabilities as well as our geographic reach across our end markets to enhance our diversification goals.
At the same time, adding technology that will enhance our EV offering remains a priority.
Our sweet spot continues to be acquisition targets in the range of up to $50 million a year in sales, but we remain open for the right larger opportunities that will advance our long-term strategy.
Looking ahead, the semiconductor shortage is now expected to reduce vehicle builds by nine million to 10 million units this year.
Pressure from the semiconductor shortages and OEM shutdowns certainly deteriorated downwards in the third quarter.
For the U.S. light vehicle transportation market, the SAAR dropped closer to $12 million in September, and we expect approximately 13 to 13.5 million unit range for this year.
On hand days supply are now closer to 20 days, the lowest in recent history and down over 60% from the five-year average of 55 days.
European production is forecasted in the 16 million to 17 million unit range.
The Chinese market has fluctuated, which also reflects the chip related impact.
China volumes are expected to be in the 23 million to 24 million unit range for this year.
The commercial vehicle market remains solid and likely to remain robust in 2022.
The biggest challenge to that outlook is the supply of semiconductors and the subsequent rescheduling of some unit builds into next year.
As I mentioned earlier, for transportation, the supply challenges will continue to impact our sales for the balance of this year.
However, we continue to see improvements in the medical end market as well as solid growth in industrial and defense markets.
In terms of our guidance for full year 2021, we are updating and narrowing our range.
Our previous guidance was for sales in the range of $480 million to $500 million and adjusted earnings per share in the range of $1.70 to $1.90.
We are now updating our guidance for sales to be in the range of $495 million to $505 million, and adjusted earnings are expected to be in the range of $1.85 to $1.95.
Our global team continues to demonstrate strong execution and a commitment to delivering operational excellence and achieving our long-term goals.
Our investments in our business development program and front-end sales are providing us with opportunities to build on our existing accounts and cross-sell our technologies, as you will find at some of our new business wins.
In our ongoing efforts to build our talent and culture, we came together in September as the global leadership team for the first time since the beginning of the pandemic.
Our event proved to be engaging and energizing as we collaborated and worked diligently on our focus 2025 initiatives to support growth, focusing on our strategic path forward customer relationships, operating systems, leadership, talent and culture.
Along the same lines and as part of our ongoing efforts to bolster engagement in our communities, we launched CTS Cares, a new platform designed to help our employees across the globe, collaborate on community engagement and charitable giving programs and share best practices for doing so.
This is our 125 anniversary, and we're very proud of our rich heritage and excited by what we can give back to our communities in the years ahead as we integrate the CTS Cares program into our culture.
In conclusion, CTS is well positioned for the future.
We have a strong team aligned around common goals that continue to advance the business for long-term value creation for our shareholders and other stakeholders.
Third quarter sales were $122.4 million, up 8% compared to the third quarter of 2020 and down 6% sequentially from the second quarter.
Sales to transportation customers declined by 5% compared to the third quarter of 2020 and 13% sequentially.
Conversely, sales to our other end markets increased 24% year-over-year and 3% sequentially, as the industrial, aerospace and defense end markets exhibited consecutive year-over-year double-digit growth.
As Kieran mentioned, this quarter, we have made significant advances in our diversification strategy as the sales to transportation end market represented 51% of our total revenue.
We remain committed to further diversifying the business.
Changes in foreign exchange rate impacted our revenues favorably by approximately $1.3 million.
Our gross margin was 37.3% in the third quarter, up 490 basis points compared to the third quarter of 2020 and up 50 basis points sequentially from the second quarter of 2021.
Our global team's operational efficiencies as well as profitability in our industrial, medical, aerospace and defense end markets helped mitigate the price increases in raw materials and freight costs that we have seen during the year.
We are also working closely with our customer base to find the best ways to manage the macroeconomic pricing pressures we currently face.
In the third quarter, we achieved $0.03 in earnings per share in savings from our restructuring program.
We remain on track to achieve targeted annualized savings of $0.22 to $0.26 of earnings per share by the end of 2022.
SG&A and R&D expenses were $26 million or 22% of sales in the third quarter of 2021 versus $23 million or 20% of sales in the third quarter of 2020.
The higher expenses in 2021 were driven by higher incentive compensation, timing of certain projects and the full restoration of cost reduction initiatives implemented in 2020.
In the third quarter, we recorded a noncash charge of $106 million before tax as part of the U.S. pension plan termination process.
As a reminder, these are noncash charges as the U.S. pension plan was overfunded at settlement.
The third quarter tax rate was 28.9% as a result of the impact of the final pension settlement charge on our income statement.
We anticipate our 2021 tax rate to be in the range of 19% to 21%, excluding the impact of the pension settlement and other discrete items.
We are also closely monitoring the U.S. government initiatives on tax that may impact our business in the future.
For the third quarter 2021, we reported a loss of $1.97 per share.
Adjusted earnings for the third quarter were $0.46 per diluted share compared to $0.34 per diluted share in the same period last year.
Our operating cash flow was $21 million for the third quarter of 2021 compared to $26 million in the same period last year.
The primary driver of lower operating cash during Q3 was inventory increases in our plants as we work through the supply chain challenges and our customers pushing out shipments.
We continue to focus on working capital efficiency, but anticipate carrying some excess inventory considering the ongoing supply chain challenges.
Our cash position is strong with a cash balance of $129 million as of September 30, 2021, up from $92 million on December 31, 2020.
Our long-term debt balance is at $50 million, a slight decrease from the $55 million on December 31, 2020.
Our debt to capitalization ratio was at 9.9% at the end of the third quarter compared to 11.4% at the end of 2020.
Given the strength of our balance sheet and cash flows, we continue to carefully consider M&A transactions that will further help our diversification efforts.
We are near the end of our rollout of the SAP system.
A majority of our sites are now running on SAP, and we expect to complete the rollout to the remaining sites in early 2022.
As Kieran mentioned earlier, we see a sustained demand ahead of us.
However, supply chain challenges are expected to persist for us and our customers on both material availability and cost through the rest of the year and into 2022.
This concludes our prepared comments.
| q3 loss per share $1.97.
q3 sales rose 8 percent to $122.4 million.
q3 adjusted earnings per share $0.46.
raised and narrowed its 2021 guidance for sales to $495 - $505 million.
sees 2021 adjusted diluted earnings per share to be $1.85 - $1.95.
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Sales in the second quarter were $129.6 million, up 54% compared to the same period in 2020.
Customer demand remains robust, while supply challenges persist especially for automotive products.
Second quarter gross margin was 36.8%, up 525 basis points from 31.6% in the second quarter of 2020.
Though improved, gross margin performance continues to be impacted by semiconductor and commodity price increases, as well as increased logistics costs.
EBITDA margin of 21.5% was up 480 basis points from 16.7% in the same period last year.
Second quarter adjusted earnings per share of $0.52 were up 225% from $0.16 in the second quarter of 2020.
Later, Ashish will add color to the GAAP performance including a non-cash charge related to the U.S. pension plan termination.
Operating cash flow of $19 million was up from $12 million in the second quarter of 2020.
New business awards of $174 million were solid and up from $105 million in the same period last year.
Ashish Agrawal, our CFO, is with me for today's call and will take us through the Safe Harbor statement.
And more information can be found in the company's SEC Filings.
To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available in the Investor section of the CTS website.
I will now turn the discussion back over to our CEO, Kieran O'Sullivan.
In the second quarter, our sales were $129.6 million, up 54% from the second quarter of 2020.
Excluding sales from the acquisition of Sensor Scientific, sales were up 52% organically.
The SSI acquisition continues to deliver solid growth.
As I referenced in our last earnings call, we expected the transportation sales run rate to be slightly lower than our first quarter 2021 performance due to ongoing supply challenges.
Our teams worked creatively and diligently to secure parts, approved substitutions and adapt with speed to support our customers.
Transportation sales while up 88% from the same period last year would have been stronger by a few million dollars if we did not have these supply challenges.
We expect the supply challenges and some customer shutdowns to persist in the second half.
New business awards were $174 million for the quarter, up from $105 million in the same period last year.
We added three new customers in the quarter; two in transportation and one in telecom.
In Asia, we added a new transportation customer in China for a large platform that would ship in the 2023 timeframe.
Across the accelerator modules, we had wins with two existing customers in China, secured awards with two Japanese OEMs for the North American market and added a new electric vehicle customer in Europe.
With passive safety sensors, we had wins with existing Tier 1 customers across all three regions with one of the wins for an EV application.
In Europe and North America, we had wins for throttle position and transmission position sensing.
Bookings and sales for two-wheeler applications were strong in Asia.
We continue to advance our diversification strategy by growing in non-transportation end markets.
In Defense, we had several undersea sonar wins and we also maintain good momentum with our RF filter products for GPS anti-jamming applications.
Temperature sensor wins were solid in defense, and we had an important win for an aviation application in Europe.
In Industrial, we continue to see strong demand for temperature products across pool and spa as well as HVAC applications.
We also had a large win in industrial printing, securing a two-year contract where the market has expanded into new applications such as garment printing.
Momentum in medical markets was positive but with inconsistencies regionally due to countries emerging from lockdowns and some customers being impacted by material shortages.
We had various temperature application wins and additional wins in CPAP, medical ultrasound and intravenous drug delivery.
For medical ultrasound, our design wins are increasing through new programs with existing customers and several new customers sampling our solutions.
We received two transportation OEM quality awards and we're also recognized for delivery performance by an industrial OEM and a large distributor.
Overall, across all end markets, demand remains robust.
Some automotive customers have confirmed demand through 2022.
Order intake for electronic components was strong in the second quarter.
Although we've not seen signs so far, we remain cautious of potential inventory buildup in various end markets.
This past quarter we announced the $50 million stock buyback program.
As we look to capital deployment, our emphasis remains firmly on supporting organic growth investments and using our strong balance sheet to advance on M&A in alignment with our strategic priorities.
We continue to strengthen our M&A pipeline.
Potential changes in capital gains taxation may also provide some further momentum in our areas of interest.
We continue to seek to expand our range of technologies, products, customers, and geographic reach.
And at the same time, continue to diversify our end market profile to complement our quality of earnings.
For the second quarter, transportation sales represented 55% of our total company revenues as we made progress in Industrial, Medical, and Defense sales.
Operationally, we can see the end of our journey and the rollout of the SAP system, though we will continue to optimize our learnings and capabilities.
The previously announced restructuring savings of $0.22 to $0.26 by the second half of 2022 are tracking close to the target range.
Building the CTS operating system capability continues with four sites advancing their proficiency on the system and tools as we aim to empower our teams and strengthen operational and enterprise expertise.
Transitioning to end markets, the semiconductor shortage is expected to reduce vehicle builds by 6 million units this year.
The supply of global microcontrollers is improving from companies such as Renesas and NXP, which should deliver some improvements to vehicle OEMs. For the U.S. light vehicles transportation market, demand remains robust.
We still expect approximately a 15 million to 16 million unit range this year, up double digits year-over-year.
On-hand days of supply are between 25 and 30 days, the lowest in recent history, and down 50% since January of this year.
European production is forecasted in the 16 million to 18 million unit range with some uncertainty persisting due to the extended COVID lockdowns.
The Chinese market has fluctuated recently showing the first chip-related impact.
China volumes are expected in the range of 23 million to 25 million unit range for this year.
The commercial vehicle market remains strong, not only for this year but likely into the first half of 2022.
The biggest challenge is the supply of semiconductors as demand remains robust.
As I mentioned earlier, for transportation, the supply challenges will continue to impact our sales in the second half of this year.
However, we see improvements in medical as well as solid growth in industrial and defense markets.
In terms of guidance for the full year 2021, we are updating our range.
Our previous guidance was for sales in the range of $445 million to $500 million, and adjusted earnings in the range of $1.35 to $1.70.
We are now updating our guidance for sales to be in the range of $480 million to $500 million, and adjusted earnings are expected to be in the range of $1.70 to $1.90.
Further updates will be provided as we continue to monitor the ongoing supply challenges.
Phase 2 of our journey and our biggest priority as we advance toward our 2025 goals is layering on a more robust sales growth profile.
Our teams are making progress as we continue to focus on existing accounts and add resources and capabilities to further support business development.
At this time, Ashish will take us through the financial performance.
Second quarter sales were $129.6 million, up 54% compared to the second quarter of 2020 and up 1% sequentially from the first quarter.
Sales to transportation customers bounced back 88% compared with the pandemic-driven lows in the second quarter of 2020.
However, we were down 6% sequentially as we saw the impact of supply challenges on global production volumes.
Sales to other end markets increased 26% year-over-year and were up 10% sequentially.
We had another quarter of solid year-over-year double-digit growth in the industrial as well as aerospace and defense end markets.
Sales to the transportation end market represented 55% of our total revenue.
This reflects progress toward our strategic goal to further diversify our business by growth in the Industrial, Medical as well as Aerospace and Defense end markets.
Our two temperature sensing acquisitions have performed well and had strong top line growth in the second quarter.
Changes in foreign exchange rates impacted our revenue favorably by approximately $2.7 million.
Our gross margin was 36.8% in the second quarter, up 525 basis points compared to the second quarter of 2020 and up 360 basis points sequentially from the first quarter of 2021.
These improvements reflect the progress in operational efficiency in our foundry operations over the last 12 months, as well as improvements in other parts of our business.
We also benefited from a larger portion of our revenue coming from the Industrial, Medical and Aerospace and Defense end markets.
Raw material price increases, as well as freight costs continue to impact us unfavorably.
And we are working closely with our customer base to offset or share these cost increases.
In the last quarter, we generated $0.03 of earnings per share in savings from our restructuring program announced in the third quarter of 2020, bringing the total savings to $0.12 of earnings per share so far.
As we mentioned back in April, the timing of some of our projects is being impacted due to the ongoing impact of COVID-19 on travel, as well as an increase in demand.
We are still on track to achieve the targeted annualized savings of $0.22 to $0.26 by the end of 2022.
SG&A and R&D expenses were $27 million or 21% for the second quarter.
Operating expenses increased primarily as a result of reinstating cost cuts made during the pandemic to offset the impact of revenue decline and higher incentive compensation expenses.
In the second quarter, we recorded a non-cash charge of $20.1 million related to the termination of the U.S. pension plan.
We are expecting the remaining non-cash charge of approximately $101 million to be booked in the third quarter when we complete the settlement process.
As a reminder, these are non-cash charges and the U.S. pension plan is expected to be overfunded at settlement.
Second quarter tax rate was 246% as a result of the impact of the pension settlement charge on our income statement.
We anticipate our 2021 tax rate to be in the range of 19% to 21% excluding the impact of the pension settlement and other discrete items.
We are carefully watching the new tax proposals and initiatives of the Biden Administration, and we'll discuss the impact on our business in the coming months as we get more clarity.
Second quarter 2021 earnings were $0.03 per diluted share.
Adjusted earnings per diluted share were $0.52 compared to $0.16 for the same period last year and $0.46 last quarter.
Now I'll discuss the balance sheet and cash flow.
Our controllable working capital is essentially flat from the end of 2020.
While we remain focused on working capital efficiency, we anticipate carrying some excess inventory where possible to manage supply chain concerns over the next few quarters.
Our operating cash flow was $19 million for the second quarter which is an improvement from $12 million in the second quarter of 2020.
We generated $16 million in free cash flow.
Capex was low in the first half primarily due to the timing of various projects.
In 2021, we expect capex to be in the range of 4% to 4.5% of sales.
Our cash balance on June 30, 2021 was $117 million, up from $92 million on December 31, 2020.
Our long-term debt balance was $50 million, down from $55 million on December 31, 2020.
Our debt to capitalization ratio was at 9.9% at the end of the second quarter compared to 11.4% at the end of 2020.
The combination of a strong balance sheet with a net cash position and access to approximately $250 million through our credit facility gives us the liquidity to make progress on the right M&A transactions.
In early July, we successfully went live on SAP at Boise, Idaho, and Tecate, Mexico.
These are locations from our first temperature acquisition.
As we had previously mentioned, more than 90% of our revenue now comes from sites that are running on SAP.
We expect to complete the rollout to our remaining sites in early 2022.
Before we wrap up, as Kieran mentioned earlier, we see a sustained demand environment in the second half of 2021.
However, supply chain challenges are expected to persist for us and our customers on both material availability and cost through the rest of the year.
Our current expectation is that Q3 could be the most challenging with some improvements in the fourth quarter.
This concludes our prepared comments.
| q2 earnings per share $0.03.
q2 sales $129.6 million versus refinitiv ibes estimate of $122.4 million.
q2 adjusted earnings per share $0.52.
updating its 2021 guidance for sales from $445 - $500 million to $480 - $500 million.
sees 2021 adjusted diluted earnings per share $1.70 - $1.90.
|
Such statements express our forecasts, expectations, hopes, beliefs and intentions on strategies regarding the future.
cummins.com, under the heading of Investors and Media.
I'll start with a summary of our second quarter financial results and our market trends by region and then finish with a discussion of our outlook for 2021.
Mark, will then take you through more details of both our second quarter financial performance, and our forecast for this year.
Demand remained strong in the second quarter, as the global economy continued to improve, driving strong sales growth across most businesses and regions, resulting in solid profitability.
We are encouraged by economic trends across a number of our key end markets, which point to strong demand for the remainder of this year, and extending into 2022.
In North America freight activity continues to grow, leading to elevated spot and contract rates and driving fleet profitability, and a rising backlog of truck orders.
Leading indicators for non-residential construction, continue to improve and fiscal support for investment and capital projects is robust, led by North America and Europe.
Iron ore, copper and thermal coal prices also remain high, supporting a positive outlook for mining.
Cummins is well positioned to benefit, as these markets gain momentum due to our leading global position across a number of end markets, and we continue to see demand our products outpace our competition.
Before getting into our results.
I want to take a moment to highlight a number of partnerships and strategic milestones, and the evolution of our next generation technologies.
In May, we formed a partnership with the Iberdrola, a leading global producer of renewable power to accelerate the global growth of business opportunities in the electrolyzer market, and especially in Europe with a focus on the Iberian Peninsula.
The Alliance will help position Cummins as a leading supplier of electrolyzer systems for large scale projects in Europe.
As part of our alliance, Cummins will be the electrolyzer supplier for a 230 megawatt project for a leading fertilizer producer that will serve as a benchmark for large PEM scale electrolysis globally.
We signed a globe, a joint venture with Sinopec and Enze fund in June which will accelerate the affordability and availability of green hydrogen in China to development of hydrogen generation projects, and increasing manufacturing capacity of electrolyzers and other key products in the green hydrogen supply chain.
As one of the largest hydrogen suppliers in China, Sinopec's annual hydrogen production reaches 3.5 million tons, accounting for 14% of total -- China's total hydrogen production.
China's embrace of green hydrogen is great for the planet, and Cummins and Sinopec joining together to realize the potential of green hydrogen is a huge leap forward for scaling our innovative PEM electrolyzer systems.
We recently announced a strategic collaboration with Chevron to develop commercially viable business opportunities in hydrogen and other alternative energy sources.
The MoU provides the framework for Chevron and Cummins to initially collaborate on four main objectives.
First, advancing public policy that promotes hydrojet -- hydrogen as a decarbonizing solution for transportation and industry; building market demand for commercial vehicles and industrial applications powered by hydrogen; developing infrastructure to support the use of hydrogen for industry and fuel cell vehicles; and fourth, exploring opportunities to leverage Cummins electrolyzer and fuel cell technologies at one or more of Chevron's domestic refineries.
The partnership with Chevron allows us to scale low carbon fuel delivery and build hydrogen corridors for use by fuel cell vehicles.
In addition, we can work with Chevron to decarbonize parts of their operations using our green hydrogen technology.
Finally, last week, Cummins announced the signing of an MoU with Air Products to work together to begin the transition of Air Products' heavy-duty tractor fleet to zero emissions vehicles in the Americas, Europe and Asia.
Cummins will provide hydrogen fuel cell electric powertrains integrated into selective -- selected OEM partners' heavy-duty trucks for use by Air Products.
The project will take a phased approach to transition Air Products fleet to hydrogen fuel cell electric powertrains, starting with five demonstration units to be delivered in Europe and North America by the end of next year.
Following successful demonstration, the project includes ramp-ups, which -- with a total of 2,000 trucks to be delivered by the middle of the decade.
This represents among the largest orders for fuel cell vehicles to-date, and we will be working with a partner that has deep expertise in the generation, transportation and use of hydrogen.
We've now deployed more than 2,000 fuel cells and 600 electrolyzers around the world as we continue the development of our hydrogen business.
In addition to accelerating our revenue momentum via these important strategic partnerships, we are also building out our electrolyzer capacity, targeting the regions which we expect to be at the forefront of green hydrogen production and commercial adoption.
Site selection search within the Guadalajara area of Castilla-La Mancha in Spain is currently underway for Cummins new approximately $60 million PEM electrolyzer manufacturing plant that will house system assembly and testing for approximately 500 megawatts per year of electrolyzer production and will be scalable to more than one gigawatt per year.
Cummins-Enze, the JV we signed in conjunction with Sinopec, will be located in Foshan, Guangdong province in China.
The JV will initially invest $47 million to locate a manufacturing plant to produce PEM electrolyzers.
The plant will open with a manufacturing capacity of 500 megawatts of electrolyzers per year, but will also be scalable to more than one gigawatt per year.
These investments, in addition to our build-outs underway at our current facilities in Belgium and Canada, will position us to have nearly two gigawatts of capacity by the middle of the decade with the flexibility to scale up as demand accelerates.
In the battery electric space, we continue to produce and sell fully electric powertrains in first-mover markets such as transit, school bus and yard spotters.
Cummins is collaborating with PepsiCo's Frito-Lay on a electric demonstration truck for a pickup and delivery application that has been running daily routes since last November.
This truck will be showcased at the upcoming North American Council for freight efficiencies electric truck demonstration.
We are well positioned with our deep market expertise in electric powertrain technology and are continuously evaluating how we can adapt and improve to meet customer demand and market trends as the technology matures.
This includes next-generation battery electric systems to balance the durability needs of our customers while focusing on delivering products at a compelling price point.
We are also continuing to explore new partnerships to enhance our capabilities, improve our cost position and drive more volume and scale into the business.
In addition to these important milestones for our New Power business, we are investing in our Engine and Components businesses to develop advanced diesel and alternative fuel products, which will be critical to meeting customer and regulatory requirements in the coming years.
We announced the signing of an LOI to acquire a 50% equity interest in Momentum Fuel Technologies.
The joint venture between Rush Enterprises and Cummins will produce Cummins-branded natural gas fuel delivery systems for the commercial vehicle market in North America, combining the strength of Momentum Fuel Technologies compressed natural gas fuel delivery systems Cummins powertrain expertise and the engineering and support infrastructure of both companies.
We have seen increasing interest over last year and expect natural gas powertrains to become an increasingly popular choice for end users due to both a compelling total cost of ownership as well as the environmental benefit of such powertrains, especially when utilizing renewable natural gas sources.
We also began testing of a hydrogen-fueled internal combustion engine for heavy-duty truck applications, building on Cummins' existing technology leadership in gases fuel applications and powertrain leadership to create a new power solution to help customers meet the energy environmental needs of the future.
The hydrogen engine program can potentially expand the technology options available to achieve a more sustainable transport sector complementing our capabilities in hydrogen fuel cell, battery electric and renewable gas powertrains.
We are committed to bringing customers the right solution at the right time.
Doing so requires us to maintain a broad portfolio of power solutions to meet our diverse customers' needs and to minimize total carbon emissions throughout the energy transition.
Now I'll comment on the overall company performance for the second quarter of 2021 and cover some of our key markets, starting with North America before moving on to our logos international markets.
Revenues for the second quarter of 2021 were $6.1 billion, an increase of 59% compared to the second quarter of 2020.
EBITDA was $974 million or 15.9% compared to $549 million or 14.3% a year ago.
EBITDA increased as a result of stronger global demand and higher joint venture income, partly offset by significantly higher premium freight and other costs associated with supply chain disruptions in addition to higher compensation costs.
Our global markets experienced an unprecedented shock from the impact of COVID-19 during the second quarter of last year.
And while we have been encouraged by the ongoing recovery across all of our global markets, our industry continues to experience significant constraints across the supply chain, leading to an extended period of inefficiencies and higher costs.
Despite these supply chain impacts, though, we are continuing to deliver strong financial performance while supporting our customers.
The ability to supply our customers remains our key focus now.
And while we are optimistic that the supply chain constraints will ease with time, they are likely to persist through the end of the year.
Our second quarter revenues in North America grew 74% to $3.5 billion, driven by higher industry build rates across all on-highway markets.
Industry production of heavy-duty trucks in the second quarter was 67,000 units, an increase of 180% from 2020 levels.
While our heavy-duty unit sales were $23,000, an increase of 217% from 2020.
Industry production of medium-duty trucks was 29,000 units in the second quarter of 2021, an increase of 94% from 2020 levels, while our unit sales were 22,000 units, an increase of 85% from 2020.
We shipped 42,000 engines to Stellantis for use in the Ram pickups in the second quarter of 2021, an increase of 272% from 2020 levels.
Revenues for Power Generation grew by 48% due to higher demand in recreational vehicle, standby power and data center markets.
Our international revenues increased by 42% in the second quarter of 2021 compared to a year ago.
Second quarter revenues in China, including joint ventures, were $2.1 billion, an increase of 8% due to higher sales in power generation and mining markets.
We also experienced a higher penetration rate with our joint venture partners in the heavy and medium-duty on-highway markets as they prepare for broader implementation of NS VI in July of this year.
Industry demand for medium and heavy-duty trucks in China was 566,000 units, a decrease of 4%, but still well above replacement, driven by continued pre-buy of NS V trucks, ahead of the broader implementation of the new NS VI standards in July of this year.
Our sales and units, including joint ventures, were 85,000 units, a decrease of 5% versus the second quarter of 2020.
The light-duty market in China decreased 8% from 2020 levels to 614,000 units, while our units sold, including joint ventures, were 38,000, a decrease of 28%, driven by supply chain constraints, particularly in these lighter displacement vehicles.
Industry demand for excavators in the second quarter was 97,000 units, a decrease of 5% from very high 2020 levels.
Our units sold were 16,800 units, a decrease of 7%.
The demand for power generation equipment in China increased 47% in the second quarter, driven by growth in data center markets and other standby power markets.
We continue to hold a leading market position in the data center segment, driven by strong end-user relationships and a compelling product offering in that space.
Second quarter revenues in India including joint ventures were $392 million, an increase of 219% from the second quarter of 2020, despite experiencing a terrible second wave of COVID-19 during this period.
Industry truck production increased by 468%, while our shipments increased 535%, as our joint venture partner continued to gain share.
Demand for power generation and construction equipment rebounded strongly in the second quarter, compared to a very low base a year ago.
We remain encouraged by the continued economic recovery, driven by anticipated government infrastructure spending.
In Brazil, our revenues increased 175%, driven by increased demand in most end markets.
Now let me quickly cover our outlook for 2021.
Based on our current forecast, we are maintaining full year 2021 revenue guidance of up 20% to 24% versus last year.
EBITDA is still expected to be in the range of 15.5% to 16%.
And the company expects to return 75% of operating cash flow to shareholders in 2021, in the form of dividend and share repurchases.
And summing up the quarter, strong demand across many of our key markets drove continued sales growth in the second quarter and resulted in solid profitability.
We have secured important new partnerships in our New Power segment.
At the same time, we continue to invest in bringing new technologies to customers, outgrowing our end markets and providing strong cash returns to our shareholders.
Cummins Filtration is a premier filtration platform and a technology leader specializing in filtration products used in heavy-medium-duty and light-duty trucks, industrial equipment and power generation systems.
The business generated revenues of approximately $1.2 billion in 2020, and remains well positioned for continued growth, sustained margin performance and strong free cash flow generation.
Cummins Filtration has a strong global footprint with leading positions in North America, India and China.
And a significant presence in other key markets supported by long-standing local partnerships.
We are exploring a range of options to unlock significant shareholder value, including the separation of Filtration into a stand-alone company with a dedicated management team, who are well positioned to drive the business forward and diversify its business, leveraging strong technology portfolio and footprint.
The execution of this exploration process is dependent upon business and market conditions, of course, along with a number of other factors and considerations.
And any costs associated with the evaluation of these alternatives for the Filtration business has been excluded from our financial outlook.
We plan to share a lot more about this and other elements of our strategy, during our Analyst Day on February 23rd.
Our purpose in delaying this event from November this year, until spring, is to be able to hold it in person.
And we will provide more details as we get closer, to the February 23rd date.
There are four key takeaways from our second quarter operating results.
First, underlying demand remains strong, outpacing supply and increasing backlogs in some of our largest markets.
Number two, global supply chains remain constrained due to the elevated levels of demand and complications arising from COVID, resulting in higher premium freight costs and other associated inefficiencies than we anticipated three months ago.
We delivered solid profitability and cash flows in the first half of the year despite the continued cost headwinds associated with tight supply chain.
And for the full year, we are maintaining our revenue and profitability guidance.
And fourthly, we returned $860 million to shareholders in the quarter through cash dividends and share repurchases and $1.48 billion for the first half of the year, consistent with our plan to return 75% of operating cash flow to shareholders this year.
Now let me go into more details on the second quarter.
Second quarter revenues were $6.1 billion, an increase of 59% from a year ago when the impact of COVID-19 was at its most severe.
Sales in North America grew 74% and international revenues rose 42%.
Currency positively impacted revenues by 3%, driven primarily by a weaker US dollar.
EBITDA was $974 million or 15.9% of sales for the quarter compared to $549 million or 14.3% of sales a year ago.
EBITDA increased primarily due to the benefits of higher volumes and stronger earnings from our joint ventures in China and India, partially offset by higher product coverage costs and higher compensation expenses primarily variable compensation.
Gross margin of $1.5 billion or 24.2% of sales increased by $588 million or 110 basis points, primarily driven by the higher volumes, global supply chain tightness continued in the second quarter and resulted in approximately $100 million of additional freight, labor and logistics costs.
We expect these costs to remain elevated in the second half of the year with demand projected to remain strong, supply tight and some increase in logistics and transportation costs.
Selling, general and administrative expenses increased by $130 million or 28% due to higher compensation expenses.
And research expenses increased by $87 million or 46% from a year ago.
As a reminder, due to the significant uncertainty at the onset of COVID-19, we implemented temporary salary reductions in April of last year that lasted through the end of September last year.
Salary reductions resulted in approximately $75 million of pre-tax savings for the company in the second quarter of 2020 across gross margin, selling, admin and research expenses.
In addition, our variable compensation plan worked as designed, flexing down in the face of weaker economic conditions last year and flexing up with stronger financial performance this year.
All operating segments experienced higher compensation costs than a year ago for these two primary reasons.
Joint venture income was $137 million in the second quarter, up from $115 million a year ago.
Strong demand for trucks and construction equipment in China as well as a broad recovery in other international markets led to the improved profitability versus a year ago.
Other income increased by $30 million from a year ago due to a number of positive items, including a one-time $18 million gain on the sale of some land in India, which benefited our Distribution segment.
Net earnings for the quarter were $600 million or $4.10 per diluted share compared to $276 million or $1.86 from a year ago, primarily due to stronger after-tax earnings driven by stronger volumes.
The gain on the sale of land in India contributed $0.05 of earnings per share this quarter.
The effective tax rate in the quarter was 21.4%.
Operating cash flow in the quarter was an inflow of $616 million, compared to an outflow of $22 million a year ago.
Stronger earnings and dividends received from joint ventures more than offset increases in working capital.
I'll now comment on segment performance and our guidance for 2021, which is unchanged from three months ago.
For the Engine segment, second quarter revenues increased by 75%, driven by increased demand for trucks in the U.S. and construction equipment in U.S. and Europe.
EBITDA increased from 10.5% to 16.1% of sales, primarily driven by higher volumes and lower product coverage expense, which more than offset higher costs and inefficiencies associated with global supply chain challenges.
And although, supply chain costs in this segment remain elevated from a year ago, they did improve a little from first quarter levels.
We expect full year revenues to be up 23% to 27%, and EBITDA margins to be in the range of 14.5% to 15% for the Engine segment.
In Distribution, revenues increased 20% from a year ago.
And EBITDA increased as a percent of sales from 10% to 10.5%, primarily due to stronger performance in North America.
We have maintained our outlook for segment revenue growth to be up 6% to 10%, and EBITDA margins to be 9% at the midpoint of our guidance.
In the Components business, revenues increased 73% in the second quarter, driven primarily by stronger demand for trucks in North America.
EBITDA increased from 12.3% of sales to 15.1%, due to the benefits of stronger volumes, partially offset by higher product coverage costs.
For the full year 2021, we expect Components revenue to increase 30% to 34% and EBITDA to be 17%, at the midpoint.
In the Power Systems segment, revenues increased 47% in the second quarter, driven by stronger global demand for power generation and mining equipment.
EBITDA increased from 11.7% to 12.2% of sales, primarily due to the benefits of higher volumes and lower product coverage expenses.
We are maintaining our Power Systems guidance of revenues up 16% to 20%, and EBITDA margin in the range of 11% to 11.5% of sales.
In the New Power segment, revenues increased to $24 million, up 140%, due to stronger sales of battery electric systems and fuel cells.
EBITDA losses for the quarter were $60 million, in line with our expectations, as we continue to invest in new products and scale up ahead of widespread adoption of the new technologies.
For Full year, we currently project New Power revenues of $110 million to $130 million and EBITDA losses to be in the range of $190 million to $210 million.
Total company guidance remains unchanged, with revenues to grow between 20% and 24%.
And EBITDA margin to be between 15.5% and 16%, for the full year.
EBITDA perfect for the first half of the year was 16%.
Some of the key factors expected to influence second half profitability, are the piece of improvement in truck production in North America, the rate of decline in demand in China, and the performance of the global supply chain.
We now expect earnings from joint ventures to be up 10% in 2021, compared to our prior year guidance of down 5%.
Stronger-than-expected demand in China truck and construction markets, especially in the second quarter, is the primary reason for the increase in our forecast.
So joint venture earnings are expected to ease in the second half of the year with industry truck sales expected to decline following the broader adoption of the new National Standard VI on highway emissions regulations in China in July.
And we also anticipate a softening of demand for construction equipment coming off all-time high levels in the first half of the year.
Our effective tax rate is expected to be approximately 21.5%, excluding discrete items, down from our prior guidance of 22.5% due to the mix of geographic earnings, capex -- capital expenditures were $125 million in the quarter, up from $77 million a year ago.
And we expect our full year capital expenditures to be at the high end of our range of $725 million to $775 million for the full year.
We returned $869 million to shareholders through dividends and share repurchases in the second quarter, bringing our total cash returns to $1.48 billion for the first half -- excuse me for my dry throat.
To summarize, we delivered strong results in the second quarter despite continued supply chain constraints and elevated costs.
Demand currently exceeds supply in a number of important markets, pointing to strong demand for our products into 2022.
We continue to extend our leadership position through advancing the technologies that power the profitability of our customers today and will continue to do so for some time to come.
This sets the company up to further increase the earnings power of our core business while we continue to invest in a range of new technologies and develop new partnerships that position the company for additional growth.
Our strong balance sheet focused on improving performance cycle-over-cycle and consistent cash flow generation means that we can sustain important investments for the future through periods of economic uncertainty and distribute excess cash to shareholders.
Out of consideration to others on the call, I would ask that you limit yourself to one question and a related follow-up.
And if you have additional questions, please rejoin the queue.
Operator, we are now ready for our first question.
| q2 earnings per share $4.10.
q2 revenue $6.1 billion versus refinitiv ibes estimate of $6 billion.
sees fy revenue up 20 to 24 percent.
also announcing exploration of strategic alternatives for its filtration business.
potential strategic alternatives to be explored include separation of cummins filtration business unit into a stand-alone company.
|
If you do not have the releases or the slides you can find them on the company's website at www.
Jim will start with an overview of the acquisition and cover the results of the quarter in the year as well as provide our financial guidance for fiscal 2022.
Jeff will then review details of the transaction and we will have Dan discuss Barber-Nichols.
These risks and uncertainties and other factors are provided in the releases and in the slide decks as well as with other documents filed by the company with the Securities and Exchange Commission.
These documents can be found on our website or at sec.gov.
I also want to point out that during today's call we will discuss some non-GAAP financial measures, which we believe are useful in evaluating our performance.
We appreciate you joining Graham's year end earnings call and also to join in our discussion about Barber-Nichols, a $70 million transformative acquisition we closed today.
This is truly an exciting day at Graham, one that benefits all stakeholders, Graham shareholders, employees at both Barber-Nichols and Graham, customers, suppliers, Arvada, Colorado and Batavia, New York communities from which we draw our workforce talent and create stable well paying employment and provide a place where employees are stimulated, challenged, developed, rewarded and able to build long-term careers.
Thus we will go through year-end results and quickly move into discussing the excitement surrounding adding Barber-Nichols to Graham Corporation.
I will begin my remarks with Slide 3.
Let me start by stating I am thrilled to have completed this acquisition.
It was nearly three years in the process to get this done, initially engaging with Barber-Nichols in late summer of 2018, when Jeff first visited.
Just immediately identified BNI met most of the critical criteria for what Graham strategically wanted in an acquisition.
As we have discussed in the past, our process for identifying acquisition targets is to establish necessary key attributes of a target such as, but not limited to values and culture, IP protected products and market served operations model and revenue range.
Chris is responsible for developing the messaging for each target, creating the compelling reasons as to why Graham is an ideal strategic acquirer and outlining the value of a proposed combination.
Most often the target isn't necessarily for sale, which was the case with BNI.
Fortunately Dan Thoren, the President of BNI was intrigued by Chris's messaging and agreed to have an initial discussion that took time to earn trust, develop relationships and establish the value contributions of both organizations to the combination and agree on terms of the transaction.
Jeff, Alan Smith, Chris and I were impressed right away by Dan and the BNI management team that are remaining with us as well as BNI's culture, which represents one of their most important assets.
The employee engagement, level of positivity, passion for the company and can do approach to their business all confirmed Dan and the BNI team have created something very special and extremely powerful.
The time it took to complete the deal permitted us to observe Dan and team in action and their ability to make stretch commitments and deliver on those commitments.
We first engaged with BNI at a time when they were ramping up calendar 2018 at $40 million, up from $30 million a year earlier.
Over the ensuing two years, it was wonderful to observe the planning and forecasting processes and importantly their ability to deliver forecasted results culminating in $56 million of revenue for calendar year 2020.
This demonstrated to us that BNI has strong management capabilities and their systems at BNI have the necessary controls and that the business processes are scalable to drive future growth.
Barber-Nichols is an outstanding company.
We are fortunate to have them become part of Graham Corporation effective today.
Jeff will go through the deal rationale in detail and Dan will provide an overview of Barber-Nichols.
However, what I viewed compelling about Barber-Nichols was it fulfilled our goal of diversifying into the defense market, which provides greater stability, multiple year visibility, incredible long-term asset base loading.
The wonderful aspect about BNI products is there is no overlap with Graham's.
We serve the defense shipbuilders specifically the nuclear propulsion program while BNI serves offensive and defensive systems for the ships.
In addition, BNI serves the commercial space market with sophisticated and advanced technologies for rocket engine fuel systems and space life support systems.
This is expected to be an expanding long-term growth market due to the Internet of Things, growing communication networks and the ever-increasing way in which people throughout the world are interconnected.
Thus today we had new market segment revenue within the defense industry and also bring new markets such as commercial space, advanced power generation, alternative energy along with capabilities for system integration.
Importantly, the acquisition of Barber-Nichols is a catalyst for immediate improvement in revenue and profitability with top line expanding approximately 50% due to the addition of BNI for the 10 months in fiscal 2022 that we own them and it provides a terrific platform for follow-on organic and acquisitive growth.
I am very pleased and excited to have Barber-Nichols become part of Graham.
Actually, I've been remiss, I have mentioned Dan Thoren a couple of times.
Dan, is on the call as Deb had mentioned.
Dan was President and CEO of Barber-Nichols until this past May when he moved to Chair of the Board.
Dan joins Graham Corporation as President and Chief Operating Officer and will report directly into me.
Dan will be responsible for near and long-term performance of both Barber-Nichols and Graham's historic defense, energy and petrochemicals businesses.
Dan will work with Matt Malone, our Vice President, General Manager for Barber-Nichols.
Matt is the current President and CEO at Barber-Nichols.
Dan also will work with Alan Smith, our Vice President and General Manager for Graham.
You're all familiar with Alan and the terrific job he has done as our General Manager.
I'm really excited to get into the detailed discussion about Barber-Nichols, and its benefit to long-term shareholder return.
However, let's walk through the fourth quarter and year-end results.
I will take you through the fourth quarter performance, full year results and fiscal '22 guidance.
Jeff will walk you through the strategic rationale and deal structure and then Dan grabs the ball to provide an overview of Barber-Nichols.
I am now referring to Slide 4.
A key facet of our diversification strategy is to add revenue streams uncorrelated to energy.
Revenue that is less volatile and provides a long runway for growth and importantly offers high levels of multiple year asset base loading.
The acquisition of Barber-Nichols fulfills that objective perfectly.
Moreover, Graham's organic defense revenue reached 25% of consolidated sales and was in the mid $20 million range for fiscal 2021.
We expect modest growth in fiscal 2022 and then move into the mid $40 million range by fiscal 2025.
Complemented by Barber-Nichols defense revenue, we believe the combination will quickly approach $100 million in defense sales.
Our commitment to our installed base for crude oil refining and petrochemical markets will continue to bear fruit.
Everything we read here and observe supports continued investment in existing assets for mature markets and new capacity capital investment in emerging economies.
Graham's shift into competing in price sensitive segments of our energy and petrochemical markets, supported by innovation of our operations model has changed our participation and success in these previously underserved segments.
This strategy has been 10% to 15% of sales.
Last year was at a comparable level in fiscal 2020.
The team has done well to navigate the selling cycle to get us in position to win and also -- sorry, and also the execution side working with the global supply chain for component fabrication has created cost efficiencies and execution capacity for us.
Importantly, Alan and his team achieved margins projected for the orders completed thus far.
A key business initiative is to expand the capacity of our production workforce.
Today, we need to grow our capacity within our production workforce by 20% in Batavia.
That will permit backlog conversion velocity to improve and also expand margins due to operating leverage and reduction in subcontracting.
Energy and petrochemical markets feel different today than six months ago.
That is encouraging, however, the bid pipeline has a long way to rebuild before returning to pre-2020 levels.
We are watching this closely during the next few quarters, cost measures have not been taken due to the need to have depth across the company's sales, engineering, quality, manufacturing, IT and other critical departments.
It takes a long time to build a proficient knowledge worker at Graham.
We continue to evaluate near-term benefit and long-term implications of cost reduction measures.
We elected to protect the strength of Graham during this Black Swan event caused by COVID-19.
Let's move on to Slide 5.
Fourth quarter sales were $25.7 million.
Defense sales were strong at $6.5 million.
Also was revenue lift from short cycle sales, driven by the freeze in the US Gulf Coast region.
Also and importantly 15% to 20% of sales were due to our success penetrating the price sensitive segment of the refining market.
Earnings per share was $0.04 with net income at $400,000.
On March 31, cash was $65 million of which approximately $40 million was used for the acquisition of Barber-Nichols.
Backlog on March 31 was $137.6 million with $104 million for the defense market and acquiring Barber-Nichols approximately $100 million of backlog was added effective today.
Nearly $240 million multi-year backlog is a valuable asset for Graham.
Please move on to Slide 6.
Year-over-year revenue increased to 11% and gross profit 14%.
Profitability and margin were pressured due to decisions we made not to address business cost during the pandemic and also our inability to quickly expand production personnel.
Government support during the pandemic has made it difficult to compel potential workers to join the Graham team.
This should improve in the coming quarters, but is a headwind now as we want to convert more existing backlog more quickly by having a larger production workforce.
We have the infrastructure but not the human resources.
Let's move on to Slide 7.
Alan Smith and the operations team performed remarkably in achieving full year revenue of $97.5 million.
Due to COVID-19, full year throughput capacity was at 85% as an average of what our production workforce could produce if unaffected by lost time due to COVID.
This made planning and management of backlog conversion difficult.
Alan and his team did fantastic even though that is not apparent in the results.
Here too profitability and margins were under pressure due to under-absorption caused by 15% lower throughput and also strategic decisions to hold personnel at pre-COVID levels.
On to Slide 8.
We had strong defense bookings of $69 million for the year.
Energy and petrochemicals stayed mired due to demand destruction stemming from the range of implications of COVID-19.
We do have a terrific backlog that at March 31, as I said earlier was $137.6 million, up $25 million year-over-year.
Importantly, and again Barber-Nichols adds roughly $100 million into our backlog bringing the combined total to just under $240 million.
$40 million of Barber-Nichols backlog is expected to contribute to fiscal 2022 revenue for the 10 months we own them.
40% to 45% of our organic backlog is expected to convert into revenue during fiscal 2022.
Now let's move on to the guidance slide.
Full year revenue range is $130 million to $140 million with $45 million to $48 million from Barber-Nichols and the remainder being organic revenue.
Adjusted EBITDA is expected to be between $7 million and $9 million.
Once we complete purchase accounting treatment of the BNI acquisition, we will be in a position to provide gross margin and SG&A guidance.
This was an exciting start to the fiscal 2022.
Large elements of recent diversification strategies have come together to dramatically improve fiscal '22 results and more importantly reshape Graham's future with a path to stronger total shareholder returns.
The Barber-Nichols acquisition is transformative for Graham.
There is a platform for follow-on organic and M&A investment to propel growth.
Graham's defense revenues in the mid $20 million range with growth anticipated to yield more than $40 million of revenue by fiscal 2025.
Importantly, we are beyond first article operations and therefore margins should improve as well.
Just as a reminder, first article operations are first time fabrications that involved production R&D, production of jigs and fixturing and defining ideal build flow or order of operations.
Once beyond first article work, productivity gains should be achieved.
I am pleased by our success in winning work and previously underserved price focus segments of the energy and petrochemicals markets that represented 15% of sales fiscal '19 through '21.
It's also worth noting $7 million of new orders were secured during the month of May from the crude oil refining market.
We became involved in these opportunities in early 2019.
It is great to see significant order releases from this end market.
Both are from the installed base.
One is for US Gulf Coast refiner undertaking a revamp to enable use of lower cost, lower quality feedstocks.
The other is a Mideast refiner debottlenecking the refinery to provide more gasoline and diesel fuels to meet local demand.
With those remarks, I want to pass the call over to Jeff and Dan to walk through the acquisition.
If you could turn to the Barber-Nichols acquisition deck.
If you look at Slide 2, you will see we have a Safe Harbor statement similar to that which was in the earnings deck and I'll allow you to review rather than me reading through it.
Moving on to Slide 3.
It's great to be speaking with you from Barber-Nichols here in Denver with Dan Thoren.
As Jim mentioned, we have been working at Barber-Nichols for quite a long time.
My first visit to the Denver facility was in August of 2018, when Dan was graciously willing to meet with me.
Barber-Nichols which I may refer to as BNI is a great fit for Graham, since it meets all the criteria that most of you have heard me describe over the past several years.
It is clearly a transformative acquisition for Graham.
Certainly the most exciting activity in my time at Graham and probably in the history of the company.
It will increase the size of Graham by 60% on a pro forma basis and immediately accelerates our diversification strategy.
We expect to see 10 months of revenue in fiscal 2022 or approximately 50% growth.
BNI expands our defense business from $24 million in fiscal 2021 to a run rate of approximately $65 million to $70 million currently.
Since there was no overlap with our current defense business, this dramatically expands our platform.
Barber-Nichols also has a $10 million in the aerospace business which is mostly related to the space industry.
This will be another exciting market for us.
Looking forward, we expect more than half of our business to come from defense and aerospace.
This is a fantastic complement to our refining and petrochemical platform.
Along with defense and aerospace, BNI offers us opportunities for growth in cryogenics and advanced energy.
As Jim mentioned with a backlog of $100 million in addition to Graham's backlog of $137 million, we have a combined backlog of nearly $240 million of which 80% is in defense and aerospace.
This increased multiyear visibility reduced volatility of revenue and earnings and ability to grow organically and via M&A across multiple platforms is exciting.
We clearly see some exciting organic growth opportunities.
And yes, to be clear, once we have Graham and Barber-Nichols working well together, we intend to look for more M&A growth opportunities.
Chris Johnston and I are excited to engage with Dan to identify further businesses to add to BNI.
As part of the deal, the owners of Barber-Nichols wanted some skin in the game, so approximately $9 million in Graham shares were part of the purchase consideration.
This represent 610,000 shares or approximately a 6% increase in shares outstanding.
I have mentioned numerous times that we would use a little equity if it made sense.
Clearly having the BNI owners, who are remaining with us post acquisition to ask me for a stake in Graham was another positive aspect of the deal.
The transaction is expected to bring some very nice accretion, though the initial purchase accounting will likely put a near term damper on it.
Finally Barber-Nichols brings a strong management team, led by Dan Thoren who has nearly 30 years of Barber-Nichols, 24 of which as its President.
Dan is now ascending to President and Chief Operating Officer of Graham to utilize his capabilities across all of the combined company.
Matt Malone, has taken over as the new President of BNI.
Matt has strong leadership skills, a very high energy level which I expect will drive BNI toward a very successful future.
The remaining leadership team at BNI is similarly top notch.
This is a fantastic team that we are gaining along with the business.
On to Slide 4.
Let me talk briefly about the deal structure.
Graham paid $70 million made up of $61 million of cash and $9 million of stock for 610,000 shares.
Out of the $61 million, $41 million was in cash from our balance sheet and we entered into a $20 million term loan for the remainder.
This leaves us with over $20 million of cash, so our net debt position is zero, but it gives us flexibility to go after future organic and M&A investments.
There is an earn out provision based on fiscal 2024, essentially the third year of the deal, which will allow up to $14 million in additional cash payments.
The earn out has a threshold, which if met would kick in at $8.75 million of EBITDA in fiscal 2024 and provide a $7 million payout.
If the EBITDA achieved that year is $11 million, the payout increases to a maximum level of $14 million.
Between those two EBITDA numbers the earn out would be interpolated.
This acquisition assumed no synergies.
We believe there will be benefits for the combined organization but not needing them to justify the deal was great.
Will Graham bring some capabilities to Barber-Nichols, I believe so.
But just as likely I believe Barber-Nichols will bring new capabilities to our current Graham team.
I mentioned Dan and Matt earlier, they will become Graham named executive officers at our Annual Meeting at the end of July.
On to Slide 5.
Along with the excitement of the acquisition, we also now have a far more efficient balance sheet.
While having a lot of cash was comforting that dormant cash did not achieve a return for our shareholders.
You all know that I've desperately wanted to utilize that cash for growth and a stronger return.
Now with Barber-Nichols, I'm confident that it will.
We have entered into a new bank relationship with Bank of America and it includes a $20 million term loan, which I mentioned earlier as well as a $30 million revolver.
We also have a $10 million accordion feature available on top of that $30 million revolver.
We do not expect to utilize the revolver much in the near term, but it will -- it provides us with more dry powder and flexibility going forward.
We continue to have a relationship with HSBC now with the $7.5 million cash secured facility for certain bank guarantees in geographies where they have a strong presence.
Overall, our balance sheet will look much different, but in my view it will be far more efficient rather than overly conservative.
We are now using our balance sheet for growth today and more so going forward.
On to Slide 6.
When our business development team that would be Chris and I, talked about an ideal fit for Graham, we could not have picked a better match than BNI.
Before I continue, I would like to recognize Chris Johnston again.
He has been working behind the scenes, most of you have not met him, but as I've told many of you, he does a fantastic job for both M&A and as well as organic opportunities for us.
He is a great partner and a great leader on our team.
Now I'd like to speak briefly about Barber-Nichols and then we'll pass over to Dan to provide far more depth on the business.
Barber-Nichols is based in Arvada, Colorado, the suburb of Denver.
They have a 55-year history of engineering, development and innovation.
As a former engineer myself, they have some real cool capabilities here.
They have over 150 employees, which is double what they had just four or five years ago.
We are looking forward to adding more employees at a similarly rapid pace to support Barber-Nichols' future growth.
They recently completed construction of a 43,000 square foot state-of-the-art manufacturing plant.
This is nearly double their facility size and I cannot wait to bring some of you through the facility for a tour.
The leadership team at BNI is outstanding and most importantly, the entire workforce is tremendously skilled, continually enhancing their training and extremely engaged.
Now that I've set the bar high, I will pass over to Dan Thoren, Graham's new President and Chief Operating Officer, who will provide much more depth about Barber-Nichols.
I'm happy to be with you and provide more background on BNI.
We'll just kind of hang out on Slide 6 here and I'll tell you more about us.
Barber-Nichols is a team of about 150 engineers, machiners, inspectors, technicians, and support personnel that engineer and build specialty pump, turbine and compressor systems that are used in the highly sophisticated applications like submarines, rockets, physics research facilities, advanced power plants and thermal management systems.
We've talked a lot about numbers so far, but it's our people and the work environment that we nurture that make the numbers happen.
We have an amazing team.
Many of us came from large aerospace defense or industrial companies.
I came from a large aerospace company with 5,000 employees at my location.
I walked into BNI when it had 35 people and I was amazed that these 35 people were doing what my company was doing with 5,000, albeit at a much smaller scale.
I was sold on BNI and I decided I had to work there.
Many of us who came from a much larger companies found they can-do, continual learning, relationship driven culture at BNI invigorating.
While it's been tough during COVID, we do spend a lot of time helping our people understand the importance of what our customers are trying to do.
We excel when we are part of our customers team.
We are fully engaged during development of our equipment and their systems and we share our customers anticipation during first launch.
One last comment before we move to Slide 7.
BNI leaders and employees like to have skin in the game, Jeff talked about this.
One of the alluring aspects of this transaction was the ability to have meaningful ownership in a micro-cap company like Graham.
Most BNI stockholders took stock and many employees will now get to buy stock in their company.
That is a powerful incentive when you know your daily efforts will benefit you and your fellow investors.
Now let's move to Slide 7.
Most of Barber-Nichols business comes from defense and aerospace.
The US Navy is a large customer for submarine, Torpedo ejection systems and Torpedo power systems as well as aftermarket parts and overhaul.
Thermal management systems are used in a variety of power dense electronics and other power applications.
For Aerospace, our involvement is broader with thermal management systems, fluid management systems, propulsion and power systems that support vehicles and satellites and environmental control in life support systems for our heroes.
Slide 8 is next.
When Kim Nichols and Bob Barber started BNI, their first customer was the US Navy, for whom they designed high speed turbines.
Another near founder Jim Dillard got us involved in a prototype air turbine pump used for Torpedo ejection systems and US Navy submarines using a special manufacturing process called electrochemical machining.
This initial engineered product development focus has been leveraged into production manufacturing on several Navy programs.
We are now seeing full lifecycle with spare parts and overhaul of these systems.
Please turn to Page 9.
NASA has been a front customer over the years and we designed and built several cryogenic pumps for them in our early years.
My first job with NASA was on the ground based trainer for the space shuttle manipulator arm.
NASA also gave us our first opportunity to design and build a rocket engine turbopump using our cryogenic pump and hot gas turbine knowledge.
That early experience in 1997 through 2000 set us up well for the new space companies that have been busy developing commercial space launch services over the last 10 years.
I'm now moving to Slide 10.
BNI works across many markets and that ability has served us well over the years as all markets go through cycles.
When we are able to move from one market in decline to another on its way up, we can manage our business much better.
In the physics research arena, BNI is known worldwide as a specialty cryogenic pump supplier.
We also work with all of the air separation giants that separate oxygen and nitrogen and argon and other gases into industrial gases.
BNI's cryogenic blowers are installed in North American LNG import terminals and satellite test chambers around the world.
Since day one, BNI has been involved in advanced energy systems, building and commissioning geothermal power plants and concentrated solar power systems.
More recently, we have been involved in fuel cell power plants making anode and cathode blowers.
The new administration plans to spend more money on alternate energy storage and power gen and we see opportunity in specialty pumps for hydrogen fueling systems.
On to Slide 11.
Slide 11 gives another view of BNI from a product perspective.
One thing that jumps out that hasn't been apparent on the earlier slides is the motor generator controller product area.
When I first joined BNI, we used generation one variable frequency drive to push 3,600 RPM motors to 5,000 RPM.
The higher speed provides a more power dense turbine machine.
Since then we have driven pumps to 30,000 RPM and compressors to over 100,000 RPM.
We are now designing and building the electronic boxes that drive our motors and condition the power from our generators, sometimes doing both in the same machine.
As you can tell, I'm passionate about our people, our customers and our technologies.
I'm also very excited to learn about the employees of Graham.
Their families and their dreams, their customers and their products, together, I believe we'll do some amazing things.
Jim, I think we're back to you, my man.
I am now referring to Slide 12.
On the integration side, the operating models between BNI and Graham are different.
Graham produces large complex welded fabrications to a very tight tolerances and BNI produces very tight tolerance highly machined fabrications.
The asset bases are different in Arvada for BNI and in Batavia for Graham.
Also, the markets or segments of the markets served by BNI and Graham are different.
The transaction value as Jeff had outlined is not predicated on realizing synergies.
Of course, there may be some, however, Arvada and Batavia will run as independent operating businesses under one umbrella.
Initial integration is related to benefit plans, accounting and finance systems and public company compliance and strategic capital investment governance.
There are BNI systems and program management processes Dan and Matt's Arvada business can share with Alan's defense team.
Also there are Batavia constraint management processes and performance improvement techniques, Allan's Batavia team can share with Matt's team in Arvada and working together to share best practices, we believe margin gains can be realized in both businesses.
With Dan Thoren in the Chief Operating Officer role, working with both Matt and Alan, the talent pool is now nearly 500 person combined organization that is deep and very strong.
Dan of course knows Barber-Nichols deeply and much has been shared with Dan about Graham and in the coming quarters Dan will learn more about Graham, it's people, our culture, our markets, our customers and our competitors in the passion that every Graham employee has for ensuring our customers are successful and that Graham is successful.
I will be thrilled to continue to work directly with Dan in driving both businesses.
Let's move on to Slide 13.
This graphic projects the transformation the BNI acquisition provides.
For fiscal 2021, Graham was approximately $100 million of revenue with an end market breakdown of 41% to refining, 25% to defense industries, 24% to chemical and petrochemical markets and 10% to various other end markets.
A pro forma projection of fiscal 2022 following the BNI acquisition is for revenue to be between $130 million and $140 million comprised of 45% for defense, 26% for refining, 16% for chemical and petrochemical end markets, 6% to aerospace and 7% to other end markets served by the combined entity.
Excitingly, there is further growth in defense by entering new programs, accelerating backlog conversion and from additional mergers and acquisitions.
Refining end markets also provide growth simply from a recovery from the pandemic, also from strategies and acted to shift position in underserved price sensitive segments and our continued focus on the installed base.
For chemicals and petrochemicals like refining have the same growth options with strategic actions already enacted.
Aerospace and commercial space market is expected to grow.
BNI with its cryogenic and triple pump technology is an important supplier to this market.
There is much growth runway in this end market.
With the addition of BNI growth prospects for Graham, Graham is becoming an outstanding industrial.
I will conclude with Slide 14.
The acquisition of BNI, deployed capital to expand our presence and diversified revenue from the defense industry and also provide access to an expanding aerospace market.
Importantly, it adds significantly to our less cyclical revenue streams that reduced financial results volatility.
Defense and aerospace valuation multiples are stronger now than those in energy and chemicals due to end market fundamentals and visibility into future orders.
As we continue to grow defense and aerospace revenue, we anticipate that will enhance Graham's valuation multiple.
A catalyst was needed to break out of the revenue range Graham was in.
BNI provides that catalyst.
And that fiscal 2022 revenue is expected to be approximately 50% stronger than without Barber-Nichols.
Beyond 2022 with the addition of BNI it creates follow-on acquisition opportunities along with organic growth that is meaningful.
Once Graham's traditional refining and chemical markets get beyond the pandemic, that will provide further revenue and margin improvement.
We structured our balance sheet to take on low-cost debt and provide flexibility to invest in additional acquisitive growth or substantial organic investment that may be necessary as new defense, aerospace programs are secured.
I trust you share the excitement that Jeff and I have about adding BNI to Graham and then having Dan join our leadership team.
Fiscal 2022 is an exciting new chapter for Graham.
We have talked a lot thus far, let us open the line now for Q&A.
| compname posts q4 earnings per share $0.04.
q4 earnings per share $0.04.
q4 sales $25.7 million versus refinitiv ibes estimate of $24.7 million.
revenue in fiscal 2022 is expected to be $130 million to $140 million.
expects approximately 40% to 45% of backlog will convert to revenue in fiscal 2022.
|
I'm joined today on the call by Marcelo Fischer, IDT's chief financial officer.
IDT continued to deliver strong results, reflecting the sustained execution of our strategic priorities and the robust operating performances of our businesses.
As a result, our top and bottom lines increased appreciably compared to the year-ago and prior quarters.
Even though excluding the positive impacts of a reversal of income tax valuation allowances and gains on investments recorded this quarter, consolidated revenue increased $52 million year over year to $374 million with our fourth consecutive quarter of year-over-year revenue increases.
With solid performances across the board, including an exceptional increase in mobile top-up revenue among our traditional communications offerings, consolidated income from operations increased from $10.1 million to $13.9 million this quarter.
Our adjusted EBITDA less capex, which is overall a good proxy for cash generation, jumped to $13.2 million and $5.7 million.
Sorry, my kids have just joined me, I apologize.
I am sorry, it's the problem with not pre-recording.
I am just going to go back and drop, I apologize.
Consolidated income from operations increased $10.1 million to $13.9 million this quarter.
While adjusted EBITDA less capex, which is overall a good proxy for cash generation jumped to $13.2 million from $5.7 million.
All three of our reporting segments, net2phone-UCaaS, fintech, and traditional communications met or exceeded our expectations.
Our high growth, high margin businesses once again performed extremely well, net2phone delivered subscription revenue growth of 39% year-over-year.
The increase reflected in part for progress on the net2phone development roadmap, net2phone continues to add API third-party integrations and now offers integrations with Salesforce, Zoho, PurpleCloud, Slack, Zapier, and Microsoft Teams, among others.
Its growing integration toolkit enhances access to new segments across its domestic and international markets.
In our fintech segment, NRS accelerated its impressive revenue growth increasing revenue by over 120% year over year, led by payment processing and digital advertising services.
This quarter, NRS announced the partnership enabling our independent retailers to ship and receive commerce packages.
This deal illustrates the real strength of the NRS ecosystem, namely, its ability to generate revenue from a variety of services in ways that add tremendous value to our retailers.
Also, within fintech, our BOSS Revolution money transfer business remained strong, generating 63% revenue growth year over year after excluding the significant positive impact of the transient FX opportunities we successfully pursued starting with the year-ago quarter, but which finally and completely ceased in the second quarter of this year.
Our money transfer team has done a great job of enhancing the BOSS Revolution money app, user experience, and systematically cross-selling customers from our other BOSS offerings.
In the coming months, we will continue to grow our money transfer service to new corridors, enhance our distribution network, notably in Africa and expand it to new origination markets.
These initiatives offer abundant long-term growth potential.
And finally, within our largest segment, traditional communications, mobile top-up revenue jumped by $36 million sequentially and by $47 million year over year, underscoring the vigor of these offerings and the potential to sustain long-term cash generation.
This significant revenue increase reflects our recent efforts to grow our share in the mobile top-up space.
Powered by mobile top-up, adjusted EBITDA less capex for the traditional communication segment jumped to $20.8 million, an increase of $8.7 million from the year-ago quarter.
Finishing up our strong third-quarter operational results enabled us to further strengthen our balance sheet with a significant improvement to available cash and current ratios this quarter.
And I'm sure some of my kids would love to join, but hopefully, it will just be the two of us.
| idt corp qtrly consolidated revenue increased 16% to $374 million.
|
Unless otherwise stated, all net sales growth numbers are in constant currency, and all organic net sales growth excludes the non-comparable impacts of acquisitions, divestitures, brand closures, and the impact of currency translation.
As a reminder, references to online sales include sales we make directly to our consumers through our brand.com sites and through third-party platforms and also includes estimated sales of our products through our retailers' websites.
[Operator instructions] [Audio gap] Fabrizio.
It is good to be with you today as our hearts continues to be with those impacted by COVID-19 around the world.
We achieved record sales and profitability in the second quarter of fiscal year 2022.
Our multiple engines of growth strategy showcased the benefit of its diversification.
Every category, region, and major channel expanded.
We size the favorable dynamics of skincare, fragrance-developed markets in the West, brick and mortar, and continue to prosper in the East with Chinese consumer, as well as in global travel retail and global online.
The flexibility we built into our business model over the last decade enable us to both allocate resources to attractive growth opportunities and effectively manage the impacts by increasing inflationary environment.
Our advanced planning for the key shopping moments of 11.11 and holidays allowed us to overcome supply chain obstacles.
For our second quarter, reported net sales grew 14%.
Organic net sales rose 11%.
Adjusted operating margin expanded, and adjusted diluted earnings per share increased 15%.
Today's results are all the more impressive compared to the pre-pandemic second quarter of fiscal year 2020 when we delivered record organic sales growth in our seasonally largest quarter.
Despite the ensuing challenges of COVID-19, which escalated during the quarter with Omicron, we far exceeded the exceptional results of two years ago.
Reported sales are 20% higher, driven by organic sales growth, and with every region now larger, and we are much more profitable.
Our gains during the last two years reinforced our confidence in our ability to navigate the impacts of the prolonged pandemic.
Moreover, our optimism in the opportunities of tomorrow remains incredibly strong, owing to the timeless desirability of our brands and our commitment during the pandemic to invest for the near and the long term.
Our brand portfolio of large, scaling, and developing brands served as a powerful catalyst for growth as consumer reward the quality of our trusted brand and hero products.
In the second quarter, 11 brands achieved double-digit organic sales growth versus the prior-year period.
This broad-based trend is similar to the contribution in the first quarter despite a far tougher comparison.
The momentum in our largest brands, Clinique, Estee Lauder, La Mer, and M·A·C, continues as the hero franchises capitalize on innovation in product engagement and high-touch experiences and services to drive trial and repeat.
La Mer and Clinique delivered standout results in skin care, while Estee Lauder and M·A·C drove makeup emerging renaissance.
Our scaling and developing brands achieved excellent results.
Jo Malone London and Tom Ford Beauty led fragrance and were among our top-performing brands, while Bobbi Brown grew strongly driven by skincare.
Aveda and Bumble and bumble delivered accelerating sales growth in hair care as Too Faced and Smashbox rose double digits in makeup.
Product innovation also served as a powerful catalyst for growth across our brand portfolio, contributing nearly 25% of sales.
This level of contribution is notable in a quarter when holidays exclusives represent a larger mix of business and especially so in a challenged supply chain environment.
La Mer fueled by its iconic heroes on-trend holidays merchandising and highly sought new The Hydrating Infused Emulsion led the company's sales growth.
The brand excelled in every region and across major channels, cheered by its loyal consumer and embraced by new cohort of consumers, including more men.
Clinique's skincare portfolio with its desirable innovation and hero franchises performed strongly.
Its new Smart Clinical Repair Wrinkle Correcting Serum drove sales gains in North America, amplifying the brand's global momentum in the serum subcategory.
Clinique Take The Day Off makeup remover saw a dramatic uptick in sales, evidence of makeup's emerging renaissance and the staying power of this crowd-favorite skincare product, which is recruiting a new generation of consumers.
For makeup, the Estee Lauder brand is a driving force in the category emerging renaissance, with makeup sales for the brand already larger than two years ago.
Estee Lauder Double Wear hero franchise delivered remarkable performance, while its Futurist foundation, which is an East to West product born of skinification of makeup trend, was very strong.
Our fragrance portfolio continued to go from strength to strength, owing to the enduring sand-based ritual created in the pandemic and enhanced by innovation, better online storytelling, and expanded reach as consumers in the East embrace this category.
Each of Jo Malone London, Tom Ford Beauty, Le Labo, KILIAN PARIS, and Frédéric Malle delivered strong double-digit growth in every region, demonstrating the allure of these brands around the world.
Tom Ford Beauty exemplifies the benefits of a strategic focus on heroes and innovation.
Its new Ombre Leather Parfum had a halo effect on the other perfumes such that sales for the franchise doubled.
In the third quarter, the brand is leveraging its global appeal with a flare of local relevance in the fragrance launch of Tom Ford Rose Trilogy.
Our growth engines also continue to diversify by region as we anticipate.
Developed markets in the West performed especially well.
North America executed with excellence to capture brick-and-mortar reopening trends and deliver a strong holiday across channels.
Festive seasonal exclusive, including Estee Lauder Blockbuster Set and Aveda collaboration with Philip Lim, proved highly sought.
Indeed, our in-store and online activation and merchandising were incredibly successful, with brand.com posting a record Black Friday.
Every category grew double digits organically in North America led by makeup where our brand paired trusted product with enticing innovation as social and professional user education increased.
M·A·C, Bobbi Brown and Too Faced produced engaging content and artist-led education to inspire consumers to size the joy and creativity of the category.
Mainland China delivered high single-digit organic sales growth, an impressive result given the regional restrictions in the quarter, the pressured brick and mortar, and makeup.
Online sales rose double digits organically, even after having posted significant growth in the year-ago period.
For 11.11 on Tmall, the Estee Lauder brand ranked No.
1 flagship store in beauty for the second consecutive year as La Mer's flagship store topped luxury beauty once more and Jo Malone London again led in prestige fragrance.
On JD, the Estee Lauder brand ranked No.
1 flagship store in beauty in its first year.
Skincare and fragrance grew double digits organically in Mainland China.
Hero products and innovation excelled, driving new consumer acquisition and repeat purchases.
Several brands expanded prestige beauty share in the quarter, including Estee Lauder, La Mer, and Dr. Jart+.
Looking ahead, we are excited about the long-term growth opportunity in the vibrant Asia-Pacific region and, most notably, in China.
We are a few months from opening our new innovation center in Shanghai.
Our aspiration for it are bold as we aim to meet and exceed the desires of Chinese consumers.
The center is designed to enable end-to-end innovation from concept, from product packaging through development, scale-up, and commercialization.
I am pleased to share that the build-out of our state-of-art manufacturing facility near Tokyo is also progressing very well, which is a testament to the amazing work of our global supply chain team amid the pandemic.
Its first phase is complete, and we are on track to start limited production by the first quarter of fiscal year 2023.
Our growth engines further diversified by channel as both online and brick and mortar prospered.
Specialty-multi and department store contributed meaningfully, and freestanding store in the West performed very well on reopening.
Traffic improved and complemented our strategic actions, including those under the post-COVID business acceleration program, to benefit productivity in brick and mortar.
This channel trends are encouraging for the long term, even if tempered in this moment by Omicron.
We continued to expand our omnichannel capabilities in the quarter to give consumers flexible and convenient shopping options for greater certainly for fulfillment.
Buy online, pickup in-store offerings in the United States for M·A·C, Aveda, Jo Malone London, and Le Labo are driving favorable average order value trends, and we are expanding the capability to more doors internationally, which holds great promise for the future.
Our global online channel delivered excellent performance, with organic sales rising high single digit after having surged over 50% in the year-ago period.
Each of brand.com, third-party platform, pure play, and retail.com contributed to growth.
The drivers included higher levels of engagement for virtual try-on and tools for choosing shade and scent, sophisticated assembly to drive trial and repeat, and more and better live streaming.
Indeed, in North America, La Mer generated the most sales from a live stream to date in the quarter.
Our brands are innovating in social commerce on Instagram, Snapchat, TikTok, and WeChat, among others.
We gained momentum in this promising online ecosystem during the quarter.
Too Faced leveraged an Instagram live shopping event to launch its new fragrance.
Estee Lauder Double Wear followers on TikTok skyrocketed with its latest campaign also driving brand awareness and affinity much higher.
And Tom Ford Beauty creatively debuted its new flagship site on WeChat's mini program in China.
Embedded with these outstanding results across categories, regions, and channels is the progress we are making in social impact and sustainability.
Since we spoke with you in November, we are pleased to have received several external recognition of our ESG efforts.
We were named to Forbes inaugural list identifying the world's top female-friendly companies, leading the way to support women inside and outside the workforces.
And for the fifth year in a row, we were named to Bloomberg Gender Equality Index.
We were included in the CDP's Climate A-List for the second consecutive year, which is a tribute to our deep commitment to climate action and to the highest level of transparency around our environmental interest.
Last, MSCI recognized our progress toward our 2025 ESG goal in its recent upgrade of the company to an A rating.
The company, our brands, and our employees have a number of events and activations planned in honor of Black History Month, and we are continuing to focus on our racial equity commitments and the work of accomplishing our goals.
As we embarked in -- on the second half of our fiscal year, our innovation pipeline is rich with newness, especially for sustainability.
La Mer newly advanced The Treatment Lotion, which will be on country in March as a powerful upgrade inside and out, crafted using our unique Green Score methodology and housed in a new recyclable glass bottle made with 20% post-consumer recycled glass.
This methodology, which was peer-reviewed in academic journal, Green Chemistry, during the quarter, evaluate ingredients and formulas throughout the lenses of human health, ecosystem health, and the environment.
This approach can be adopted, built upon, and scaled by others across our industry to further advance sustainability.
Estee Lauder is launching an all-new Revitalizing Supreme moisturizer created with innovations in formula and ingredients in a new recyclable glass jar.
Smashbox is introducing Photo Finish Silkscreen Primer collection featuring vegan formulas with a skin-defending complex and instant makeup benefits.
Lastly, DECIEM vegan brands, The Ordinary, is welcoming back Salicylic Acid 2% Solution, boosting a win list of over 400,000 for the new formula.
In closing, we delivered outstanding performance amid the accelerated volatility and variability, as well as supply chain challenges of the pandemic.
This demonstrates that we have the competency to navigate complexity well.
Our commitment to invest for the long term is of great importance in this moment as we benefit from the advancement we have made over the last few years in data analytics, technology, R&D, and supply chain.
These announced capabilities, combined with our strong portfolio of desirable brands, exceptional talent, and more flexible resource allocation, are enabling us to realize the power of our multiple engines of growth strategy even in a difficult external environment.
The grace, wisdom, and ingenuity of our employees in this still-challenging moment knows no bounds.
They are the embodiment of our company's strong culture.
And to them, I extend my deepest gratitude.
As you just heard, our momentum continued in our second quarter, with net sales growing 11% organically and 14% in total, led by a continued overall progression and recovery despite the volatility inherent across markets with a prolonged pandemic.
We had a solid holiday performance across all of our regions.
The inclusion of sales from the May 2021 DECIEM investment added approximately 3 points to reported net sales growth, and the currency impact was neutral.
From a geographic standpoint, organic net sales in the Americas rose 19% as holiday shoppers return to brick-and-mortar retail where we had an exciting array of gifting products and holiday activations in-store.
And even with more consumer shopping in stores, organic sales online also grew solidly in the Americas, with online representing more than a third of sales in the region.
Every market in the region contributed to sales growth this quarter, and the inclusion of sales from DECIEM added approximately 5 points to the total reported sales growth in the region.
In our Europe, the Middle East, and Africa region, organic net sales rose 13%.
Growth was diverse and broad-based, with global travel retail, as well as every market contributing.
All channels grew, led by double-digit growth across brick and mortar as recovery continued in both developed and emerging markets in the region.
Despite a strong performance during key shopping moments, organic sales online declined slightly, primarily driven by the U.K., due to a tough comparison with the prior year, which was more severely impacted by brick-and-mortar lockdowns.
The inclusion of sales from DECIEM added about 3 points to total reported sales growth in the region.
Our global travel retail business grew low double digits.
Travel restrictions have eased globally, and international passenger traffic continued to progressively improve, resulting in some stores reopening during the quarter, particularly in Europe and the Americas.
Travel retail continues to be led by Asia Pacific where demand from Chinese consumers remain strong.
In our Asia-Pacific region, organic net sales rose 5%.
Most of the markets in the region grew, led by Mainland China and Australia, although we continue to see variability in COVID restrictions and retail traffic across markets.
Sales grew across most major channels in the region, especially online, which benefited from the recent launch of three brands on JD.com.
The inclusion of sales from DECIEM added approximately 1 point to total reported sales growth in the region.
From a category standpoint, organic net sales of fragrances grew 30% with double-digit increases across all regions.
Exceptional double-digit increases from Jo Malone London, Tom Ford Beauty, Le Labo, and KILIAN PARIS reflected strong performances from hero products, new product launches, and the continued growth of the bath and body and home subcategories.
Organic net sales in makeup rose 12% as consumers in the Americas and Europe responded to social media activations, holiday assortments, and trends.
Estee Lauder foundations continue to resonate very strongly with consumers, especially those in the Double Wear and Futurist franchises.
M·A·C continued to drive the makeup renaissance with engaging, interactive campaigns throughout the quarter, like the special M·A·C trend Halloween report and solid holiday collections.
Too Faced, Tom Ford Beauty, Smashbox, and Bobbi Brown also contributed to growth in the category this quarter.
Organic net sales in skincare grew 7%, reflecting double-digit increases from La Mer, Clinique, and Bobbi Brown.
The inclusion of sales from DECIEM added 4 percentage points to reported growth.
Our organic net sales in hair care rose 18% as traffic in salons and stores improved, primarily in the Americas.
Aveda's growth came mostly from holiday gifts and hero franchises and in online and freestanding stores, while Bumble and bumble focused on recruiting new consumers in the specialty-multi channel.
Our gross margin improved 20 basis points compared to last year.
The benefits of strategic price increases and favorable currency more than offset the impact of higher makeup mix and lower gross margin on DECIEM products.
Inflationary pressures in our supply chain are expected to begin to more prominently impact cost of goods in our fiscal third quarter.
Operating expenses decreased 140 basis points as a percent of sales.
Our leverage of selling expense and general and administrative expense was partially offset by increases in advertising and shipping costs, the latter due to both inflation and our direct-to-consumer online growth.
Operating income rose 22% to $1.44 billion, and our operating margin expanded 160 basis points to 25.9% in the quarter.
Our tax rate at 21.4% continued at a more normal level this year versus the prior year, which was impacted by a one-time benefit associated with GILTI.
Diluted earnings per share of $3.01 increased 15% compared to the prior year.
For the six months, we generated $1.85 billion in net cash flows from operating activities, compared to $1.98 billion last year, which reflects both a return to more normalized working capital needs, as well as increased inventory, to mitigate some of the risk of supply chain disruption, given the ongoing global macro challenges.
We significantly increased our capital investment to $459 million to support the construction of our new production facility near Tokyo, as well as investments in our online business and other technology enhancements.
And we returned $1.84 billion in cash to stockholders through a combination of share repurchases and dividends, with an increase in our dividend rate occurring in the second quarter.
So turning now to our outlook.
We delivered an exceptional first half characterized by strong and diversified double-digit organic sales growth and disciplined cost management in the context of intermittent COVID disruptions, including the rise of the omicron variant, high inflation, and volatility.
Looking ahead, we are raising guidance to reflect our expectation for a strong year despite the potential further spread of Omicron, supply chain challenges, and increased inflationary pressures.
Inflation and transportation and procurement is expected to impact our cost of goods in the second half.
However, the benefit of pricing and cost mitigation efforts are helping to offset some of the inflation impacts for the fiscal year.
At this time, we expect pricing to add approximately 3.5 points of growth with the inclusion of the additional pricing actions we are taking during our second half.
We are planning to support the continuation of the recovery with increased point-of-sale staffing as retail traffic continues to gradually improve.
We are also planning to support key hero franchise launches in our third quarter from Estee Lauder, La Mer, and Origins with increased marketing and advertising support.
This investment will increase cost toward the latter part of the third quarter with more of the benefit to be realized in the fourth quarter.
For the full fiscal year, organic net sales are forecasted to grow 10% to 13%.
Based on rates of 1.146 for the euro, 1.357 for the pound, and 6.399 for the Chinese yuan, we expect currency translation to be negligible for the full year.
This range excludes approximately 3 points from acquisitions, divestitures, and brand closures, primarily the inclusion of DECIEM.
Diluted earnings per share is expected to range between $7.43 and $7.58 before restructuring and other charges.
This includes approximately $0.07 of accretion from currency translation and $0.03 of accretion from DECIEM.
In constant currency, we expect earnings per share to rise by 14% to 17%.
We expect organic sales for our third quarter to rise 8% to 10%.
The net incremental sales from acquisitions, divestitures, and brand closures are expected to add about 3 points to reported growth, and currency is forecasted to be negative by about 1 point.
We expect third quarter earnings per share of $1.55 to $1.65.
Currency is expected to be $0.01 accretive to EPS, and the inclusion of DECIEM is not expected to be material.
In closing, our results thus far clearly demonstrate the power of our diversified portfolio.
Temporary softness in our Eastern markets driven by the pandemic was again offset by renewed growth in our Western markets.
A resulting slight slowing of growth in skin care was offset by remarkable growth in fragrances.
We continue to be choiceful about where we invest, and the flexibility we have built into our cost structure is helping us to mitigate some of the COVID-related disruptions and inflation while allowing us to continue to invest appropriately in our future growth.
This agility, along with the resilience of our remarkable teams worldwide, gives us confidence that we can continue to manage through the temporary complexities caused by the prolonged pandemic by focusing clearly on our long-term strategy and executing against it with excellence.
| sees q3 earnings per share $1.55 to $1.65 excluding items.
q2 adjusted earnings per share $3.01 excluding items.
q2 sales rose 14 percent to $5.54 billion.
q3 reported net sales are forecasted to increase between 10% and 12% versus prior-year period.
full year fiscal 2022 reported net sales are forecasted to increase between 13% and 16% versus prior-year period.
sees fy 2022 earnings per share $7.43 to $7.58 excluding items.
q3 adjusted diluted net earnings per common share are projected to be between $1.55 and $1.65.
expects to take charges associated with previously approved restructuring and other activities in fy 2022.
company expects higher costs to negatively impact cost of sales and operating expenses for remainder of fiscal 2022.
|
I am Quynh McGuire, Vice President of Investor Relations.
You may access it via our website at www.
As indicated in our announcement, we've also posted materials to the Investor Relations page of our website that will be referenced in today's call.
References may also be made today to certain non-GAAP financial measures.
Joining me for our call today are Leroy Ball, President and CEO of Koppers; and Mike Zugay, Chief Financial Officer.
I will now turn the discussion over to Leroy.
Now for those of you who joined us in mid-September for our Koppers Investor Day, we hope you enjoyed the event.
Our team was very encouraged by the interest shown and to have the opportunity to provide some additional context on our long-term business strategy.
And while I am disappointed to post lower-than-expected results in our first quarter following that day, I'd also like to emphasize that we are playing a long game, which as we all know, can be difficult to do as a public company.
That's where our focus has been, and that's where it remains, and that's why we were excited to take the opportunity to unveil our 5-year plan.
Our interest is in attracting an investor base that's also in it for the long game.
And those investors that are interested in owning an essential and underappreciated business model, which has a lot of upside, should have a lot to like with the future we have laid out for Koppers.
So now let us get started with a review of our Zero Harm safety performance for the third quarter with special attention on COVID-19, as seen on slide four.
Following guidelines set by the Center for Disease Control and the Occupational Safety and Health Administration, Koppers continues to require masks for those working indoors with some flexibility as case numbers dictate in each region.
The vaccination rates for the company as a whole currently track at 64% globally with 61% in North America and 81% across our international locations.
Overseas, Denmark lifted its COVID restrictions throughout the country now that more than 75% of its population is fully vaccinated.
And as a result, we have relaxed protocols at our new Board facility.
In Australia, lockdowns are being lifted as vaccination rates there have exceeded 60%.
However, we have elected to keep our COVID protocols in place at our sites there for the time being.
And over the coming days, we will be reviewing it to determine exactly how it must be deployed, and we will put the necessary plans and protocols in place.
As described on slide five, we are going through our annual open enrollment process in the U.S. for employees to select their health insurance for 2022.
And after careful consideration, we have decided to institute a monthly healthcare surcharge to employees that remain unvaccinated.
That decision was made to help mitigate the additional cost of care for those that end up hospitalized as a result of contracting COVID.
The data supports that for those who do contract COVID, the health results and cost of care for unvaccinated individuals far exceeds that for the vaccinated.
And I cannot, in good conscious ask our vaccinated employees to bear the additional cost that is brought on by others that are consciously choosing to not vaccinate for their own personal reasons.
And also, we have adjusted our Zero Harm life-saving rules to reflect current COVID safety requirements, and we are maintaining all safety and health protocols regarding masks and social distancing.
All Koppers office locations have been made available to employees and those who have been vaccinated must wear masks in common areas, while unvaccinated employees are encouraged to work remotely.
Unvaccinated individuals who come into the office must wear mask and maintain social distance at all times.
We are now planning a return to the office beginning on January 3, 2022, and a hybrid work arrangement between office and home will remain in effect and available to employees as appropriate.
At this time, as shown on slide six and as announced back in August, Mike Zugay, our Chief Financial Officer and a critical member of the Koppers leadership team in the past seven years, has announced his retirement effective at the end of this year.
And that means that this will be Mike's last earnings call.
We will miss him.
Next week, Mike will be recognized here in Pittsburgh with a career achievement award as the CFO of the year for his tremendous contribution he has made to the several organizations he has worked at during his career.
Without any further ado, I will hand over the podium to Mike for the final time.
On slide eight, consolidated sales for the quarter were $425 million, which was a decrease from sales of $438 million in the prior year quarter.
Sales for RUPS were $187 million, down from $191 million.
PC sales fell to $115 million from $148 million, and CM&C sales rose to $123 million, up from $99 million.
Moving on to slide nine.
Adjusted EBITDA for the quarter was $54 million or 12.7%, down from $67 million or 15.2% in the prior year.
Also compared to the prior year, adjusted EBITDA for RUPS was $11 million, down from $19 million.
PC EBITDA decreased to $20 million, down from $32 million, and CM&C EBITDA improved to $23 million, up from $17 million.
On slide 10, sales for RUPS were $187 million, a slight decrease from the prior year's results.
We attribute this mostly to declining Class I crosstie treating volumes and the impact of exiting our contract with Texas Electric Cooperatives.
We are now serving the Texas market by treating poles at our own facility in Summerville, Texas, and this creates opportunities for longer-term sales growth for the company.
These declines were partially offset by increased activity in commercial crossties and rail joints.
Hardwoods for crossties remain a procurement challenge as there is continuing strong demand in the construction industry for other uses for that wood.
In fact, crosstie procurement is down 38% in the quarter over last year, while crosstie treatment has increased slightly by 3%.
On slide 11, adjusted EBITDA for RUPS was $11 million compared with $19 million in the prior year.
This was driven by lower green crosstie purchases, which led to reduced capacity utilization and absorption at the plant level.
We saw reduced track time due to increased levels of rail traffic, along with inefficiencies caused by employee turnover, which led to an approximately $2 million decrease in EBITDA for our Maintenance-of-Way business.
Additionally, the costs incurred by converting from Penta to our CCA preservatives had a negative $2 million unfavorable impact.
Moving on to slide 12.
PC achieved sales of $115 million compared to $148 million in the prior year.
Volumes of preservatives in North America were down, while wood treaters continue to closely manage inventory due to higher lumber prices.
As the economy has reopened in various areas, travel and other in-person goods and services have been taking a higher share of discretionary consumer spending.
However, we have implemented price increases for our copper-based preservatives, which has somewhat offset these headwinds.
On slide 13, adjusted EBITDA for PC was $20 million compared with $32 million in the prior year.
This change can be attributed to lower sales volumes compared with pandemic fueled demand in the prior year and higher raw material and logistics costs, partially offset by price increases.
EBITDA from Europe and Australia was about $3 million lower due to European regulatory impacts on our product portfolio and rolling lockdowns in Australia and New Zealand.
Slide 14 shows CM&C sales at $200 -- $123 million compared to sales of $99 million in the prior year.
The increase can be attributed to higher pricing for carbon Pitch, carbon black feedstock and phthalic anhydride, partially offset by lower volumes of carbon pitch.
Moving on to slide 15.
Adjusted EBITDA for CM&C was $23 million compared to $17 million in the prior year.
This increased profitability was driven by favorable pricing and strong operational efficiencies, partially offset somewhat by higher raw material costs.
Compared with the second quarter, prices of major products this quarter increased 11%, while average coal tar cost increased 8%.
Compared with the prior year quarter, average pricing of major products rose 24%, while average coal tar costs went up by 39% in that particular quarter.
Now let us review our debt and liquidity.
As seen on slide 17, at the end of September, we had $762 million of net debt with $326 million in available liquidity, and we also remain in compliance with all of our debt covenants.
Our net leverage ratio was 3.4 times at the end of September, down from 3.5 times at the end of December 2020 and 3.8 times in the prior year quarter.
Longer term, our net leverage goal continues to be between two times and three times.
In connection with our ongoing efforts to evaluate potential financing options, we are reviewing various refinancing alternatives for both our $500 million senior notes, which are due in 2025, as well as our existing bank credit facility.
With that said, we have not yet determined to move forward with any particular refinancing transaction at this time.
Now before getting into a review of business sentiments and our outlook for the remainder of this year, I would like to share some notable accomplishments of Koppers and our people in the third quarter.
On slide 19, you can see the remarkable accomplishment achieved by our entire Koppers Wood Products team at Longford, Australia, who have reached a 100% vaccination rate, our first location of 20 or more employees to reach that milestone, which is an incredible feat, and we are extremely appreciative of this achievement.
Our new Nyborg Denmark team is dealing with the pandemic in an outstanding fashion as well.
The 93 employees there have achieved a 95% vaccination rates which are passing even the national rate of 75%.
It's due to their willingness to take the COVID-19 virus so seriously that we have had no infections at Nyborg.
And finally, in our corporate headquarters in Pittsburgh, where we have 177 employees, we have crossed the 90% vaccination threshold.
I believe it's important for our headquarters personnel to set the right example of what we expect to see throughout the organization.
So I am especially happy to see us get to that level.
Kudos all around to our teams at Longford, Nyborg and Pittsburgh for truly making Koppers Zero Harm culture to heart.
On slide 20, we wanted to congratulate our truck drivers, the unsung heroes of Koppers who load transport and deliver our products all over the world safely and with special attention paid to limiting and eliminating negative environmental impacts.
At our annual Zero Harm Truck Driving Championship 10 drivers were identified as finals for their overall performance and were appropriately recognized.
As seen on slide 21, the Pittsburgh Post-Gazette named Koppers headquarters location in Pittsburgh as one of the top workplaces for 2021 with a special recognition of our attention to Health and Wellness.
This honor determined by a third-party and using survey results of employees across the Greater Pittsburgh region noted our company for its alignment, coaching, engagement, leadership, work-life balance and more.
Now as the competition for talent intensifies, it will be the flexible adaptive culture we have created that focuses on the whole person that we expect to bring as a competitive advantage for Koppers.
And we have seen some significant shifts impacting our businesses during the third quarter, many attributable to the aftereffects of the global pandemic, including various supply chain issues and rising costs.
I want to stress the headwinds we are facing are short-term and surmountable.
They are not indicative of any underlying negative systemic changes to the foundations of our business model, which is important.
The first-up is a review of what we see in the fourth quarter for Performance Chemicals, as outlined on slide 23.
Now while we had a respectable third quarter, it fell a little bit short of our internal expectations.
Residential preservative volumes took a little longer to recover from the deep trough that began in the last couple of weeks of June as lumber prices were in a steep and rapid free fall.
The fourth quarter looks to generate a sales volume improvement of about 8% over third quarter results, building on North American residential demand that began in the back half of October.
Year-over-year sales volumes are expected to finish about 14% lower than the record volumes in the prior year, which were driven by the strong demand during the pandemic in 2020.
Now the trend of our largest customers leading the way and consolidating the residential treaty market continues to work to our advantage.
And as a result of consolidation that's occurred this past year, Koppers will now be the largest wood preservative supplier to the top three U.S. big-box retailers, which is a tremendous achievement and shows what can be achieved with strong proprietary technology and strong partners.
Industrial demand in the U.S. should remain strong at a 5% year-over-year increase through September as the pent-up preservative is phased out for utility pole treatment.
And this is one of the areas that we have dealt with some supply chain disruption, and therefore, haven't been able to fully keep up with demand.
However, that situation has recently improved, and we appear to be on a path of restocking the inventory channel.
The book of demand remains strong, and we have been challenged to keep up.
So the full potential of industrial sales will still be a little bit limited somewhat by short-term supply chain challenges in Q4.
We are seeing the cost of labor, energy shipping and materials are all trending higher.
And as such, we will need to continue pushing further price increases that started at the beginning of the year.
Despite what some are saying, these inflationary cost pressures are not transitory.
So we will need to continue the acceleration of global price increases that began in early 2021 and that have totaled $15 million thus far through September.
In foreign markets, strong demand and a weaker dollar have South America on track for a record year, while regulatory pressures on European products have led to a forecast of record low results there.
Rising copper prices and a revalued inventory have helped our PC results despite the recent volume drop off, it does create some short-term risk of earnings volatility for this segment if the price of copper were to fall rapidly before our price increases step in to fill the gap.
Looking at the external data, some encouraging news came from a 7% rise in the sale of Existing-home with all four U.S. regions experiencing increases in sales and housing demand, according to the National Association of Realtors.
The NAR also noted that it expects homebuyers to continue fueling a strong market, securing mortgages before potential interest rate increases.
In October, the consumer confidence index was 114%, an increased from September and reversing a three month decline as concerns began to lessen regarding the spread of the Delta variant of the coronavirus.
Spending intentions have risen for homes, cars, major appliances and travel, all of which are projected to drive economic growth for the rest of this year.
Slide 24 provides a look at the longer-term PC picture from 2022 through '25.
Currently, our early take on MicroPro volumes in North America next year are that we expect them to be between 2020 and 2021 volumes.
This is based upon an industry consensus view that volumes return to normal after the pandemic, and we see market share growth through the friendly treating consolidation mentioned earlier.
And we also expect North American industrial volumes will rise as the Penta preserver continues to get phased out of the utility pole market and customers move to other preservatives, including our CCA and DuraClimb products.
I mentioned earlier that we are on track for our best year ever in South America, which is a rapidly growing market for wood preservation.
And to support that growth, we will be looking to expand our footprint in that geography.
Earlier this year, we purchased property for a greenfield manufacturing operation in Brazil and are currently going through the detailed design engineering phase of that project.
This is capital that's already in our strategic plan and supports our preservative growth strategy.
The expansion of production capacity for Basic Copper Carbonate at our Hubbell, Michigan facility was completed this past quarter.
That development, along with regulatory approval of a new domestic BCC supplier promises to significantly reduce our dependence on overseas suppliers for that critical material, thereby strengthening our MicroPro supply chain.
Now to keep up with rising costs, we are continuing to implement price increases that should add more than $20 million in 2022 and more than $60 million in 2023 based on current copper prices.
We also anticipate higher working capital values moving forward due to the higher cost of raw materials and increased inventory levels that we will likely carry for some period until we are comfortable that our concerns around supply chain have been alleviated.
From an R&D standpoint, we are pleased to report that we have been issued a patent for our next-generation MicroPro product, which will remain in force through early 2038, and we will begin commercializing it in 2023.
This is a big deal as it improves upon our current product line while extending the protection of our technology.
As support for next year's volumes projection, is a leading indicator of Remodeling Activity estimates that spending on home renovation and repairs will reach 9% annual growth and surpassed $400 billion by the third quarter of 2022.
Also, the expansion in homeowners' equity opens the door to increased numbers and scope of home improvement projects in the coming year, even as labor and material costs are projected to rise.
All in all, the future continues to look very bright for our Performance Chemicals business.
Now slide 25 offers some insight into our UIP business for the fourth quarter.
Near-term sales have been affected by the downstream effect of PC related supply chain issues, but that situation is already improving and should be much improved by the time we get to the end of the year.
Now similar to our PC business, inflationary cost pressures will mean continued U.S. price increases that began in the second quarter and have continued through the third quarter on an accelerated pace.
Year-to-date through September, those increases have totaled $8 million, and we will need to continue to cover the rising cost of labor, chemical, fuel and transportation.
As mentioned previously, market production of Penta will cease at the end of this year, and most of our customers are choosing to transition to our PC produced CCA and DuraClimb treatment solutions for the Southern Yellow Pine utility poles.
Our Vidalia, Georgia plant completed its conversion from Penta to CCA in the third quarter, which did have a negative impact on Q3 results, as Mike had earlier indicated.
At our Vance, Alabama facility, a similar conversion will occur in the fourth quarter, which will similarly impact Q4 results.
A new dry kiln also located in our Vance plant came online in the third quarter, while a similar kiln at Newsoms, Virginia will be completed in the fourth quarter.
And although all these projects are disruptive in the short term, they are part of our network optimization strategy to reduce costs by becoming more efficient and taking closer control of our supply chain.
Wood supplies seem relatively stable, although we are seeing pricing pressure stemming from increased demand for small logs and pulp and export.
Trucking and logistics costs are remaining high due to increased diesel costs, availability of third-party trucking assets and labor costs.
And all this goes back to our need to pass-through our increased costs.
Sales of poles in Australia have been affected by pandemic related shutdowns, although a vaccine rollout in New South Wales is expected to ease restrictions over the next few months.
Turning to slide 26.
We offer a peak ahead to next year and beyond for our UIP business.
Now as mentioned earlier, sales of CCA treated poles will increase as 65% of our UIP customers have selected CCA as their preservative of choice with 10% still undecided.
In 2022, we will continue to build on our Texas creosote pole business as we leverage our pole recovery business to add new customers and improve our cost structure.
Sticking with the network optimization theme, we expect a much improved cost footprint to add meaningfully to EBITDA in 2022 through the capital spent this year for plant conversions and drying capacity.
Furthermore, we continue to evaluate our treating footprint and could pull the trigger on the consolidation of another treating plant in 2022, pulling that volume into the remaining plants in our network and saving even further on fixed costs.
Basic demand for poles should remain high at least over the first half of 2022 due to project work and upgrades that were deferred during the pandemic, the longer-term demand profile should also remain positive as utilities need to continue to maintain their infrastructure, to avoid service interruptions as remote work continues and extreme weather events continue to increase.
Now an ample supply of softwood to keep whitewood prices stable for the foreseeable future.
On the preservative side, we have been granted a registration to produce copper naphthenate, which would add another oil born preservative to our portfolio.
At this point, we are in the process of assessing the most effective path forward and whether it is to externally procure or independently produce.
In 2022, we expect to implement $15 million to $20 million in annualized price increases to cover the increased costs we are experiencing and that I had outlined earlier.
Now for next year, in Australia, we see strong underlying pole demand to replace poles damage from recent natural disasters.
While a new dry kiln has been installed at our Takura location to meet the growing demand for softwood due to hardwood supply constraints.
Moving on to our Railroad products and services business on slide 27.
The year-over-year trend of green tie purchases looks to have bottomed out and should comparatively improve beginning in the fourth quarter.
At our current pace of 4.4 million ties purchased, this would represent a new low driven by customer reluctance to pay higher prices to meet their demand levels.
Treated and sold ties are flat year-over-year, suggesting that crosstie insertions are not an issue.
Railroad customers are using high green tie prices to defer purchases with demand being pushed out to mid-2022 in hopes that cost will abate.
Trucking problems persist from a lack of drivers and pent-up demand limiting access, all of which are driving transportation rates higher.
In commercial crosstie profit should improve as comps get easier, but the market overall is still very competitive.
As announced in early October, we closed on the sale of the property where our former Denver facility was located, providing net proceeds of $24 million in the fourth quarter.
The American Association Railroads reports total year-over-year U.S. carload traffic increased 8%.
Intermodal units increased 10% and combined carloads and intermodal units increased by 9% as of September 30.
The AAR added that limited availability of downstream truck and warehouse capacity because of supply chain logistics are impacting intermodal volumes for the time being.
Now, the association added that significant network investments have made the rail industry more adaptable and enable to adjust ongoing changes in operational and market conditions, which bodes well for rail traffic long term.
The fourth quarter view of our maintenance-of-way business calls for it to sequentially improve and come in slightly better than last year's fourth quarter.
Full year EBITDA, however, is on pace for an all-time low due to a collection of direct and indirect COVID related factors, such as labor shortages, lockdowns and reduced track time due to increased rail traffic mentioned previously.
slide 28 discusses our view for our RUPS business in 2022 and beyond.
Our current projections have supply issues around green ties beginning to subside with a rebound beginning in the second half of 2022.
In the meantime, we have been working on the development of a long-term strategy to smooth out the peaks and valleys of the procurement side of the business, and we are planning to use the experience we have had addressing the factors that created volatility in both our CM&C and PC businesses and applying those same factors to address this challenge.
We expect a minimum of $20 million in price increases to flow through our top-line next year to account for higher material costs that we have been experiencing thus far this year.
We are close to finalizing the last of our contract extensions on the Class one contracts that were set to expire this year.
And when complete, most of our Class I volume will be secured beyond 2025.
While overall volumes are set to increase 3% to 4% in 2022, with share remaining flat, volumes are expected to grow by more than 10% in 2023.
The planned completion of expansion at our North Little Rock facility will support a large portion of that projected volume growth.
As a result, working capital will increase due to higher green tie purchases and volume growth.
And while I mentioned the disappointing results for our maintenance-of-way business this year, on a bright note, we are carrying the highest backlog we have had in that business in years into 2022.
Our results should improve meaningfully as we gain cooperation from the railroad for track time and see better crew continuity.
We are addressing our turnover issue through a new redesigned compensation model for portions of our maintenance-of-way group that focuses on what that workforce values.
Finally, we are actively working to expand our crosstie recovery business and add more Class one customers to our portfolio.
While there's no getting around the fact that 2021 has been a disappointment for our RUPS business, the investments we are making now will set us up to make a major jump in profitability over the next two years.
Looking at the fourth quarter for our CM&C business on slide 29, we see strong demand continuing in key markets like steel and aluminum, with production increasing in auto and other manufacturing industries.
The energy crisis in China, along with global supply chain issues have caused raw material shortages and longer lead times for finished goods, which has supported our business model outside of China.
And one example is the high pitch export pricing out of China that's partially caused by the previous factors that supports stronger pricing of our Australian produced products that are tied to that benchmark.
Our European business continues to experience end market pressure as a result of aluminum production cutbacks cutting into our customers -- cutting into our competitors' demand, which has caused them to compete for business to replace what was lost.
In North America, tar production is even with or maybe even surpassed what it was pre-COVID, meaning we can reduce our higher cost tar imports from Europe and shorten our supply chain.
Price increases on coal tar are expected to continue globally, which will begin to compress margins somewhat in the fourth quarter.
Pricing of products tied to oil, like carbon black feedstock, phthalic anhydride should remain high and boost profitability.
On the downside, we are expecting volumes in our phthalic business to be lower due to customer supply chain issues impacting their demand.
We are considering dissolving the previously closed KCCC facility in China during the fourth quarter or early next year to substantially complete our China exit plan.
Slide 30 offers a look forward for CM&C.
Strong demand in aluminum and steel markets should continue into 2022 or longer with passage of an infrastructure bill in the U.S. and as reliance on Chinese exports goes down and global logistics challenges continue, our CM&C business is poised to benefit.
A global review by IHS Markit says that after making adjustments for production trends during the pandemic, production of light vehicles worldwide is expected to see double-digit growth in 2022.
Now also, it reports that the semiconductor supply chain is stabilizing, which represents another positive step in the recovery of the automobile and other manufacturing segments.
More decarbonization projects to eliminate coke from the steelmaking process are occurring and will further impact future coal tar availability.
But despite external pressures, our focused footprint puts us in a solid competitive position to maintain our low to mid-teens EBITDA margins in this business.
Ongoing improvements we are making at our Stickney facility will improve safety, boost reliability and generate additional profitability.
Higher future crosstie volumes and creosote treated utility poles will also have a positive effect on the CM&C business in the form of more distillate being upgraded from carbon black feedstock to creosote.
Our yield optimization project would further improve pitch yields that we get from tar from 50% of production to up to 70%, meaning higher sales and profitability.
In a similar vein, work on enhanced carbon products for use in battery anode materials continues in North America, Europe and Australia.
And those projects are not yet included in our 2025 projections but could provide significant potential upside.
On slide 32, our sales forecast for 2021 has been revised to be approximately $1.7 billion compared with $1.67 billion in the prior year to reflect the lower than previously expected PC volumes on our third and fourth quarter.
On slide 33, we are adjusting our 2021 EBITDA projections to now be approximately $220 million, which is at the low end of our previously communicated range.
That compares favorably with the $211 million generated in the prior year and will be our seventh consecutive year of EBITDA growth looking at the company in its current formation.
On slide 34, our adjusted earnings per share guidance is now expected to be approximately $4.12, which is comparable to our all-time high 2020 adjusted earnings per share despite the negative impact of $0.40 per share from our higher estimated effective tax rate.
Our $4.12 estimate for 2021 is lower than our prior estimate range, primarily due to our effective tax rate increasing from prior projections.
Finally, on slide 35, our capital expenditures were $87.6 million year-to-date through September 30 or $78.7 million, net of the $8.9 million in cash proceeds.
We are on track to spend a net amount of $80 million to $85 million on capital expenditures with approximately $45 million dedicated to growth and productivity projects.
So in summary, while we always strive to do better, I actually think it's pretty remarkable that we are on track to be in our most recently communicated range of guidance and actually right in the middle of the original guidance we gave for the year back in February.
Of course, how we are getting there is quite a bit different than what we thought.
But once again, I believe that just highlights the strength and the diversity of our business segments, which tend to operate opposite of each other.
In the dynamic environment, we find ourselves in, it's tremendously helpful to not be reliant upon a single business or market to carry the day, year in and year out.
It's been a difficult and draining couple of years, but I am proud of how our team has weathered the storm and put us in a position to capitalize on the many opportunities in front of us.
And through a combination of significant price actions and continued execution on our high-return internal projects, I am confident that we will take the next important step forward in 2022 toward meeting our 2025 goal of reaching $300 million in EBITDA.
With that, I would like to open it up to any questions.
| sees 2021 sales will be approximately $1.7 billion.
expects adjusted ebitda will be approximately $220 million for 2021.
sees 2021 adjusted earnings per share to be approximately $4.12.
expects to invest $115 million to $120 million in capital expenditures in 2021.
|
With me on the call is Ron Kramer, our Chairman and Chief Executive Officer.
Such statements are subject to inherent risks and uncertainties that can change as the world changes.
Finally, from today's remarks will adjust for those items that affect comparability between reporting periods.
We're off to a great start in the first half of fiscal 2021 with our second quarter revenue increasing 12%, adjusted EBITDA up 41%, and adjusted earnings per share up 109% compared to the prior year quarter.
These results were driven by continued demand for our comprehensive consumer product categories and supported by a strong housing market and repair and remodel activity.
Our strategic actions to optimize our business remain on plan and we are realizing the early benefits of this work today.
Highlighting this success is our increased cash generation profile coupled with our EBITDA margin expansion in both CPP and HBP, which increased 220 and 190 basis points, respectively over the prior year period.
Our AMES strategic initiative is progressing on plan and on budget.
As previously announced, this investment will consolidate operations, increase automation, support e-commerce growth, and create new data and analytics platform for AMES globally by the end of 2023.
We expect this to further improve margins in the years ahead.
As we move into our second year of managing our business during a global pandemic, we prioritize protecting our employees and we'll continue to do so as restrictions in the United States begin to ease.
Turning to our segments.
In Consumer and Professional Products, we saw continued retail demand across all geographies and product lines.
The AMES strategic initiative remains on schedule for completion by the end of 2023 and we reiterate our expectation to realize annual cash savings of $30 million to $35 million, and inventory reductions of the same magnitude when the benefits of the initiative are fully realized.
In Home and Building Products segment, we continue to see healthy demand for both residential and commercial door products and we continue to see demand outstripping supply.
In Defense Electronics, telephonics revenue and profitability decreased from the prior year primarily driven by reduced volume due to the timing of work performed and deliveries on certain communications and surveillance programs as well as the divestiture of our SEG.
Telephonic's actions to improve its operational efficiency continue with the work to consolidate three facilities into two, which will be completed in our fiscal fourth quarter.
Earlier this month Telephonics was awarded $162 million five-year support contract from Lockheed Martin for our multi-mode maritime surveillance radars for the U.S. Navy's MHR-60R (sic) MH-60R maritime helicopters.
We continue to see additional opportunities for our products in domestic applications as well as through the MH-60 Romeo foreign military sales to countries like South Korea and Greece.
Backlog in the quarter was $354 million with trailing 12-month book-to-bill of 1.1 times.
Turning to our balance sheet.
We continue to have excellent flexibility in our capital structure to execute on organic and acquisition opportunities and return cash to shareholders through our quarterly dividends.
We've delevered to 3.1 times net debt-to-EBITDA marking two full turns of improvement over the prior year period.
Additionally, we have $176 million in cash and $363 million available on our revolving credit facility providing ample liquidity and putting us in an excellent position to capitalize on our active pipeline of acquisition opportunities.
Earlier today, our Board authorized an $0.08 per share dividend payable on June 17, 2021 to shareholders of record on May 20, 2021.
This marks the 39th consecutive quarterly dividend to shareholders, which has grown at an annualized compound rate of 17% since we initiated in 2012.
Griffons evolved over the past decade from a decentralized holding company to a highly centralized operating focus conglomerate.
We see growth through acquisitions driving our future capitalizing on our strong bench of management talent.
And regarding our management, Steve Lynch, the President of Clopay Corporation will retire at the end of our fiscal year.
Steve has served as the President of Clopay with distinction for the past 12 years, and has been part of Clopay since 2001.
During his tenure, Steve navigated Clopay through the financial crisis of 2009 and subsequently has transformed the business into the industry leader it is today through building the company's facilities, equipment products, technologies, people and culture.
Steve will continue working with Clopay as a consultant after his retirement.
And effective with Steve's retirement, Vic Weldon will be appointed the new President of Clopay.
Vic is a 20-year veteran of Clopay having served in leadership roles across the business including supply chain, logistics, sales and operations, and has been Clopay's Chief Operating Officer since 2019.
Vic has played an instrumental role in making Clopay the company that it is today, including leading the integration activities of the Cornell acquisition, which we completed in 2018.
Vic is the ideal candidate to assume the role of President where he can apply his wealth of company, customer and industry knowledge to the role.
We're looking forward to Vic continuing Clopay's success.
I'll start by highlighting our second quarter consolidated performance.
Revenue increased by 12% to $635 million and adjusted EBITDA increased 41% to $67.8 million, both in comparison to the prior year quarter.
Adjusted EBITDA margin increased 220 basis points to 10.7%.
Gross profit on a GAAP basis for the quarter was $170 million, increasing 12% over the prior year quarter.
Excluding restructuring-related charges, gross profit was $174 million increasing 13.2% over the prior year quarter with gross margin increasing 30 basis points to 27.4%.
Second quarter GAAP selling, general, administrative expenses were $127 million compared to $226 million in the prior year quarter.
Excluding restructuring-related charges from both periods selling, general and administrative expenses were $123 million or 19.3% of revenue compared to $122 million or 21.5% in the prior year quarter.
Second quarter GAAP net income was $17 million or $0.32 per share compared to the prior year period of $1 million or $0.02 per share.
Excluding items that affect comparability from both periods, current quarter adjusted net income was $25 million or $0.48 per share compared to $10 million in the prior year or $0.23 per share.
Corporate and unallocated expenses excluding depreciation were $12 million in the current year quarter in line with the prior year second quarter.
Our effective tax rate excluding items that affect comparability from all periods for the quarter was 30% and for the year-to-date period it was 31.1%.
Capital spending was $12 million in the second quarter compared to $9 million in the prior year quarter.
Depreciation and amortization totaled $15.9 million for the second quarter compared to $15.7 million in the prior year second quarter.
Regarding our segment performance, Q2 revenue for CPP and HBP increased over the prior-year quarter by 21% and 16%, respectively while DE decreased 26% or 19% excluding the impact of SEG disposition.
Adjusted EBITDA for CPP and HBP increased over the prior year by 50% and 31%, respectively, Defense Electronics decreased 48%.
During the second quarter AMES incurred pre-tax restructuring-related charges were approximately $7.5 million supporting the AMES strategic initiative, capital expenditure supporting the initiative was $3.2 million in the quarter.
At Telephonics, we are executing on our efficiency initiatives.
We have reduced headcount and we expect to complete the consolidation of our three Long Island-based facilities into two company-owned facilities by the end of this fiscal year.
The total cost for the facility consolidation will be approximately $4 million, which will primarily consist of capital expenditures occurring in 2021.
Regarding our balance sheet and liquidity, as of March 31, 2021, we had net debt of $883 million and leverage of 3.1 times as calculated based on our debt covenants.
This is a two turn reduction from our prior year second quarter and a 0.3 turn reduction from our fiscal year-end.
As a reminder, Griffon uses cash in the first six months of its fiscal year, which will be more than offset by the generation of significant cash flow in the second half of the year.
Our cash and equivalents were $176 million and debt outstanding was $1.06 billion.
Borrowing availability under the revolving credit facility was $360 million subject to certain loan covenants.
So regarding our 2021 guidance, as most of you know, we typically provide guidance once a year during our November earnings call and generally do not update that guidance during the course of the year.
The guidance provided on our November call was revenue of approximately $2.4 billion and adjusted EBITDA, excluding unallocated one-time charges related to AMES and Telephonics initiative of $285 million or better.
With our second quarter behind us, we are continuing to see healthy demand for products across our portfolio, recovery in consumer activity and a strong housing market are contributing to a constructive macroeconomic environment and homeowner focus on outdoor living and repair and remodel projects continue.
While we are seeing the expected headwinds from cost inflation, some supply chain disruptions and a tight labor market, we are managing through those effects.
As a result of our substantial outperformance in the first half of the year and with consideration to this year's Q3 and Q4 comparatives to strong prior year quarter results, we are expecting our fiscal 2021 performance will be substantially above our original guidance and in line with our trailing-12 months.
That produced approximately $2.5 billion of revenue and $320 million of adjusted EBITDA, excluding unallocated and one-time charges.
We expect continued growth in the second half of fiscal 2021 driven by a strengthening global economy, a strong housing and repair and remodel environment coupled with our industry-leading product portfolio.
We are active in evaluating potential acquisitions and opportunities to invest in our existing businesses and are actively exploring ways to further diversify and grow.
We're pleased with the progress we've made on driving long-term shareholder value however, there still are significant benefits to come from completing our strategic initiatives.
Operator, we'll take any questions.
| compname reports q2 earnings per share of $0.32.
q2 earnings per share $0.32.
q2 revenue rose 12 percent to $634.8 million.
q2 adjusted earnings per share $0.48.
|
Let me talk a little bit about the environment before we talk about the results for the quarter.
We talked to you about 90 days ago.
So I'll try and draw comparisons to what I said 90 days back.
I had an optimistic tone 90 days ago, I'm more optimistic today.
What we're seeing, the data that is coming to us from every angle, whether it's around the vaccination and the pandemic or its economic data across the board, we're seeing more reasons to be optimistic for the remaining of this year and into next year than we were in January.
In January, we were fairly optimistic to begin with.
So the economy is opening up.
Florida is clearly much further along than other parts of the country.
New York is a little further behind than other parts of the country.
But overall, our franchise where we do business, we're seeing a lot of positive momentum.
And then that -- those assumptions then get reflected in our financials, which we will talk to you in some detail.
But generally feeling very good about economic activity and about the economy opening up and the vaccine rollout.
Within the company also, I will say that we are trying to gather data on how many employees have been vaccinated.
It's self-reported data, so it lags a little bit.
But we're kind of matching up with where the country is.
About 30% of our employees are either vaccinated or about to be fully vaccinated, and many more are in line.
Most of the senior management team is now fully vaccinated.
The quarterly performance, we reported net income of about $99 million, 98.8% to be exact, $1.06 per share.
This compares to $0.89 that we reported to you last quarter.
And obviously, last -- this time last year, the first quarter was a loss of $0.33.
So we've come a long way in a short few months.
The highlights of the quarter is, again, we'll go through a little bit about the P&L.
I'll jump to the balance sheet after that.
Net interest income continued to grow despite elevated levels of liquidity as is the problem across the industry.
We had NII of $196 million.
This compares to $193 million last quarter and $181 million compared to the first quarter of last year.
As we told you three months ago, we were positively biased where it came to NIM guidance, and NIM did expand from 2.33% last quarter to 2.39% this quarter.
And that expansion really is a result of us executing on our deposit strategy.
Deposits continue to grow and cost of deposits continue to come down.
We had another very, very solid quarter.
Noninterest DDA grew by $957 million, which I'm very happy about.
The average noninterest DDA grew by $338 million.
But the number that really makes me happy is that noninterest DDA now stands at about 29% of our total deposits.
Just in December, we were at 25%.
At the end of 2019, I think we were at 18%.
And when we started this deposit-centric strategy about three years ago, we were in the mid-teens.
I think we were 14% or 15%.
So we've come a long way, and I'm very, very proud of what the company has achieved.
Cost of deposits also declined by 10 basis points.
Last quarter, we were at 43, we're down to 33 basis points for this quarter.
And I'm very confident that second quarter, we will again show a fairly decent decline.
And the reason I can say that is because on March 31, on a spot basis, we were already down to 27 basis points.
So we're starting second quarter at 27, so the number is going to be somewhere in the mid-20s.
And the guidance that we gave that we will drop our cost of funds -- cost of deposits into the teens by the end of the year stands.
So overall, feeling very good about what we've been able to achieve on the deposit side.
And the deposit growth was fairly widespread, came from every part of the bank.
On credit, the -- let me talk a little bit about loans.
Loans were down about $500 million.
Most of that decline was the continued drop in utilization rates online.
So, I think $425 million of that $505 million was directly attributable to less utilization.
This has been a negative surprise for us.
We had made assumptions when we did the plan at the beginning of the year that the line utilization will start to normalize slowly month by month.
But instead, we saw further declines in January.
We saw another decline further in February.
It's only in March where we've seen a slight uptick.
One month doesn't make a trend, but it's a positive number, and we're happy to see that.
And hopefully, we'll see this stabilize from here on and we start to get back to normal.
So Tom will talk to you more about that, but that was what was the biggest driver.
In terms of credit, let me go over a few things, temporary deferrals and modified loans under CARES Act -- modification under CARES Act, that total number remains stable at about 3% of the portfolio.
It was 71 basis points last quarter, it's down to 67.
But if you actually exclude the guaranteed portion of SBA loans, it was 53 basis points.
Charge-offs declined compared to all of last year.
I think last year, we were running at about 26 basis point net charge-off rate.
We're down to 17 basis points this quarter.
And for the first time since this pandemic hit us, our criticized and classified assets also started to decline.
And as we see more good economic data come through, more importantly, as we start to see cash flow data come through, I expect this number to start declining a little more rapidly into the second and third quarter.
So overall, feeling pretty good capital.
By the way, needless to say, we're in a very strong capital position.
CET1 ratio is at 13.2% for holdco and 14.8% for the bank.
We did buy back some stock.
We bought back about $7.3 million of stock this quarter.
We still have a little less than $40 million left in the buyback, and we plan to execute it against a buyback opportunistically.
It's a pretty volatile time in the stock market.
So we want to use that volatility to our advantage and buy back when they see dips in the stock.
We did declare a $0.23 dividend, and currently, we anticipate maintaining that level.
Our book value per share is now at $32.83.
Tangible book values at $32 even.
Both are above the pre-pandemic levels.
So strategy stays the same, continuing to add one core relationship at a time, continuing to focus on noninterest DDA.
I'll give you an example, something that just crossed my screen late last night.
We've been looking for this -- we've been calling on this client for a long time, and we're finally able to pry it away from one of the biggest banks in the country.
It's a firm -- mid-market firm based in Broward.
The relationship is coming over.
I won't say from which bank, but it comes with $0.5 million loan and $26 million in deposits with a full suite of treasury management products.
And a long-standing company, very successful in the community, and very happy to have them be a client of BankUnited.
So I see a deal or two like this every other day, and that's -- that really is driven by what really adds to the franchise value, and we're focused on that.
We'll also keep identifying niche markets and segments where we can grow.
We're now shifting focus.
We haven't hired very many producers over the course of last year through the pandemic, but we're now focused on bringing on more producers and are in discussions with a number of producers in different geographies.
Very importantly, we'll continue to invest in technology and innovation.
This -- actually, I do want to say, this quarter marks the culmination of our two-year journey, the cloud journey, as we call it.
We are now officially out of the data center business.
We are a fully cloud-enabled bank.
Took two years to put everything in the cloud and to be partnered with Amazon.
They've been great partners.
And in terms of our capabilities, our infrastructure, and the capabilities that cloud provides us, we're in a very different place than we were two years ago when we started down this path.
Also, I want to announce that part of this was also the first cloud-native application that we developed, also a very big deal for BankUnited because we never really had any developers.
We've never developed anything in terms of products for delivering our deposit solutions.
But two years ago, we decided that mobile banking is such a core function that we cannot just outsource it to the same vendor which every other bank our size goes to.
That we needed to control this and needed to actually have this in-house.
We put a lot of effort into developing it.
It will develop, like I said, in the cloud, and we launched this just last weekend, and converted our entire customer base with no issues at all, and I'm very excited about this big investment that we made.
Also, let me talk a little bit about 2.0, and specifically 2.0 revenue initiatives.
As you know, they have been delayed given the pandemic.
But I'm happy to report that we are actually making progress and getting a lot of traction, all the various things that added up to that revenue target, whether it's a commercial card program, whether it's treasury management space.
And you'll start to see some of that -- you already are seeing some of that in our P&L.
Deposit service charges and fees this quarter were up 17% compared to the first quarter of last year.
This is -- a lot of that is coming from the 2.0 initiatives that we've put in place and more to come.
Also, the small business initiatives that were also part of 2.0 are now going to pick momentum.
Small business, as you can imagine, were distracted very much with PPP 1.0 and then PPP 2.0.
As the PPP and everything related to this gets behind us, we're going to start focusing on that and start delivering on those initiatives as well.
So overall, feeling pretty good.
I think it was a pretty solid quarter.
Tom and Leslie are going to walk you in a little more detail on the businesses and also the financials.
So let's talk a little bit about the deposit side first.
And obviously, another excellent, excellent quarter for us in NIDDA growth.
And as Raj said, I think what's -- when we look back at this quarter, what's most satisfying is we're kind of building this wall brick by brick.
And when we look at the results that you see in NIDDA, I think the thing that's most gratifying is how broadly it's based across our business lines and also just the number of new relationships that are contributing to this growth, which is where we're seeing the majority of the growth is just coming off of, what we would call, new logos for the quarter were across all business lines and kind of sweet spot type relationships for us that, none are particularly jumbo, the one that Raj mentioned is a little bit larger, but just a broad number of small business, middle market, commercial relationships is really adding to this NIDDA growth.
So average noninterest-bearing deposits grew by $338 million for the quarter and by $3.1 billion compared to the first quarter of 2020.
On a period-end basis, noninterest DDA grew by $957 million for the quarter, while total deposits grew by $236 million.
So we continue to allow more price-sensitive and broker deposits to run off as we've grown the NIDDA base.
So significantly, time deposits for the quarter declined by $1 billion.
So if you look at total cost of deposits, as Raj mentioned, declined to 33 basis points for the quarter, 27 basis points on a spot basis, down from 36 as of December 31, 2020.
And reductions in cost of deposits continue to be broad-based across all product types and all lines of business.
We continue to forecast good growth in NIDDA, a good continuation of the momentum that we've had.
Every quarter may not be as strong as this one, but we expect that each quarter to be very good.
And we also expect overall cost of deposits to continue to decline.
As Raj mentioned on the loan side, we were down $505 million.
Q1 is not typically a strong quarter for us.
We did have $234 million of growth in the residential portfolio with the EBO Ginnie Mae portion contributing $341 million.
As Raj noted, the majority of our decline for the quarter was really attributed to line utilization, which has got hitting historic lows, but we anticipate that will pick up as we start to see the year unfold, the economy improve, people start to use more inventory purchases and other things happening within the portfolio.
One interesting sidenote, we looked in -- at our numbers for the quarter and we had a more historic level of line utilization, our commercial loans, our C&I loans would have actually been up.
It would have contributed another $800 million of base into the C&I portfolio.
So it gives you some kind of a dynamic for what the line utilization numbers look for.
As we look forward in the year, we're seeing good growth in pipelines in Q2.
As Raj noted, obviously, increased economic activity among our clients.
So we're anticipating, as the year develops, that we'll see growth in our residential teams, our small business lending, our commercial banking teams, core middle market teams, mortgage warehouse lending.
So we expect the remainder of the year to develop more strongly than we saw in the first quarter.
Just an update on PPP loans.
We booked $265 million worth of PPP loans during the first quarter under the Second Draw Program.
And in numbers of units, it's about 1/3 of what we did in the First Draw Program.
At this point, we're not accepting any more second draw PPP loans.
On the forgiveness front, we were -- we forgave $138 million in loans during -- that were made during the First Draw Program.
We have about $650 million remaining outstanding under the First Draw Program as of March 31.
Switching gears a little bit, some additional details around deferrals and CARES Act, modifications, Slide 16 in the supplemental deck also provides more details around this.
The levels of loans on deferral or modified basis remained relatively consistent with prior quarter.
In commercial, only $35 million of commercial loans.
We're still on short-term deferral as of March 31, $621 million of commercial loans have been modified under the CARES Act.
Together, these are $656 million or approximately 4% of the total commercial portfolio, which is pretty consistent with the levels since the end of the last quarter.
Not unexpectedly, the portfolio segment most impacted has been the CRE, hotel book, where $343 million or 55% of the segment has been modified, also consistent with prior quarter end.
Residential, excluding the Ginnie Mae early buyout portfolio, $91 million of the loans were on short-term deferral, an additional $15 million had been modified under longer-term CARES Act repayment plans as of March 31.
This totaled about 2% of the residential portfolio.
Of $525 million in residential loans that were granted an initial payment deferral, $91 million or 17% are still on deferral, while $434 million or 83% have rolled off.
Of those that have rolled off, 94% have either paid off or are making their regular payments at this time.
As it relates to the CRE portfolio, I wanted to spend a little time as we normally do going into some of the occupancy collection rates and some key data on some of the more impacted segments of the portfolio.
So on average, rent collection rates for the quarter, we continue to see good strength in the office market.
We saw collection rates of 96%, which were even for both Florida and New York.
Multifamily loans were at 90% collection rate in New York and 92% collection rate in Florida.
And retail has continued to improve and performed pretty well at 85% in New York and 99% in Florida.
I think the big news on the hotel front is we're seeing a lot more strength in the hotel market.
All of our properties in Florida are open and have been for a considerable period of time.
Two of the three properties that we have in New York are open, with the third expected to reopen in June.
Occupancy for the two hotels that are open in New York ran about 80% for March.
And in Florida, occupancy rates for the entire portfolio, which is a little under 30 hotels in total, averaged 80% in March, with some reporting occupancy rates in the 90% range.
For those that have tried to find a hotel in Florida recently, it's not so easy to find any place that's now open in Florida.
So we've seen this improve from 46% last quarter, 56% in January, February was stronger, and March was up to the 80% level, and we're seeing forward forecast for most operators that continue to show strength as we get -- as we start to head toward the summer months.
From a franchise perspective in the QSR portfolio, we're seeing the majority of our concepts are open, reporting strong same-store sales, particularly those with good drive-through delivery, pickup models.
We still have a couple of concepts that are predominantly indoor dining that are challenged, but I'd say, on a broad basis, the QSR portfolio is performing much better.
Staffing is a challenge in this market.
A lot of our QSR operators are reporting difficulty in bringing in staffing right now with stimulus payments and whatnot flowing through the economy.
So the labor market is a bit of a challenge.
But overall, revenue is strengthening in this segment.
In the fitness segment, Planet Fitness.
We have two concepts, as you know.
Planet Fitness, 100% of the stores are now open with payment systems turned on, retention is averaging 90% in that concept.
And we now have all of our Orange Theory franchises open.
There's been some decline in membership, but operators are still expecting a full recovery.
Some of them are still operating at lower capacity levels due to social distancing, but we're seeing a sizable pickup in the Orange Theory franchises as well.
So we're feeling much better about the QSR and franchise portfolio than we felt last quarter or the quarter before, so seeing a lot of strength there.
So with that, Leslie, we'll get into a little bit more detail about the quarter now.
So as Raj mentioned, net interest income grew this quarter, up about 1.5% from the prior quarter and up 9% from the first quarter of the prior year.
The NIM increased to 2.39% this quarter from 2.33% last quarter in spite of elevated levels of liquidity on the balance sheet, so we were pleased to see that.
The yield on loans increased to 3.58% this quarter from 3.55% last quarter.
The recognition of fees on PPP loans that were forgiven added about six basis points to that yield this quarter compared to three last quarter.
So as we pull that out, pretty flat quarter-to-quarter for the yield on loans.
And $6.3 million of that relates to the First Draw Program.
The yield on securities declined by nine basis points to 1.73% for the quarter.
Spreads remain really tight in the bond market, as I'm sure all of you know, and we continue to experience an accelerated level of prepayments on some of the higher-yielding mortgage-backed securities.
So those yields do remain under pressure.
The total cost of deposits declined by 10 basis points quarter-over-quarter with the cost of interest-bearing deposits declining by 13 basis points.
We do expect that to continue to decline given that the spot rate was 27 basis points at quarter end.
It's going to be at least somewhat lower than that, so we will see an additional decline this quarter, although maybe not as much as we've seen in the last two quarters.
The cost of FHLB borrowings did increase to 2.32% as the borrowings that were paid down were short-term lower rate advances compared to the hedged advances that remain on the balance sheet.
In the aggregate, there's about $1.6 billion of hedged advances that are scheduled to mature over the remainder of 2021, with a weighted average rate in excess of 2%.
And we continue to evaluate the economics and whether it makes sense to terminate some of the longer-dated hedges that are out there.
We do expect the NIM to continue to increase, we expect it to grow next quarter.
It will be helped by PPP forgiveness, but even excluding that, we expect the NIM to continue to grow up -- to go up.
Shifting gears a little bit to talk about CECL and the reserve.
Overall, the provision for credit losses for the quarter was a recovery of $28 million, compared to a recovery of $1.6 million last quarter, and obviously, a provision of $125 million in the first quarter of 2020, which was the quarter where we really booked our big provision related to the onset of COVID.
The negative provision this quarter primarily resulted from an improving economic forecast.
And within the forecast, the improvement in outlook for unemployment was the biggest driver of the reserve release.
The reserve declined from 1.08% to 0.95% of loans, and Slides nine through 11 of our deck gives some further details on the allowance.
Major drivers of change, the reserve went down $36 million related to the economic forecast, again, primarily the change in unemployment.
A decrease of $10.1 million due to charge-offs, most of which related to one BFG franchise loan that was having trouble even prior to COVID.
A decrease of $12.8 million due to changes in the portfolio mix and the net decline in the balance of loans outstanding.
$6.1 million increase in qualitative reserves.
$9.6 million increase related to updates of certain assumptions, primarily updated prepayment speeds.
An increase of $6.8 million related to loans that were further downgraded to the substandard accruing category.
So those are the major components of the move in the reserve for the quarter.
I do want to point out that the reduction in the reserve for the quarter was primarily related to the pass rated portion of the portfolio.
The reserve for pass rated loans declined from $137 million to $93 million, while the reserve for non-pass loans increased from $120 million to $128 million.
So as we move forward, our expectation would be if economic trajectory plays out as we think it's going to, we would expect to see some upward risk rating migration, and that should -- that would, in turn, result in some further reductions in the reserve.
Some of the key economic forecast assumptions that drove the reserve, and I'll remind you that it's really a lot more complicated than this.
This is a very high-level look at some of the data points that are in the economic forecast.
National unemployment declining to 5% by the end of 2021 and trending down to just over 4% by the end of 2022.
Real GDP growth of just over 7% by the end of 2021 and 2.3% for '22.
The S&P 500 index remaining relatively stable at around 3,700 and Fed funds rates staying at or near zero into 2023.
Little bit of detail on risk rating migration, and you can see a breakdown of all of this on Slides 23 through 26 in the deck.
Total criticized and classified assets declined by about $75 million this quarter, but we did see some migration into the substandard accruing category from special mention.
We do, again, expect to see some positive tailwinds here if the economy continues to improve, as we expect it to, as we move through 2021.
In terms of the migration to substandard accrual, the largest categories where we saw that were CRE, hotel, multifamily, New York, and office.
Nonperforming loans did decline this quarter, from $244 million to $234 million.
Just to quickly wrap up, when I look forward to the rest of 2021, to reiterate Tom's comments, we do expect noninterest DDA growth to continue as well as total deposit growth.
But our focus remains on noninterest DDA, and we're more than willing, given our liquidity position, to allow more rate-sensitive and brokered deposits to run off.
FHLB advances will continue to decline, and securities will probably grow in the low to mid-single digits, depending on our liquidity position.
The provision, always the fun one to try to forecast.
Under CECL, the provision should, in theory, be related to new loan production, while charge-offs should reduce the reserve.
If we do see positive risk rating migration as we currently expect, we'll see some further reserve release related to that.
Net interest income should be up mid-single digits over 2020, as should noninterest income excluding securities gains which tend to be episodic, and we don't make any attempt to predict those.
And with respect to expenses, I'd say the guidance we gave in January has not changed.
Leslie, I'll just add to your little color.
This is a very hard time to try and predict what will happen.
We gave you guidance three months ago, and I look at various aspects of our guidance.
On the deposit side, we're way ahead of what we thought we would do, to be very honest.
This quarter was much better than what was in our plan.
On the loan side, we had also expected that we'll start bringing in -- increasing our line utilization, instead it actually declined.
Now with the exception of March where it went up 0.5 point, so it sort of went in the right direction a little bit.
But December to Jan, Jan to Feb, it was just -- it surprised us because we were seeing economic activity around us, but we were not seeing the line utilization.
So, I think the guidance overall -- we still feel pretty good about where the trajectory will be for earnings.
But in terms of deposit, I think we will outperform.
On the loan side, I think we said low to mid-single digits, we'll probably be in the low single digits based on what we see now.
And margin, we still feel pretty good.
We've already delivered a nice expansion in margin, and we'll continue to do that.
So overall, I feel fairly good.
I was in Miami for the first time after 12 months, two weeks ago.
I spent a few days there and -- just to see the hustle and bustle that is -- that I've been hearing about from everyone for the last several months now.
But to actually see it and feel it, I will tell you that if you are planning summer vacations, nobody can go to Europe and people are planning to go to either Hawaii or Florida or other places.
Now is the time to book your hotels.
You are not going to find any hotel rooms if you wait another month.
That's how active Miami Beach and Miami generally is.
So very, very positive trends that we're seeing.
Some silly things also happening in Miami Beach, but that just comes with the territory.
But let's turn this over and take some questions.
| q1 earnings per share $1.06.
|
In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO, and net debt to recurring EBITDA.
I'm very pleased to report that we continued our strong start to the year, achieving record investment volume of more than $750 million during the first six months of 2021.
Robust and high quality investment activity further increased our investment grade, concentration and raised our ground lease exposure to a record of nearly 13%.
Our investment activities during the quarter were supported by more than $1 billion of strategic capital markets transactions that fortified our best-in-class balance sheet and positioned our company for continued growth in the quarters ahead.
During the second quarter, we invested approximately $366 million in 59 high-quality retail net lease properties across our three external growth platforms.
54 of these properties were originated through our acquisition platform representing acquisition volume of more than $345 million.
The 54 properties acquired during the second quarter are leased to 32 tenants operating in 18 distinct retail sectors including best-in-class operators in the off-price, home improvement, auto parts, general merchandise, dollar store, convenience store, craft and novelties, grocery and tire and auto service sectors.
The acquired properties had a weighted average cap rate of 6.2% and a weighted average lease term of 11.8 years.
Through the first six months of this year, we've invested a record $756 million into 146 retail net lease properties spanning 35 states in 24 retail sectors.
Approximately $732 million of our investment activity originated from our acquisition platform.
Roughly 75% of the annualized base rents acquired in the first half of the year comes from leading investment grade retailers, while almost one-third of annualized base rent is derived from ground leased assets.
These metrics demonstrate our continued focus on best in class opportunities with leading omnichannel retailers, while still achieving record results.
Given our record acquisition activity date and visibility into our pipeline, we are increasing our full-year 2021 acquisition guidance to $1.2 billion to $1.4 billion.
During this past quarter, we executed on several unique and notable transactions, including a new small format target on the University of Georgia's campus in Athens.
We are extremely pleased to expand our relationship with target, as well as add another unique street retail asset to our growing portfolio.
We continue to invest in market dominant grocers during the quarter.
Most significant with a five-store sale leaseback transaction with Kroger for approximately $68 million.
The stores are located in Texas, Michigan, Ohio, and Mississippi and each location is subject to a new 15 year net lease.
With this transaction Kroger moved into our top 10 tenants at 3.2% of annualized base rents.
Kroger's of course is a leader in the grocery space.
Their fortified balance sheet, strategic omnichannel initiatives, and significant investment in e-commerce fulfillment are emblematic of our investment strategy.
Additionally, we closed on the purchase of a ShopRite, which is owned and operated by Wakefern in New Rochelle, New York.
ShopRite is a tremendous operator in the real estate located at a strategic interchange of I-95 is yet another example of the diligent bottoms for analysis that we conduct on every asset that we acquired.
Finally, as you may recall we acquired our first Wegmans Ground Lease in Chapel Hill, North Carolina during the fourth quarter of 2020.
We've built upon that momentum in this quarter with the acquisition of our second property ground leased to Wegmans.
The store located in Parsippany, New Jersey is over 100,000 square feet and was constructed at Wegmans expense.
Through the first six months of the year we've acquired 45 ground leases for a total investment of over $240 million.
The second quarter contribution to this total was 14 ground leases representing an investment volume of more than $113 million.
Additional notable ground lease acquisitions during the quarter included our first capital grow in Whippany, New Jersey.
A Walmart Supercenter and Lowe's and Hooks at New Hampshire, our first Cabela's in Albuquerque, New Mexico, as well as three additional Wawa assets increasing our Wawa portfolio to 25 properties including their flagship store in Downtown Philadelphia.
As mentioned at quarter end, our overall ground lease exposure stood at a company record of 12.7% of annualized base rents and includes a very unique assets leased to the best retailers in the country.
Inclusive of our second quarter acquisition activity, the ground lease portfolio now derives nearly 90% of rents from investment grade tenants and has a weighted average lease term of 12.5 years.
The majority of the portfolio includes rent escalators that result in average annual growth of close to 1% while the average per square foot rent is only $9 and $0.65.
This growing portfolio continues to be a source of tremendous risk adjusted returns when reviewing the lease term, credit, underlying real estate attributes and of course the free building and improvements of a tenant wherever to vacate.
We look forward to continue to leverage our industry relationships and strong track record of execution to identify potential additions to this expanding and diversified sub portfolio.
As of June 30, our portfolio's total investment grade exposure was nearly 68%, representing a significant year-over-year increase of approximately 670 basis points.
On a two-year stacked basis, our investment grade exposure has improved by more than 1,300 basis points.
The continued growth of our ground lease portfolio and the investment grade exposure demonstrates our disciplined focus on building the highest quality retail portfolio in the country.
Moving on to our Development and Partner Capital Solutions platforms, we continue to uncover compelling opportunities with our retail partners.
We had six development in PCS projects either completed or under construction during the first half of the year that represent total capital committed of more than $36 million.
Three projects were completed during the second quarter, including a grocery outlet in Port Angeles, Washington, a Gerber Collision in Buford, Georgia, and a Floor & Decor in Naples, Florida.
I'm pleased to announce we also commenced construction during the quarter of our second development with Gerber Collision in Pooler, Georgia.
Gerber will be subjected to a new 15 year net lease upon completion and we anticipate rent will commence in the first quarter of 2022.
We continue to work with Gerber Collision on additional opportunities that we anticipate announcing later this year and into next year.
Construction continued during the quarter on our first development with 7-Eleven in Saginaw, Michigan.
We anticipate delivery will take place in the first quarter of next year at which time 7-Eleven will be subject to a new 15 year net lease.
We remain focused on leveraging our full capabilities to grow our relationships with these leading omnichannel retailers.
I look forward to providing an update on our continued progress in the coming quarters.
While we continue to strengthen our best-in-class retail portfolio through record investment activity we're also quite active on the disposition front during the quarter.
We continue to reducing Walgreens exposure and as well as franchise restaurants as we sold seven properties for gross proceeds of approximately $28 million with a weighted average cap rate of 6.7%.
In total, we disposed of 10 properties through the first six months of the year for gross proceeds of more than $36 million with a weighted average cap rate of approximately 6.7%.
Given our disposition activities during the first half of the year, we are raising the bottom end of our disposition guidance to $50 million for the year, while the high-end remains at approximately $75 million.
Our asset management team has also been proactively and diligently addressing upcoming lease maturities.
Their efforts to reduce the remaining 2021 maturity to just three leases representing 20 basis points of annualized base rents.
During the second quarter, we executed new leases, extensions or options on approximately 209,000 square feet of gross leasable area.
Most notably, we are extremely pleased to have executed a new 15 year net lease with Gardner White to backfill our only former Loves Furniture store in Canton, Michigan.
As you may recall, this was the Art Van flagship we developed prior to the company's acquisition by TH Lee.
We delivered the space to Gardner White in June and rent commenced in July, allowing us to recover close to 100% of prior rents with just over one month of downtime.
I would note this is the second time we have released this asset on effectively full recovery since the Art Van bankruptcy.
Gardner White is Michigan-based family owned and operated, has been one of the preeminent furniture retailers in the state for more than a century.
The Company is led by Rachel Tronstein, one of the brightest minds in the retail furniture industry and a former high school classmate of mine.
We are extremely pleased to have Rachel and her team as partners in this flagship asset.
I'm also pleased to announce the addition of Burlington to Central Michigan Commons in Mount Pleasant, Michigan, one of the only two remaining legacy shopping centers that we chose to retain during the transformation of our portfolio.
To date we have redeveloped the former Kmart Space for Hobby Lobby and Alta and added Texas Roadhouse on an outline via ground lease.
These transactions are emblematic of our ability to unlock embedded value within the portfolio and support our decision to hold on to this very well located legacy shopping center across from Central Michigan University's main campus.
During the first six months of the year we executed new leases, extensions or options and approximately 275,000 square feet of gross leasable area and as of June 30, our expanding retail portfolio consisted of 1,262 properties across 46 states, including 134 ground leases and remains nearly 100% occupied at 99.5%.
With that, I'll hand the call over to Simon and then we can open it up for any questions.
Starting with earnings core funds from operations for the second quarter was $0.89 per share, representing a record 17.3% year-over-year increase.
Adjusted funds from operations per share for the quarter was $0.88, an increase of 15.9% year-over-year.
As a reminder, treasury stock is included within our diluted share count prior to settlement if and when ADCs stock trades above the deal price of our outstanding forward equity offerings.
The aggregate dilutive impact related to these offerings was less than half a penny in the second quarter.
Per FactSet, current analyst estimates for full year AFFO per share range from $3.40 per share to $3.53 per share, which implies year-over-year growth of 6% to 10%.
As mentioned on last quarter's call, we continue to view this level of growth as achievable and expect to end the year toward the higher end of this range given current visibility into our investment pipeline and the broader operating environment.
Building upon our 6% of AFFO per share growth in 2020-this implies two year stack growth in the mid-teens.
General and administrative expenses totaled $6.2 million in the second quarter.
G&A expense was 7.6% of total revenue or 7.1% excluding the noncash amortization of above and below-market lease intangibles.
Even as we continue to invest in people and systems to facilitate our growing business, we anticipate the G&A as a percentage of total revenue will be in the lower 7% area for full year 2021 excluding the impact of lease intangible amortization on total revenues.
As mentioned last quarter, G&A expense for our acquisitions team fluctuates based on acquisition volume for the year and our current anticipation for G&A expense reflects acquisition volume within our new guidance range of $1.2 billion to $1.4 billion.
Total income tax expense for the second quarter was approximately $485,000 for 2021.
We continue to anticipate total income tax expense to be approximately $2.5 million.
Moving onto our capital markets activities for the quarter, in May we completed a $650 million dual tranche public bond offering, comprised of $350 million of 2% senior unsecured notes due in 2028 and $300 million of 2.6% senior unsecured notes due in 2033.
In connection with the offering, we terminated related swap agreements of $300 million that hedged for 2033 Notes receiving approximately $17 million upon termination.
Considering the effect of the terminated swap agreements, the blended all-in rates for the 2028 Notes and 2033 Notes are 2.11% and 2.13% respectively.
We used the portion of the net proceeds from the offering to repay all $240 million of our unsecured term loans, the termination costs related to early pay down of our unsecured term loans total approximately $15 million.
Given the one-time nature of the termination costs, these amounts have been added back to our core FFO and AFFO measures.
The offering in combination with the prepayment of all of our unsecured term loans extended our weighted average debt maturity to approximately nine years and reduced our effective weighted average interest rate to approximately 3.2%.
In June, we also completed a follow-on public offering of 4.6 million shares of common stock.
Upon closing, we received net proceeds of approximately $327 million.
During the second quarter, we entered into forward sale agreements in connection with our ATM program to sell an aggregate of roughly 1.2 million shares of common stock for anticipated net proceeds of approximately $81 million.
In May, we settled roughly 164,000 shares and received net proceeds of approximately $10 million.
At quarter-end we had approximately 3.9 million shares remaining to be settled under existing forward sale agreements which are anticipated to raise net proceeds of approximately $259 million upon settlement.
Inclusive of the anticipated net proceeds from our outstanding forward offerings cash on hand and availability under our credit facility, we had nearly $950 million in available liquidity at quarter-end.
The balance sheet continues to be a huge strength for us.
As of June 30, our pro forma net debt to recurring EBITDA was approximately 3.6 times, including our outstanding forward equity offerings.
Excluding the impact of unsettled forward equity, our net debt to recurring EBITDA was approximately 4.5 times.
Total debt to enterprise value of quarter-end was approximately 25% while fixed charge coverage remained at a record five times.
During the second quarter, we declared monthly cash dividends of $0.217 per share for April, May and June.
The monthly dividend reflected an annualized dividend amount of $2.60 per share representing an 8.5% increase over the annualized dividend amount of $2.40 cents per share for the second quarter of last year.
Our payout ratios for the second quarter were a conservative 73% of Core FFO per share and 74% of AFFO per share respectively.
Subsequent to quarter-end, we declared a monthly cash dividend of $0.217 per share for July.
The monthly dividend reflects an annualized dividend amount of $2.60 per share or an 8.5% increase over the annualized dividend amount of $2.40 per share from the third quarter of 2020.
| compname reports core ffo per share of $0.89.
agree realty corp - qtrly core ffo per share $0.89.
agree realty corp - qtrly affo per share $0.88.
|
Please see the Events section of our Investor Relations homepage for a full list.
Our actual results may differ significantly from the matters discussed today.
When you hear us say on a comparable basis, that means excluding the impact of FX, net M&A and other noncomparable items.
When you hear us say adjusted, that means excluding noncomparable items.
When you hear us say organic, that means excluding the impact of FX and net M&A.
We will also refer to our market.
When you hear us say market, that means the change in light and commercial vehicle production weighted for our geographic exposure.
Our outgrowth is defined as our organic revenue change versus the market.
We encourage you to follow along with these slides during our discussion.
We're very pleased to share our results today for the first quarter of 2021 and provide an overall company update starting on Slide number five.
I'm very proud of our strong start of the year despite the components supply headwinds.
With just over $4 billion in sales, our first quarter revenue increased over 18% organically.
This compares to a market being up less than 13%.
So our outgrowth was about 570 basis points for the quarter, which was ahead of our expectation and our guidance for the year.
We saw strong outgrowth in North America and Europe.
Our earnings per share increased year-over-year due to the impact of our higher revenue.
Our incremental margin performance was in line with our expectations, with an even strong free cash flow of $147 million for the quarter, a good strategy toward our full year guidance.
We also secured additional new business awards for electrified vehicles, which I speak about in a moment.
And finally, during the quarter, we announced our planned acquisition of AKASOL.
The key strategic elements of the AKASOL acquisitions are detailed on Slide number six.
Based on the last couple of years of experience we have in this space, we're believers in the prospect of easy bet resistance and are very familiar with the industry players.
As a leader in this space, AKASOL had been on our radar for a long time as a potential partner.
We're confident that AKASOL is an excellent strategic fit for BorgWarner, and we are really excited about adding their capabilities to our portfolio.
In particular, we're attracted to AKASOL's following strength.
Flexible battery technology across multiple cell architectures, proven technology and products with established manufacturing facilities already in serial production today, strong order backlog of about $2.4 billion, primarily from leading OEMs and a focus on bus, CV and off-highway applications.
We're extremely excited and expect to complete the transaction during the second quarter.
Next I would like to highlight a significant new program win for electric vehicles on Slide seven.
BorgWarner's Integrated Drive Module, or as we call it, our IDM, was selected by a major non-Chinese Asian OEM for its upcoming global S segment electric vehicle production planned to start in mid-2023.
This is a significant program for the company as it is our first IDM award combining BorgWarner's and legacy Delphi Technologies portfolio.
It is a validation of the potential we saw in bringing our two companies together.
And there is more to come.
This IDM features our electric motor, our box and our integrated power electronics.
It operates at 400 volts and has exceptional peak power of 135 kilowatts.
The IDM weight and space are reduced by integrating our gearbox, our 400-volt silicon inverter and our motor.
This results in a maximized power density and functionality.
The IDM also offers a scalable and modular inverter design making it easily adaptable to customer requirements.
This is an important step for the company with a great partner.
Next, on Slide eight, let me summarize our new strategical project charging forward that we unveiled at our Investor Day in late March.
With successful execution of this strategy, we expect to deliver over 25% of our revenue from electric vehicles by 2025 and approximately 45% by 2030.
That compares to under three percent of revenue today.
Project charging forward as three pillars: one, we plan to profitably scale ELVs through our continued integration of Delphi and our ability to capture synergies.
The new IDM win is a great example.
We would also pursue other organic and inorganic actions; two, we intend to expand more aggressively into ECVs.
We will do that by leveraging our strong intimacy with CV customers as well as our position in ELVs.
We're building out a go-to-market product portfolio and operation capabilities organically and inorganically.
Our AKASOL acquisition is a key part of this expansion.
And three, we plan to optimize our combustion portfolio, reducing our exposure by disposing parts of the portfolio that we believe are lower growth that don't ever pass to product leadership or that are not expected to deliver strong margins.
We believe we can fund the EV growth underlying project charging forward, primarily from the capital generated by our existing operations.
This is not a certain change in the company's direction.
It is a logical extension to what we've been building since 2015.
We're excited about the acceleration of the market toward electrification and about the momentum that we are building with our customers.
Next, on Slide nine.
I'm proud to announce that BorgWarner achieved The Great Place to Work certified status for the second consecutive year.
Great Place to Work is the global authority on workplace culture.
This certification validates BorgWarner's positive work environment.
I've said before that the BorgWarner secret sauce starts with our people: to lead, develop and attract the best talents.
We strive to be an employer of choice where we operate around the world.
We cultivate a workplace environment that is collaborative, transparent, inclusive and that promotes continuous learning and excellence.
So let me summarize our first quarter results and our outlook.
The first quarter was a good start to the year, particularly considering the supply challenges currently impacting the industry.
We delivered strong top line growth, and we believe we're tracking well toward our full year margin and free cash flow objectives.
Our first quarter performance has led us to increase our full year revenue and adjusted earnings per share guidance despite a lower industry production outlook, as Kevin will detail.
As we look beyond 2021, I'm extremely excited about our long-term positioning.
We are continuing to take significant steps that we believe will help us to secure our profitable growth well into the future.
We are winning, in line with our expectations in the electric world, both from a component standpoint like inverters and heaters, for example, and also from a latest generation system standpoint with our IDMs. We're focusing on a disciplined inorganic investment approach, like the planned acquisition of AKASOL, which adds great technology to our portfolio while supplementing our growth profile.
Before I review the financials in detail, I'd like to provide a quick overview of the two key takeaways from our first quarter results.
First, our revenue came in stronger than we were expecting going into the year.
This was driven by the fact that we delivered solid outgrowth with both the legacy BorgWarner and former Delphi Technologies businesses performing better than expected.
Second, our margin and cash flow performance in the quarter were strong, driven by the top line results as well as our cost-saving measures.
As we look at our year-over-year revenue walk for Q1, we begin with pro forma 2020 revenue of $3.2 billion, which includes $945 million of revenue from Delphi Technologies.
You can see the foreign currencies increased revenue by about six percent from a year ago.
Then our organic growth year-over-year was over 18% compared to a less than 13% increase in weighted average market production.
That translates to 570 basis points of outgrowth in the quarter, which breaks down as follows: in Europe, we outperformed by mid- to high single digits, driven by growth in small gasoline turbochargers and strong performance in multiple former Delphi Technologies businesses, most notably fuel injection.
In North America, we outperformed the market by high single digits as we saw a nice benefit from the ramp-up of the new Ford F-150 and other new business launches.
In China, we underperformed the market by mid-single digits against very strong outperformance in the first quarter of 2020.
Also keep in mind, Q1 was a very unusual quarter last year in the face of COVID-19, primarily in China.
The sum of all this was just over $4 billion of revenue in Q1, which was a new quarterly record for the company.
Now we do believe that some of the strong outgrowth we delivered in Q1 was a result of the production of build and hold vehicles by our customers in multiple regions of the world.
That means it's likely that some level of our reported outgrowth in Q1 is inflated due to a pull forward of production into the quarter.
This will have an offsetting impact on our expected outgrowth later in the year.
However, our outgrowth for the full year is still expected to be above our prior guidance, as I'll discuss further in a moment.
With all that background in mind, we're pleased with the strong start to 2021.
Now let's look at our earnings and cash flow performance on Slide 11.
Our first quarter adjusted operating income was $444 million, compared to the pro forma $274 million in the first quarter of 2020.
This yielded an adjusted operating margin of 11.1%, which was up compared to the 10.3% margin for BorgWarner only in the first quarter of 2020.
On a comparable basis, excluding the impact of foreign exchange, adjusted operating income increased $145 million on $591 million of higher sales.
That translates to an incremental margin of roughly 25%.
This solid performance was driven by conversion on higher volumes, restructuring savings and Delphi Technology synergies in excess of purchase price amortization.
We are particularly pleased with this performance given elevated supplier costs that we experienced during the quarter.
Moving on to free cash flow.
We're proud of the fact that we generated $147 million of positive free cash flow during the first quarter, which was roughly flat year-over-year despite increased investment in working capital.
As a reminder, our market assumptions incorporate our view of both the light vehicle and on-highway commercial vehicle markets.
As you can see, we expect our global weighted light vehicle and commercial vehicle markets to increase in the range of nine percent to 12%, which is down from our previous assumption of an 11% to 14% increase.
This reduction to our prior market outlook reflects the ongoing impact of the semiconductor shortage on industry production.
Looking at this by region, we're planning for North America to be up 17% to 20%.
We see the largest incremental impact of the semiconductor shortage in North America with our market expectations down approximately 500 basis points from our initial assumptions.
In Europe, we expect a blended market increase of nine percent to 12%, with that range being down approximately 200 basis points from our earlier planning assumption.
And in China, we expect the overall market to be roughly flat year-over-year similar to our previous estimate.
Now let's talk about our full year financial outlook on Slide 13.
Starting with our pro forma 2020 sales, which includes $2.6 billion of revenue from the first three quarters of Delphi Technologies in 2020.
As you know, those revenues were not part of our P&L last year.
But to provide year-over-year comparability, we thought this pro forma revenue approach for the 2020 baseline would be useful.
You can see that our end market assumptions from the prior slide are expected to drive an increase in revenue of roughly $0.9 billion to $1.3 billion.
Next, we expect to drive market outgrowth for the full year of approximately 300 to 500 basis points, which is a meaningful step up from our previous guidance of 100 to 300 basis points.
Based on these assumptions, we expect our 2021 organic revenue to increase about 12% to 17% relative to 2020 pro forma revenue.
Then adding a $400 million benefit from stronger foreign currencies, we're projecting total 2021 revenue to be in the range of $14.8 billion to $15.4 billion.
That's up from our prior guidance by about $100 million at both ends of the revenue range.
Even with weaker end market outlook, our stronger revenue outgrowth is driving an overall increase in our revenue guidance from the guidance we gave last quarter.
Also, you should note that we're maintaining a wider-than-typical revenue range at this point of the year due to the wide range of potential production scenarios that I discussed on the previous slide, which stems from the volatility and uncertainty in end markets, arising from the industrywide semiconductor issues.
From a margin perspective, we expect our full year adjusted operating margin to be in the range of 10.1% to 10.5% compared to a pro forma 2020 adjusted operating margin of 8.3%.
This contemplates the business delivering full year incrementals in the low 20% range before the impact of Delphi related cost synergies and purchase price accounting.
From a cost synergy perspective, our margin guidance includes $70 million to $80 million of incremental benefit in 2021.
That puts us right on track to achieve 50% of our total expected cost synergies in 2021.
And based on our year-to-date performance, we believe that we're tracking at the high end of this range.
Based on this revenue and margin outlook, we're expecting full year adjusted earnings per share of $4 to $4.35 per diluted share, which is an increase from our prior guidance of $3.85 to $4.25 per diluted share.
I would point out that this guidance now assumes a 31% tax rate versus our prior guidance of 32% as a result of the successful execution of certain international tax planning initiatives.
And finally, we continue to expect that we'll deliver free cash flow in the $800 million to $900 million range for the full year.
This is flat with our prior guidance as we expect the higher sales outlook to drive an increase in working capital that largely offsets higher adjusted operating income.
This would still represent a record annual free cash flow generation for the company.
That's our 2021 outlook.
On the acquisition front, we believe we remain on track to complete the AKASOL acquisition in the second quarter.
We've now received regulatory approvals in all required jurisdictions.
The tender offer is in progress with the final acceptance period expected to be completed later this month and then with the closing shortly thereafter.
AKASOL represents an important part of Project CHARGING FORWARD as it represents approximately 20% to 25% of the estimated 2025 revenue from acquisitions underlying our plan and it significantly increases our exposure to the ECV space.
As it relates to portfolio optimization, we continue to target combustion-related dispositions with annual revenue of approximately $1 billion to be executed over the next 12 to 18 months.
The process for these dispositions is under way.
We would expect to update you on our progress there as we get closer to executing those transactions.
So let me summarize my financial remarks.
Overall, we had a really solid start to the year despite the industry supply headwinds.
We delivered 570 basis points of market outgrowth, an 11.1% adjusted operating margin and $147 million of free cash flow.
And we increased our full year revenue and earnings guidance despite moderating our industry production assumptions.
Looking beyond our near-term results, we're taking the necessary steps to accelerate the company's progression toward electrification.
The AKASOL acquisition and today's IDM announcement are great examples of our progression.
And importantly, we're executing our strategy from a position of financial strength.
Ultimately, we expect that the successful execution of our strategy will drive value creation for our shareholders.
| sees fy sales $14.8 billion to $15.4 billion.
for full-year 2021, net sales are expected to be in range of $14.8 billion to $15.4 billion.
borgwarner - full year 2021 free cash flow is expected to be in range of $800 million to $900 million.
borgwarner - expects its weighted light and commercial vehicle markets to increase in range of approximately 9% to 12% in 2021.
|
I'm excited to be speaking with you on my first earnings call as CEO of Hanes Brands.
I'm honored and excited to be leading such a passionate team as we embark on a growth-oriented journey.
The global pandemic has clearly created significant challenges and uncertainty.
It's impacted everything from our business visibility to our manufacturing, to consumer traffic in our stores and on our website.
And it continues with this week's European announcements regarding new lockdowns and curfews.
In this unpredictable environment, I'm encouraged by the progress we're making on a number of fronts.
I've been impressed with the team, the way they've been able to adapt and respond to the challenges of 2020.
We're seeing revenue momentum in our business, and I feel good about our strategic assessment and the progress we've already made toward defining the ambition and strategic goals for the organization.
For today's call, I'll begin by sharing some insights about myself and why I was attracted to this opportunity.
I'll then speak to the strategic assessment that we began on my first day.
I'll offer some thoughts on the process, what we are looking at as well as share some initial observations.
And I'll end with a few comments on our current business performance before handing off to Scott for a more detailed review of the results and our fourth quarter guidance.
Hanesbrands is a great company.
We have iconic brands.
We have global breadth and supply chain scale.
We have a solid balance sheet.
There's a long-standing commitment to sustainability, and we have a dedicated, passionate team with a genuine appetite and readiness for change.
With this strong foundation, I see significant opportunities and potential to drive growth and shareholder value.
With respect to my background, at heart, I'm a brand and product person.
I believe in providing great products borne directly from consumer insights.
I believe in the power of brands to differentiate, tell stories and build lasting loyalty.
I like to change and transform things.
And I like to think big.
To that end, I want Hanesbrands to be one of the most admired global apparel companies, one that is growth oriented and consistently delivers strong shareholder value.
I'm also a big believer in communication, being unvarnished, honest and transparent, both internally and with all of you.
With that backdrop, I'd like to give you a sense of how I spent my first three months as CEO.
The global pandemic has certainly altered my approach.
My preference would be to spend the first several weeks traveling, meeting with customers, visiting our stores, touring our manufacturing facilities in Asia, Central America and the Caribbean and sitting with our teams around the globe.
While it's frustrating not to be able to get out and meet face-to-face, I've had plenty of interactions with our global team and our customers via video meetings and virtual plant tours.
I've done a lot of listening, I've been asking a ton of questions and I've immersed myself in learning about our various businesses.
As I mentioned on my first day, we began a detailed, objective assessment of the business.
This is what I call the unvarnished truth.
It will define our opportunities as well as the challenges we must address to be successful and reach our full potential.
The strategic assessment is the foundation on which we will set our ambition for Hanesbrands.
From there, we will build our short- and long-term operating plans to achieve our goals.
With respect to the scope of the strategic assessment, we are evaluating our entire global portfolio.
We're looking at historical performance, category trends, channel dynamics and competitive landscape across geographies and business segments.
We're analyzing our cost structure across spend categories.
We're analyzing the current level and mix of our inventory, and we're looking at how we're organized.
We're also studying our supply chain, our technology infrastructure and our concept to consumer processes.
We're evaluating our online and direct-to-consumer capabilities.
We're analyzing our consumer mix, our brand equity measures and our product quality.
We're even looking at how we are perceived by retailers.
So let me share some initial observations from our work today.
This is a great company with a strong foundation that we can leverage.
However, in an environment where the pace of change is accelerating, for us to be successful and reach our full potential, we must become a more agile, consumer-centric, growth-oriented company.
So what does this mean?
It means that we're going to align Hanesbrands to become a company that embraces change, acts decisively, moves quickly and shares a common ambition.
We'll have a consumer-centric mindset.
The consumer is going to be at the center of everything that we do.
We'll become faster and more flexible by simplifying our organizational structure as well as streamlining processes and decision-making, particularly around concept to consumer.
We'll commit to growth.
For example, we'll support the momentum in the Champion brand globally as well as the growth in Bonds and Bras N Things in Australia, particularly online.
And not surprisingly, we need to return U.S. Innerwear to consistent year-over-year growth by applying a more consumer-centric approach to our brands, evolving our supply chain capabilities and capturing new opportunities.
Lastly, it means we're going to build certain capabilities that improve efficiency and speed, enable growth and position the company for long-term success.
We are looking for opportunities to modernize our technology.
We're looking at segmenting our supply chain to accelerate our time to market and meet the unique needs of our diverse brands and businesses.
We must expand our digital focus and capabilities to be able to capture our share of online growth.
And we'll invest in talent, filling current gaps while also developing the next generation of leaders.
Our investments will be deliberate and targeted.
We've already started a comprehensive review of our current cost structure to identify near-term savings opportunities that can be used to fuel some of our investments.
I feel very good about the progress we've made.
The global team is highly engaged, and there's a lot of energy, excitement and a genuine desire for change.
We're working with purpose, and we're moving fast.
This will be a multiyear journey that I believe will be rewarding for both our people and our shareholders.
You'll begin to see parts of our strategy unfold this quarter, and we look forward to updating you on our progress over the coming months.
Turning to our results.
Overall, Hanes brand had a solid third quarter, with revenue, operating profit, earnings per share and operating cash flow coming in above our expectations.
Scott will provide a more detailed review of our results, so I'll focus my comments on four key takeaways from the quarter.
First, we saw good momentum across the business as apparel revenue trends improved sequentially in each of our business segments.
We're encouraged by the trends in U.S. Innerwear.
Sales, excluding PPE, increased 11.5% over prior year driven by continued point-of-sale strength and broad-based inventory restocking by retailers.
Despite shipments exceeding point-of-sale in the quarter, inventory at retail remains below last year's levels.
Therefore, we expect some level of retailer restocking to continue in the fourth quarter.
We're pleased with the global improvement in Champion as sales increased nearly 130% from the second quarter.
Compared to last year, sales declined 9% due primarily to our sports apparel business where COVID-related headwinds have essentially shut down sporting events and college bookstores.
Excluding this, sales would have been down 2%.
We were also impacted by COVID-driven supply challenges in the quarter.
Absent these two items, Champion sales increased over prior year.
We expect the supply challenges to improve in the fourth quarter.
And with global spring/summer 2021 bookings up over 2019 levels, we expect Champion's momentum to carry into next year.
Looking forward, I'm excited and confident in the global potential of Champion.
There's a lot of opportunity for growth over the next several years.
The second takeaway is that we're facing second half profitability headwinds, which were mentioned on last quarter's call.
The timing of negative manufacturing variances and higher SG&A expense are expected to pressure both gross and operating margins in the fourth quarter.
We're also facing additional uncertainty from the latest COVID trends.
Third, we delivered another strong cash flow quarter, generating nearly $250 million of operating cash flow.
While we now expect to end the year with higher-than-anticipated PPE inventory, we continue to expect to generate positive operating cash flow in the second half and for the full year.
And the fourth takeaway for the quarter, we further strengthened our liquidity, ending the quarter with $2 billion of liquidity, which we believe provides us with plenty of operating flexibility in this uncertain environment.
So in closing, we're making progress in an increasingly unpredictable environment.
We're seeing good revenue momentum in our business.
We're moving quickly with our strategic and cost assessment.
We're defining our ambition, identifying our opportunities and building our plans to become a more agile, consumer-centric, growth-oriented company.
I'm excited to begin this multiyear journey, one that I believe will be rewarding to both our people and our shareholders.
Overall, Hanesbrands had a strong quarter, with the results across all of our key metrics coming in above our expectations.
Revenue momentum continued across the business driven by continued strength in point-of-sale trends and broad-based inventory restocking.
As expected, margins declined over prior year but less than we were anticipating, and we generated $249 million of operating cash flow, further strengthening our liquidity position.
Turning to the details of the results.
Third quarter sales increased 3% over prior year to $1.81 billion, with foreign exchange rates accounting for 80 basis points of the quarter's growth.
Apparel revenue performed better than our expectation for the quarter.
Excluding $179 million of PPE sales, apparel revenue declined 7% compared to prior year.
This represents a significant improvement from last quarter's 40% decline as each segment experienced a sequential improvement in year-over-year revenue trends.
Adjusted gross margin of 36.7% decreased approximately 275 basis points over last year due to increased inventory reserves as well as negative manufacturing variances, which were incurred earlier in the year, rolling off the balance sheet and onto the P&L.
Adjusted operating margin declined approximately 170 basis points over prior year to 12.6% as the gross margin pressure and higher operating costs from COVID were partially offset by ongoing SG&A controls as well as benefits from our temporary cost savings initiatives.
Restructuring and other related charges were $53 million in the quarter.
Approximately $49 million are nonrecurring costs from restarting portions of our manufacturing network that closed for approximately 10 weeks beginning in March due to the COVID pandemic.
We experienced a stronger-than-expected recovery in point-of-sale.
In an effort to meet demand and best serve our customers, we chose to expedite shipments via airfreight as well as temporarily leverage third-party manufacturing capacity.
This resulted in short-term incremental cost in the form of freight and sourcing premiums relative to our normal manufacturing cost.
We believe this was the right long-term business decision.
And in fact, we are already seeing the benefits in the form of newly captured retail shelf space.
The remaining $4 million of these costs relates to our previously disclosed supply chain restructuring actions and program exit costs.
These actions and their associated costs are on track and remain unchanged from previous disclosures.
Our tax rate for the quarter was 17.3%, which was in line with our expectations.
And adjusted and GAAP earnings per share decreased 11% and 43% over prior year to $0.42 and $0.29, respectively.
Now let me take you through our segment performance.
For the quarter, U.S. Innerwear sales increased 41% over prior year driven by a 15% increase in basics, a 7% increase in intimates and the inclusion of $166 million of PPE revenue.
Excluding PPE, U.S. Innerwear sales increased 11.5% over prior year due to the continued positive point-of-sale trends and inventory restocking by retailers.
In our basics business, we experienced growth in each product category, which drove approximately 170 basis points of market share gains in the quarter.
Within intimates, bra sales increased at a double-digit rate.
This more than offset the decline in shapewear sales, which is a category that continues to be negatively impacted by the coronavirus pandemic.
Looking forward, we have seen positive point-of-sale and order trends continue through October.
With these trends, as well as retail inventory that remains below last year, we expect some level of restocking to continue in the fourth quarter.
For the quarter, Innerwear's operating margin expanded approximately 80 basis points over prior year to 21.7% driven by fixed cost leverage from higher unit volumes as well as favorable product mix.
Turning to U.S. Activewear.
Revenue declined 27% compared to last year, which is an improvement from the second quarter's 52% decline.
The vast majority of the year-over-year decline was from our sports apparel business, which continues to be significantly impacted by COVID-related headwinds.
Activewear's operating margin was 9.1% for the third quarter.
As expected, Activewear's margin declined compared to prior year due to the timing of negative manufacturing variances, inventory reserves for some of our non-Champion brands as well as SG&A deleverage from lower sales volumes.
However, I will note that the segment margin improved significantly from last quarter's operating loss.
Touching briefly on Champion, sales of the Champion brand within our Activewear segment increased approximately 85% from the second quarter.
Compared to last year, sales declined 27%, with the vast majority of the decline due to the COVID-challenged sports apparel business.
Despite the challenges in sports apparel, we continue to expect sequential improvement in Champion's revenue trends in the fourth quarter driven by continued point-of-sale growth in key channels and online as well as improved product availability.
Switching to our International segment.
Revenue declined 5% compared to last year on a reported basis and 7% on a constant currency basis.
Adjusting for PPE sales, core International revenue declined 7% as compared to prior year, which is a significant improvement from a 44% decline in the second quarter.
For the quarter, International Champion sales increased 5% over prior year.
Excluding the impact from foreign exchange rates, we experienced growth in our Americas and Champion Europe businesses.
This was more than offset by declines in our European Innerwear, Asia and Australia businesses where COVID-related challenges have slowed the retail recovery.
International segment's operating margin declined approximately 100 basis points over prior year to 15.2% driven by deleverage from lower sales volumes, which was partially offset by continued tight SG&A cost management.
Turning to cash flow.
We generated $249 million of operating cash flows in the quarter.
Looking at our balance sheet, inventory increased 4% over prior year which was in line with sales growth and includes approximately $400 million of PPE inventory.
Excluding PPE, inventory declined 15% compared to prior year.
Leverage at the end of the quarter was 3.3 times on a net debt to adjusted EBITDA basis, which was comparable to last year.
While liquidity remains our short-term focus in a post-COVID environment, our focus would be to return our leverage ratio to below three times.
We further strengthened our liquidity position in the quarter even while reducing debt by approximately $130 million and paying our regular quarterly dividend.
We ended the quarter with $2 billion of liquidity above the $1.8 billion at the end of the second quarter.
We continue to believe we have significant capital cushion in this uncertain environment.
And now turning to guidance.
Outlook reflects the continued uncertainty due to the COVID-19 pandemic.
Our outlook is based on the current business environment, which, among other items, reflects the lockdowns and curfews put in place over the past week in Europe.
Outlook does not reflect any potential impact to the consumer or operating environments should governments or businesses institute additional lockdowns and store closings.
I want to remind everyone that all year-over-year comparisons reference our rebased 2019 results.
For the fourth quarter, we expect total sales of $1.60 billion to $1.66 billion, which, at the midpoint, implies a 2% decline over prior year.
Prior to this week's European lockdowns, our revenue outlook assumed a low single-digit growth.
Included in our sales outlook is approximately $50 million of PPE sales, approximately $10 million of foreign exchange benefit and contributions from a 53rd week.
We expect adjusted operating profit of $160 million to $180 million, which, at the midpoint, implies an operating margin of 10.4%.
Expected year-over-year margin pressure is due to the timing of negative manufacturing variances and higher SG&A expense.
We expect interest and other expense of approximately $50 million and a tax rate of approximately 17.5%.
Our guidance for adjusted and GAAP earnings per share range from $0.25 to $0.30 and $0.24 to $0.29, respectively.
And our guidance for full year 2020 operating cash flow is $300 million to $400 million, which includes the impact from the higher-than-anticipated PPE inventory.
Based on our year-to-date cash flow, this implies fourth quarter operating cash flow of approximately $70 million to $170 million.
So in closing, I'm encouraged by how we're managing through the increasingly unpredictable environment.
We're seeing good revenue momentum in our business.
I'm excited about our strategic assessment we're doing to define our strategy, and I look forward to the journey ahead.
| compname reports q3 gaap earnings per share $0.29.
sees q4 2020 adjusted earnings per share $0.25 to $0.30.
sees q4 2020 gaap earnings per share $0.24 to $0.29.
q3 sales $1.81 billion versus refinitiv ibes estimate of $1.67 billion.
q3 gaap earnings per share $0.29.
sees q4 2020 sales about $1.6 billion to $1.66 billion.
full-year 2020 net cash from operations is expected to be $300 million to $400 million.
continues to expect to generate positive operating cash flow in second half and for full year.
qtrly adjusted earnings per share $0.42.
|
We will be referring to that slide deck throughout today's call.
I'm Kelly Boyer, Vice President of Investor Relations.
Joining me on the call today are Chris Rossi, President and Chief Executive Officer; Damon Audia Vice President and Chief Financial Officer; Patrick Watson, Vice President, Finance and Corporate Controller; Franklin Cardenas, President, Infrastructure business segment; Pete Dragich, Chief Operating Officer, Metal cutting business segment; and Ron Port, Chief Commercial Officer, Metal Cutting Business Segment.
These risk factors and uncertainties are detailed in Kennametal's SEC filings.
In addition, we will be discussing non-GAAP financial measures on the call today.
Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website.
For today's call, I will start with some general comments on the year, followed by a quick overview of the fourth quarter.
After that, I will discuss fiscal year '21 and our strategic agenda that will well position the company as markets recover.
From there, Damon will review the quarterly financial results in more detail.
Beginning on Slide 2, I would describe our fiscal year '20 as a year of significant challenge, but also a year of significant progress on our strategic growth and profitability improvement initiatives.
As you recall, we began the year in what was already considered an industrial downturn.
737 MAX production halt and a significant decline in the price of oil followed soon after.
Last, but certainly not least, COVID-19 significantly affected end markets in all regions in the second half of our fiscal year, especially in Q4.
As a result, organic sales declines occurred throughout the year and got worse as the year progressed.
However, we focused on the things we could control by implementing aggressive cost control actions, staying the course to advance our strategic agenda including positioning the Company for profitable growth and to gain share as markets recover.
These actions resulted in strong decremental margin performance in the second half as well as substantially completing our planned simplification/modernization capital spend.
I'm pleased with how our team came together to tackle the challenges.
COVID-19 protocols we successfully implemented continue to allow us to operate safely and serve customers globally.
So, all our facilities operated throughout the fourth quarter with a notable exception of our Bangalore, India plant, which was closed for approximately six weeks due to a government mandated lockdown.
Some examples of our cost control actions are; the acceleration of planned structural cost reductions associated with our simplification/modernization program, and further temporary cost control actions to mitigate COVID-19 headwinds such as increased furloughs, salary and variable compensation reductions, and reduced production schedules.
These measures helped to align our cost more closely with demand and finish the year on a strong liquidity position, despite the challenging environment.
In addition, we continue to make significant progress on our strategic initiatives.
Yesterday, we announced our intention to close a plant in Johnson City, Tennessee as part of our simplification/modernization program.
This brings the total number of plant closures to six, since inception of the program and is in line with our original target of five to seven plant closures.
That does not include the significant downsizing of the Essen, Germany facility.
We expect the Johnson City closure to be substantially complete by fiscal year-end, with production consolidated into other newly modernized Kennametal facilities.
We are also substantially complete with the spending on simplification/modernization capital, which marks a significant milestone in our journey to fundamentally reduce our cost structure, improve financial performance throughout the economic cycle, and improve customer service to enable share gain.
As we navigate through another challenging fiscal year, we will see the benefits from simplification/modernization increase.
This is driven in part as we recognized full-year run rate savings from fiscal year '20 actions, bring additional modernized processes online, and recognize the benefits from accelerating the simplification/modernization structural cost actions.
Also, of course, as volumes return, the savings will grow from increased utilization of our modernized processes and rationalized footprint.
In addition to simplification/modernization, we continue to advance our strategic growth initiatives, including launching new high value-added products and preparing to extend our reach into a large segment of metal cutting that we previously had not focused on, and I will talk more about these growth initiatives in a minute.
But first, let me quickly review, on Slide 3, the fourth quarter results, which as you know, like other industrial manufacturing companies, we experienced significant headwinds due to COVID-19.
In Q4, the Company reported an organic sales decline of 33% on top of the 2% decline in the prior year quarter, which is the worst quarterly organic decline since the Great Recession in 2008.
All segments reported negative organic growth for the quarter with Industrial declining by 36%, WIDIA 32%, and Infrastructure at 29% compared to negative 4% and 3% for Industrial and WIDIA and infrastructure at 1% growth in the prior year quarter.
Also, all regions were negative with the Americas posting a 39% decline, EMEA 34%, and Asia Pacific 24%.
Remember that Asia Pacific saw COVID-19 related declines earlier than EMEA followed by the Americas.
Adjusted operating expenses declined 18% reflecting our cost control measures.
These actions in the quarter combined with benefits from our simplification/modernization program, significantly mitigated the effect of lower volumes on operating leverage.
Adjusted EBITDA margin for the quarter was 17.7%, a decrease of 330 basis points from 21% in the prior year.
Turning to Slide 4, due to COVID-19, it remains difficult to forecast how our customers as well as our end-markets will be affected.
As a result, we will not be providing an annual outlook for fiscal year '21.
However, I would like to provide some color on what we might expect, especially in the first quarter.
Based on our July sales and the month to month sequential sales pattern throughout Q4, market demand in Q1 would seem so far to be stable or modestly improving from Q4 levels for many end markets and regions.
But as you know, the Company typically sees, on average, an approximately 10% seasonal decline in revenues from Q4 to Q1.
So as customers' continue their reopening process in Q1, the resulting improvement in demand may not be sufficient to fully offset the normal seasonal pattern.
Also note that there can be a lag of a few months from when customers increase production to when we see a corresponding increase in demand.
Beyond Q1, it's helpful to consider customer sentiment, which seems to be that while there are signs of improvement from Q4 to Q1 there is still a lot of uncertainty because of COVID-19 on how these signs would translate to Q2 and beyond.
So while many customers are hopeful for continued improvement, they seem to feel it prudent, due to the uncertainty of COVID-19, the plan for demand to be stable or only modestly improving through the end of calendar year 2020.
But regardless of how end market demand unfolds in fiscal year '21, we will continue our cost control actions to protect margins and liquidity.
Regarding capital expenditures for fiscal year '21.
Capital spending will be significantly reduced by over $100 million to be in the range of $110 million to $130 million for the full year.
The reduction of course is as expected, given we are substantially through the capital spend for the simplification/modernization program.
The benefits of these investments will continue to increase in fiscal year '21 bringing savings since inception to approximately $180 million at fiscal year-end, including total Company headcount reduced by approximately 20% and a rationalized footprint with six fewer plants and more production moving to lower-cost countries.
So we are successfully managing through the current environment, while still advancing simplification/modernization and our other strategic initiatives to drive growth and share gain as markets recover.
For example, on Slide 5, in fiscal year '20 we continue to launch new products with great value propositions for customers in key end market.
As you can see from the customers' feedback they speak of the incredible versatility and performance of Kennametal products.
We are creating tremendous value for our customers and differentiating ourselves from the competition.
These types of innovations fuel growth.
For example, in fiscal year '20, we won a five-year strategic supplier agreement with a leading aircraft OEM and a complete tooling program from a leading wind power bearings manufacturer.
And these are just a few examples of how creating value for customers is driving new business growth.
We've also continued to advance our Commercial Excellence initiatives to gain share when markets recover.
As you can see on Slide 6, we announced yesterday that as of July 1st, we combined Industrial and WIDIA into a single metal cutting organization.
This move will enable us to more effectively direct our commercial resources, products, and technical expertise toward capturing a larger share of wallet, in addition to executing a new brand strategy.
Previously, WIDIA operated to serve a customer need segment within metal cutting that significantly overlap the Kennametal brand positioning.
Our new approach is to reposition the WIDIA brand and portfolio to serve a multi-billion dollar segment within metal cutting that we previously have not focused on.
We expect that this approach will open up a 40% increase in served market opportunity while offering better service and tooling options to our customers.
More specifically, in speaking with our customers, we know they need technical support and high performance tooling, optimized around specific applications; but they also have a need for high quality, fit for purpose tools that are readily available and have the versatility to offer performance across a broad range of applications.
It is this part of the customers' metal cutting share of wallet that we are targeting by repositioning the WIDIA brand and product portfolio, which will leverage our newly modernized manufacturing capabilities for improved delivery and cost performance.
So, from a customer perspective and this is true across all end markets, we are providing customers' access to the Company's full metal cutting suite through both direct and indirect channels, in effect a one-stop shop model to cover a broader range of their metal cutting needs.
I will begin on Slide 7 with the review of our Q4 operating results on both the reported and adjusted basis.
As Chris mentioned, demand trends already at depressed levels from the industrial downturn deteriorated significantly in Q4, driven by the effects of COVID-19.
For the quarter, sales declined 37% year-over-year, in line with the decline seen in April or negative 33% on organic basis to $379 million.
Foreign currency had a negative effect of 2% and our divestiture contributed another negative 2%.
Adjusted gross profit margin of 27.7% was down 790 basis points year-over-year.
The year-over-year performance was primarily due to the effect of lower volumes and associated absorption, partially offset by cost control actions including furloughs, increasing benefits from simplification/modernization and the positive effect of raw materials, which amounted to approximately 140 basis points.
Adjusted operating expenses of $68 million were down 41% year-over-year and decreased to 18% as a percentage of sales.
Although much of this decrease is temporary, it is reflective of our aggressive approach to managing costs in this environment.
EBITDA margin was 17.7%, down 330 basis points from the previous-year quarter.
Taken together, adjusted operating margin of 8.8% was down 700 basis points year-over-year.
The adjusted effective tax rate in the quarter was significantly higher at 51.2% due to the combined effects of geographical mix changes in our taxable income as well as the magnified effect of GILTI on the effective tax rate as we finalized actual full-year taxable income versus estimates.
It's worth noting that our adjusted effective tax rate for the full year was approximately 33%.
We reported a GAAP earnings per share loss of $0.11 versus earnings per share of $0.74 in the prior-year period, which reflects the reduced volume and higher tax rate, partially offset by our cost control actions coupled with restructuring items.
On an adjusted basis, earnings per share was $0.15 per share in the quarter versus $0.84 in the prior year.
The main driver for our adjusted earnings per share performance are highlighted on the bridge on Slide 8.
Effective operations this quarter amounted to negative $0.68.
This compares to negative $0.08 in the prior year period and negative $0.39 in the third quarter.
The largest factor contributing to the $0.68 was the effect of significantly lower volume and associated under-absorption.
This was partially offset by cost control actions, including lower variable compensation as well as positive raw materials of $0.08.
Simplification/modernization contributed $0.14 in the quarter on top of the $0.10 in the prior year.
This brings the total FY '20 simplification/modernization savings to $0.46.
As Chris mentioned, our expectations for FY '21 is that the simplification/modernization benefits will be in the range of $0.80, driven by actions already taken or announced.
Remember, restructuring is a subset of our simplification/modernization program.
In terms of benefits from our restructuring program, the savings from our FY '20 restructuring actions delivered approximately $33 million in run rate annualized savings at the end of FY '20.
FY '21 restructuring actions are expected to contribute an additional $65 million to $75 million of annualized run rate savings by the end of FY '21.
The total year results in detail and the earnings per share bridge can be found in the appendix.
Slide 9 through 11 details the performance of our segments this quarter.
Industrial sales in Q4 declined 36% organically on top of a 4% decline in the prior year period.
All regions posted year-over-year sales declines with the largest decline in the Americas at negative 40% followed by EMEA at 38% and Asia-Pacific at 27%.
The slightly better performance in Asia Pacific reflects more mixed results in the region, with growth in wind energy and improvement in China, slightly offsetting significant contraction in other countries such as India.
From an end market perspective, the weakness in demand remains broad based, with significant declines in transportation and general engineering down 45% and 32% respectively.
This was primarily driven by the demand effects of COVID-19 as well as related customer shutdowns that continued throughout Q4.
Sales in aerospace also experienced a significant decline both year-over-year and sequentially, driven by the associated effects on demand in the supply chain from COVID-19.
Adjusted operating margin came in at 7.7% compared to 18.3% in the prior year quarter.
The decrease was primarily driven by the decline in volume and associated under-absorption, partially offset by reduced variable compensation and other cost control actions, increased simplification/modernization benefits and a 90 basis point benefit from raw materials.
On a sequential basis, adjusted operating margin decreased 540 basis points as lower volumes were partially offset by aggressive cost control actions and lower variable compensation.
Turning to Slide 10 for WIDIA.
Sales declined 32% on top of a negative 3% in the prior year period.
Regionally, the largest decline this quarter was in Asia Pacific down 41%, the Americas 31% and EMEA 28%.
The decline in Asia Pacific was mainly driven by India with its countrywide COVID-19 shut down for approximately half of the quarter.
Adjusted operating margin for the quarter was negative 2.9% due to volume declines, partially offset by lower variable compensation and other cost control actions, a raw material benefit of 220 basis points, and increased simplification/modernization benefits.
Turning to Infrastructure, on Slide 11.
Organic sales declined 29% versus positive 1% in the prior year period.
Other items that negatively affected Infrastructure sales included a divestiture of 4%, FX of 2% and fewer business days of 1%.
Regionally, the largest decline was in the Americas at 39%, then EMEA at 22%, and Asia-Pacific at 14%.
By end market, these results were primarily driven by energy, which was down 47% year-over-year, given the extreme drop in oil prices and the corresponding decline in the U.S. land-only rig count.
General Engineering and Earthworks were down 31% and 17% respectively.
Adjusted operating margin of 12.7% remained relatively stable sequentially, but decreased 280 basis points from the prior year margin of 15.5%.
This decrease was mainly driven by lower volumes and associated under-absorption, partially offset by reduced variable compensation and other cost control actions, favorable raw materials that contributed 200 basis points and benefits from simplification/modernization.
Now turning to Slide 12 to review our balance sheet and free operating cash flow.
Before I review the numbers, like I did last quarter, I would like to emphasize that we view liquidity as extremely important, particularly in these uncertain times.
We will remain conservative to ensure the Company has ample liquidity to weather the current environment as well as continue to execute our strategy.
Our current debt maturity profile is made up of two $300 million notes maturing in February of 2022 and June of 2028 as well as a U.S. $700 million revolver that matures in June of 2023.
At fiscal year-end, we had combined cash and revolver availability of approximately $800 million.
At quarter end, we were also well within our covenants.
Primary working capital decreased both sequentially and year-over-year to $596 million.
On a percentage of sales basis, it increased to 35.4%, a reflection of the significant decline in sales in the quarter.
Net capital expenditures were $38 million, a decrease of approximately $20 million from the prior year, bringing the total capital spend for the year to $242 million as expected.
Our fourth quarter free operating cash flow was $39 million and represents a year-over-year decline, reflecting lower income due to volume and increased cash restructuring cost.
Total free operating cash flow for the full year was negative $18 million.
As mentioned on our last call, while we expected positive cash flow in the fourth quarter, free operating cash flow for the full year was projected to be slightly negative, given the level of capital expenditures and cash restructuring charges.
In addition, we paid the dividend of $17 million in the quarter.
Full balance sheet can be found on Slide 20 in the appendix.
Turning to Slide 13.
This slide shows how certain factors are expected to affect earnings per share and free operating cash flow during each half of FY '21 on a year-over-year basis.
As I mentioned earlier, we expect increased simplification/modernization benefits of approximately $80 million in FY '21.
The accumulated benefits will increase as we move through the year.
As we think about the temporary cost control actions that we've announced in June, they will generate a savings of $10 million to $15 million per quarter in the first half of FY '21 relative to the first half of FY '20.
However, as we look at the second half of FY21, the temporary cost control actions implemented in FY '20 and the reversal of variable compensation which we currently do not expect to repeat, will create a year-over-year headwind.
As you'd expect from us, we will remain diligent in managing our cost and we will take the appropriate actions if markets continue to be challenging.
Based on current tungsten spot prices, raw materials will be a positive in the first half due to the headwinds we faced in the beginning of FY '20 and will be roughly neutral for the rest of the year.
Depreciation and amortization will step up to a range of approximately $130 million to $140 million compared to approximately $120 million in FY '20.
We currently expect our full year tax rate in FY '21 to be similar to the 33% adjusted effective tax rate we saw in FY '20, but it could fluctuate significantly in any given quarter depending on the effects of geographical mix and the sensitivity to lower pre-tax income.
However, should trends in earnings begin to improve in the second half, particularly in the U.S., our tax rate should improve.
As we get back to a more normalized environment, we still expect our long-term effective tax rate to be in the low '20s.
Regardless of the effective tax rate, we expect cash taxes in FY '21 to be approximately $10 million less than the $37 million paid in FY '20.
In regard to free operating cash flow, capital expenditures will be significantly lower versus last year, as Chris mentioned, by approximately $120 million.
However, I want to note that the total spend for the year will be weighted to the first half, mainly due to the timing of cash payments associated with machine deliveries.
Primary working capital will depend in part on how market conditions evolve over the next several quarters.
For the first half of FY '21, although we will reduce inventory levels based on current market conditions, the net accounts receivable and accounts payable will likely still be a working capital use.
In the second half, assuming market conditions improve, we would expect working capital to be use as well given the significantly depressed accounts receivable balance in Q4 of FY '20 and reduced accounts payable from decreased capital spending in FY '21.
We will continue to be diligent on inventory, while ensuring that we do not compromise on customer service, which is essential for our high-volume, high-margin products.
Lastly, cash restructuring charges are expected to be a negative factor year-over-year in both the first half and second half due to our accelerated restructuring activities announced in June.
We currently expect cash restructuring charges to be $25 million to $35 million higher in FY '21 with the majority of this increase in the first half.
Looking ahead to fiscal year '21, we will continue to focus on the things that we can control so that we manage through the current market headwinds and prepare the company to outperform during the recovery.
We'll continue our approach to aggressively manage costs and aligning production to demand while operationalizing our modernization investments for incremental benefits.
Second, we are committed to maintaining solid liquidity with a focus on optimizing cash flow through lower capital spend, working capital management, and cost control actions.
Finally, we'll continue to pursue our strategic growth initiatives so that we can position the Company for profitable growth and share gain as end markets recover and to achieve our adjusted EBITDA profitability target when sales reach a top line range of $2.5 billion to $2.6 billion.
| kennametal q4 adjusted earnings per share $0.15.
q4 adjusted earnings per share $0.15.
q4 loss per share $0.11.
q4 sales $379 million versus refinitiv ibes estimate of $399.8 million.
effects of covid-19 were felt in every region during quarter & created challenging environment.
expect fy21 to present ongoing macroeconomic challenges.
as of today, all co's production facilities are operating.
company's primary end markets remains limited.
will not be issuing annual fy21 outlook outside of capital spending.
fy capital spending is expected to be $110 million to $130 million.
|
We are pleased to be here today to provide an update on our progress after the second quarter of 2020.
Hopefully, everyone has had a chance to review the news release we issued earlier today.
These risks include those related to the impact of the COVID-19 pandemic and measures by governmental or regulatory authorities to combat the pandemic on our business and operations as well as the business and operations of the consumer, our customers, suppliers, business partners and labor force.
These risks also include those detailed in our various filings with the SEC, which may be found on our website as well as in our news releases.
The use of the term PPE relates to our personal protection garment business, including face masks, face coverings and gowns.
Also, please note that unless otherwise stated, all prior year comparisons are to 2019 results that have been rebased to reflect the exited C9 Champion program at Target and the DKNY intimates license.
With me on the call today are Gerald Evans, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer.
This quarter, I have never been more proud of this organization and our employees' ability to rise to the occasion and meet challenges to deliver exceptional performance, even in the midst of a devastating pandemic.
Despite the economic disruption of COVID-19 around the globe, Hanesbrands delivered strong second quarter results, driven by better-than-expected performance in both our apparel and our new PPE businesses.
For the quarter, revenue increased 6%, operating profit increased 41%, earnings per share increased 58%, and we generated $65 million of operating cash flow.
Our strong second quarter performance in one of the most challenging retail and consumer environments in decades underscores the strength of our brand portfolio, the agility of our organization, the scale of our company-owned supply chain and the cash-generating power of our business model.
In my view, there are four key highlights in the quarter that speak to the strength of our underlying model.
And our ability to grow this business going forward.
First, our apparel business outperformed; second, the organization quickly pivoted to create a new PPE business; third, we generated positive cash flow; and fourth, we ended the quarter with $1.8 billion of liquidity.
Touching on our apparel business performance, which excludes PPE, our strong second quarter results were meaningfully ahead of our base case scenario in each of our three main segments: U.S. Innerwear, U.S. Activewear and international.
Point-of-sale trends improved sequentially through the second quarter in all of our key geographies, with the positive momentum carrying into July, as consumers settled into new routines, stimulus initiatives were rolled out, and retail doors reopened around the world.
In fact, point-of-sale in our U.S. Basics and Champion businesses in May and June exceeded pre-COVID levels.
In U.S. Innerwear, point-of-sale trends accelerated through the quarter.
Moving from down 29% in April to up 8% in May and up 11% in June.
We experienced strong momentum in our Basics business with mid-teens point-of-sale growth, yielding more than 300 basis points of market share gains in the quarter.
Within our Intimates business, point-of-sale returned to essentially flat in June and improved to up 3% in July, regaining its pre-COVID momentum as the mid-tier and department store channels reopened.
We experienced a similar trend in our Champion business within the U.S. Activewear segment.
In the quarter, Champion point-of-sale accelerated from down 14% in April to up nearly 40% in May and up more than 70% in June as consumers continued to actively seek out the brand, particularly within the online channel.
With store reopenings under way in our International business, we saw monthly progression within our Innerwear businesses in Europe and Australia as well as within our Champion businesses in Europe and Asia.
Strength in our Online business continued globally in the second quarter, with sales up more than 70% over prior year.
We experienced strong growth across our key regions in the quarter, with triple-digit online growth at some of our largest customers and nearly 200% growth on our newly enhanced champion.com website.
Within our Apparel business, which excludes PPE, online represented over 30% of total sales in the quarter.
We are encouraged by the strong POS trends, which we believe points to the improving shipment and revenue trend in our Apparel business as we move through the second half and into next year.
Turning to the second highlight of the quarter.
Our newly created PPE business generated over $750 million of revenue.
This was well ahead of our initial expectation as we benefited from additional government contracts for both mask and reusable gowns, and we were able to fulfill demand for a number of businesses.
We recently launched our consumer PPE facemask business at retail.
We expect to generate more than $150 million of additional PPE revenue in the second half of the year.
Looking forward, we continue to believe this consumer product line represents a meaningful ongoing business opportunity.
The third highlight of the quarter was cash flow, as we generated $65 million of cash flow from operations.
Year-to-date, operating cash flow was $40 million better than last year.
With the majority of retail doors closed for half the quarter, this performance speaks to the cash-generating power of our model and the discipline of the organization to aggressively manage operating cost and working capital.
We continue to expect to generate positive operating cash flow for the second half of the year.
And finally, in terms of liquidity, we said on our last call that our focus in this environment was on managing cash while positioning the company to be able to take advantage of opportunities.
This focus allowed us to capture stronger-than-expected demand for our products in the quarter as well as maintain our dividend.
We ended the quarter with $1.8 billion of liquidity, which we believe provides us ample capital to maximize our operating flexibility and positions us to grow the business going forward.
Looking ahead, there remains uncertainty about the extent and pace of reopening economies in the midst of COVID-19, and we are planning accordingly.
Absent any rollbacks of store reopenings, we expect year-over-year revenue trends in our Apparel business to improve sequentially in the second half.
Our core brands are healthy.
We are gaining market share.
Point-of-sale trends remain strong.
Our back-to-school and holiday plans are set and initial spring 2021 bookings of Global Champion are up meaningfully over prior year in each region.
We believe the positive underlying trends in our business, both prior to and during the pandemic, positions us for growth in a post pandemic environment.
So in closing, we delivered a strong quarter in a very challenging global environment.
Momentum is building in our Apparel business, and we believe we have ample liquidity.
We believe our diversified global business model continues to position us to drive growth and take advantage of opportunities over the next several years.
I've enjoyed getting to know you and exchanging points of view over the years.
To the Hanesbrands team, it's been an honor to be part of the HBI family for so many years.
Together, we built a company and successfully expanded it to be a global leader in our categories.
These are things that could only be achieved by the determined efforts of 60,000 team members around the world pulling together.
I look forward to watching Hanesbrands continue to prosper under the leadership of Steve Bratspies in the years ahead.
Our strong second quarter results, including double-digit growth and adjusted and GAAP EPS, underscore the earnings and cash flow leverage, our vertically integrated business model can generate.
Sales for the quarter were $1.74 billion, which includes $752 million of PPE revenue.
As compared to last year, sales increased 6% on a reported basis and 7% on a constant currency basis.
Excluding PPE, Apparel revenue declined approximately 40% over prior year.
This is well ahead of our expectation and accounted for more than half of the upside in the quarter relative to our base case scenario.
Adjusted gross margin of 37.9% decreased approximately 180 basis points over the last year.
Approximately 50 basis points of the decline was the result of deleverage from minimum royalty payments in our sports license business.
The remainder of the decline was driven by COVID related door closings, which had a greater sales impact on our core international and our Champion and U.S. Activewear businesses.
As a reminder, these businesses carry higher gross margins, but they also carry higher SG&A expense.
Adjusted operating margin for the quarter increased approximately 430 basis points over prior year to 17.5%.
Higher sales drove meaningful SG&A leverage, which was further benefited by our temporary cost savings initiatives.
Interest and other expense declined $8 million over prior year to approximately $47 million due primarily to lower average rates in the quarter.
Restructuring and other related charges were approximately $63 million in the quarter.
Our planned supply chain restructuring actions and program exit costs, which remain unchanged, accounted for $11 million of these costs.
The remaining approximately $52 million are nonrecurring COVID related costs in the quarter, which are noncash.
These include a $20 million intangible asset write down, $11 million of bad debt expense and approximately $21 million of inventory adjustments primarily related to canceled orders from retailers for seasonal product we already made.
The tax rate of 17.8% was higher than our expectation as better-than-expected performance in U.S. Innerwear and PPE resulted in a higher mix of U.S. profit in the quarter.
And adjusted and GAAP earnings per share increased 58% and 12% over prior year to $0.60 and $0.46, respectively.
Now let me take you through our segment performance.
From a high level, all of our segments experienced a similar progression through the quarter.
We saw significant year-over-year pressure in April, as regions sheltered in place.
This was followed by sequential improvement in May and June as consumers shifted to open channels, including online and closed stores began to reopen.
For the quarter, U.S. Innerwear sales increased approximately 67% over the prior year, while the operating margin expanded nearly 550 basis points to 27.8%.
Both revenue and operating profit exceeded our base case scenario, driven by better-than-expected sales in both our core Innerwear and new PPE businesses, our significant fixed cost leverage from higher sales and by lower SG&A expense due to our temporary cost reduction initiatives.
Adjusting for sales from our PPE business, core U.S. Innerwear performed significantly better than our base case scenario.
Core revenue declined approximately 27% over prior year, with Basics down 18% and Intimates down 52%.
These better than base case results were driven by the strong performance of our Basics and Intimates businesses, within the channels that remain open as well as the reopening of mid-tier and department store channels late in the quarter.
On the back of improved point-of-sale during the quarter, we have seen booking trends in both Basics and Intimates strengthen through July.
Turning to U.S. Activewear.
Revenue declined 52% over prior year, which was better than our base case scenario.
The year-over-year decline was due to COVID related door closures as well as school closings and fewer group events that significantly impacted our Sports Apparel and Printwear businesses.
As expected, Activewear's operating margin declined over prior year.
Deleveraged from lower sales, deleveraged from minimum royalty payments in our Sports License business.
And our decision to hold Champion marketing investment flat over prior year more than offset our temporary cost savings initiatives.
While Champion experienced headwinds due to COVID related channel closures, we were encouraged by the accelerating point-of-sale trends through the quarter and a continued POS strength in July.
We believe this underscores the consumers' ongoing desire for the brand and points to improving revenue trends going forward.
Switching to our International segment.
Revenue is well ahead of our base case scenario.
As compared to last year, revenue declined approximately 20% on a reported basis and 17% on a constant currency basis.
Adjusting for PPE sales, core International revenue declined 44% as compared to the prior year.
The better than base case performance in our core International business was driven by online as well as the performance of our company-owned stores as they reopened.
The International segment's operating margin of 17.3% increased 310 basis points over prior year, driven by lower SG&A costs as we benefited from various temporary cost savings initiatives.
Touching briefly on our Global Champion business.
Excluding C9, revenue declined 46% over prior year with declines in both our domestic and international businesses.
Like other parts of our business, Global Champion was hindered by closures of our company-owned stores and channel partner doors early in the quarter.
As doors reopened, Global Champion trends improved through the quarter with momentum continuing through July, reinforcing our expectation for sequential improvement in Champion sales through the balance of the year.
Turning to cash flow and the balance sheet.
We delivered a strong cash flow performance in the quarter, generating $65 million of cash flow from operations.
Year-to-date, operating cash flow was approximately $40 million above last year.
The strong performance was driven by previously planned inventory reduction efforts, temporary cost savings initiatives, continued working capital discipline and timely actions taken within our manufacturing network.
With respect to our balance sheet, inventory declined approximately $265 million or 12% compared to last year.
Leverage was 3.4 times on a net debt to adjusted EBITDA basis, down from 3.5 times last year.
And we ended the quarter with approximately $1.8 billion of liquidity, which we believe provides us with significant cash capital cushion in this uncertain environment.
Due to the uncertainty and unpredictability of the COVID-19 pandemic as well as the current lack of visibility in our business environment, we are not providing third quarter or full year 2020 guidance at this time.
However, I will like to share a few thoughts to help frame some of the key levers within our business model.
Looking at our Apparel business, which excludes PPE, revenue declined approximately 40% over prior year in the second quarter.
Absent any rollbacks of store reopenings, we currently foresee an environment for the year-over-year decline in our Apparel business to improve sequentially in both this third and fourth quarter.
With respect to our PPE business, we currently expect more than a $150 million of PPE revenue in the second half, the vast majority of which is expected in the third quarter.
While we continue to tightly manage SG&A expenses, the amount of temporary cost savings from the second quarter are currently not expected to repeat in the second half.
Combined with a lower overall unit and sales volume, we believe it is reasonable to assume year-over-year pressure on margins in both this third and fourth quarters.
Now with respect to our tax rate, we currently expect a rate of approximately 17.5% for the second half.
And in terms of cash flow, we continue to expect to generate positive cash flow in the second half of the year.
So in closing, we delivered strong second quarter results.
Our balance sheet is healthy, and we believe we have ample liquidity.
While there remains a significant amount of uncertainty, we are encouraged by the positive underlying momentum in our Apparel business, which we believe points to a return to pre-COVID levels in our business once the pandemic has passed.
| compname reports q2 adjusted earnings per share $0.60.
q2 adjusted earnings per share $0.60.
q2 gaap earnings per share $0.46.
q2 sales $1.74 billion versus $1.76 billion.
quarter-end liquidity of approximately $1.8 billion.
incurred about $63 million in both planned restructuring actions and additional covid-related costs in q2.
will not provide quarterly and fy performance guidance until visibility of pandemic's effect on global economies improves.
decline in apparel sales in q2 was better than co's base-case scenario.
anticipates sequential improvement of sales declines q3 and q4 for apparel sales.
estimates it could sell more than $150 million of protective garments in h2 2020, primarily in q3.
expects to generate positive cash flow in second half.
expects foreign currency exchange rates to reduce net sales and operating profit in 2020.
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I'm Rubun Dey, Head of Investor Relations.
And with me to talk about our business and financial results are Horacio Rozanski, our President and CEO, and Lloyd Howell, Executive Vice President, CFO and Treasurer.
During today's call, we will also discuss some non-GAAP financial measures and other metrics, which we believe provide useful information for investors.
We include an explanation of adjustments and other reconciliations of our non-GAAP measures to the most comparable GAAP measures in our third quarter fiscal year 2021 slide.
We are now on Slide 5.
Today, Lloyd and I will take you through our third quarter results and the dynamics that drove them.
And we will put the results in the context of the successful culmination of our three-year investment thesis and the strength of our business in the near and long term.
Our revenue grew more slowly than expected.
Conversely, our bottom line results, profit margins and cash flow are excellent and ahead of expectations.
Since the beginning of our fiscal year, we have described three macro environmental factors that created uncertainty about our second half, the outcome of the election, the status and outlook for the federal budget, and the course of the COVID-19 pandemic.
Let me talk specifically about how those are playing out on the demand front, on the supply front and the impact on revenue and profits.
Underlying demand for our services and solutions remains quite strong.
In the third quarter, we saw delays in some procurements in the intelligence market, largely due to the pandemic.
And in the civil market, we saw movement to the write on awards and even some pullback on funding, which we believe is due to the turmoil surrounding the presidential election.
These shifts in procurements and funding were greater than we anticipated and greater than we normally experience during a change in administrations.
We expect these dynamics to be temporary with a return to more typical market rhythms over the next six to nine months.
Secondly, on the demand side.
I'll note the reduction in billable expenses in comparison to our third quarter last year.
We have said previously that billable expenses are unpredictable and not a significant source of profitability.
The third quarter drop-off was partially due to COVID and is another dynamic that may last for a couple more quarters.
Turning now to the supply side.
There were two factors in play.
The first was a fast return to more historical productivity rates.
During the first half, we spoke of meaningful jump in productivity because of high retention and low use of paid time off.
We always knew that was temporary.
Our expectation was that we would see a gradual shift to typical patterns as COVID vaccines rolled out.
Instead, we saw a quick snapback to more normal, albeit lower productivity levels in November.
Early indication is that our fourth quarter productivity levels may remain closer to historical norms.
Also in the third quarter, the combination of lower-than-desired recruiting rates and the strategic divestiture of a small defense contract led to a sequential decline in headcount.
As productivity declined in the first half, we were comfortable with slower headcount growth.
But with the snap back to normal levels, we need to accelerate recruitment.
We have already ramped up and expect to see improvement in three to six months.
Shifting to our other key metrics.
Let me highlight the strength of our margins, bottom line and cash flow.
While the reduction in billable expenses helps margins, our over performance at the bottom line and in cash flows is primarily driven by our strong execution of the business.
Despite the challenges of the past year, our team has remained focused on the fundamentals that drive our performance, high-quality client delivery, smart capture of new business, targeted cost management and continued investment in our differentiators, especially our people.
As a result, we have made our business leaner and more competitive, enhanced our brand in the market for talent and doubled down on our growth drivers, all while delivering outstanding value to shareholders and strengthening our balance sheet.
We expect both the headwinds and tailwinds I just described to be with us for the next few months, and that is reflected in our updated full-year guidance, which Lloyd will talk through in detail.
In addition, noting our confidence in the business, we are pleased to announce a $0.06 increase in our quarterly dividend and an increase in our share repurchase authorization, which will continue to support our ongoing share repurchase program.
We are proud that through all the challenges of COVID, social unrest, natural and man-made disasters, budget uncertainty and the most difficult election and postelection period in our lifetimes, Booz Allen is on track to deliver another year of growth and value creation.
And we also know we have some work to do.
As the fourth quarter gets under way, the leadership team has prioritized four specific areas.
Converting a rich opportunity pipeline into awards and revenue as quickly as the market permits, ramping up recruiting to take full advantage of growth opportunities, continuing to reshape our intelligence portfolio to drive growth and maximizing value creation from our very strong balance sheet by deploying capital against strategic opportunities such as a recent investment in Tracepoint and other levers of shareholder value creation.
After that summary of our near-term performance and priorities, let me take the discussion up a level and put it in a fuller context.
My leadership team and I are confident and optimistic about the direction of our business and the meaningful difference our people continue to make in support of client missions.
COVID vaccinations are under way, a federal budget is in place, and the new administration has hit the ground running.
We view these as important stabilizing forces in the overall economy and in our market.
The President has nominated an experienced team of leaders to execute the business of government.
They have clear agendas and understand the value of using technology to accelerate mission.
Inside Booz Allen, even as we focus on day-to-day operational excellence, we continue to plan for the long term.
Our overriding objective is to expand and strengthen our unique market position at the intersection of technology, mission and consulting.
We do that by staying close to our clients, anticipating what they will need next and investing in the right talent and capabilities to advance missions.
The investments we've made to grow and reshape our portfolio over many years, are both driving today's performance and bolstering our prospects for the future.
For example, we believe we are the largest provider of artificial intelligence services to the federal government with 60% year-over-year revenue growth in our AI services portfolio, albeit from a small base.
This is an addressable market that we expect to increase tenfold in the next five years and we are in the pole position to shape it.
We also support key federal agencies that form the epicenter of US cybersecurity across the civil, defense and intelligence domains.
With our ranking by Frost & Sullivan as the leading provider of cybersecurity services in North America, we view ourselves as uniquely positioned to both help the nation and capture opportunity in this critical area.
The new administration is already signaling renewed focus on cyber in the wake of the solar winds attack.
We're also building scale and depth in 5G and in the next-generation tech stack.
A 5G network requires the integration of hardware, software, IoT devices, security, analytics and emission insights, which plays to our strengths and our brand in the federal market.
We're standing up a 5G lab to support research and development.
We have partnerships with leading 5G technology companies and we are prototyping integrated capabilities.
These key technology areas and others from edge computing to digital warfare to cloud solutions and open data platforms, to immersive technology and human performance.
They all inform our thinking as we develop our next strategy.
We continue to make good progress and look forward to sharing our strategy with you later this year, along with an updated multi-year financial outlook.
I'll make one final important point before giving the floor to Lloyd.
With less than one-quarter remaining in the three-year time horizon of our investment thesis, we are on track to deliver greater than 80% growth in ADEPS against an already ambitious 50% goal we originally set in June of 2018.
Even in the most turbulent times, our firm has translated its differentiated market position into high-quality performance and shareholder value, as expected of an industry leader.
On the strength of this performance and with our purpose and values as a guide, we will continue to succeed and strengthen this institution over the short, medium and long term.
Lloyd, over to you for additional perspective on the third quarter and our outlook ahead.
As we approach the end of our 2021 fiscal year, a year of unprecedented challenge, we are proud of how well our people have consistently executed on our clients' most important missions.
As Horacio mentioned earlier, in outlining our 2021 annual operating plan, we identified three major sources of uncertainty, the November election, the budget outlook and the COVID-19 pandemic.
After an exceptional top-line performance in the first half, helped by unusually strong staff utilization, we expected slower growth in the second half as PTO trends began to normalize.
We also anticipated the potential for a slowdown in award activities following the November presidential election.
We factored these elements into the annual guidance we provided at the end of the second quarter.
However, we did not correctly anticipate the timing and magnitude of the top-line impact of those dynamics.
Our cost management efforts to date enabled us to hold the line at adjusted EBITDA.
I'll now run through our third quarter results.
Revenue and revenue excluding billable expenses increased 3% and 6.2%, respectively, compared to the same quarter last year.
Revenue growth was primarily driven by solid operational performance, indicative of continued demand from our clients, tempered by lower billable expenses largely attributable to COVID.
Let me give you more color at the market level, starting with the demand side.
Revenue in defense grew 6% year-over-year, against a challenging third quarter comparable.
I'd note that revenue excluding billable expenses, continued to grow strongly, but our defense business carries the bulk of Booz Allen's exposure to billable expenses.
These were lower than expected in the third quarter due to less travel during the pandemic, and they were elevated in the prior year period due to significant materials purchases on aircraft programs.
As Horacio mentioned, underlying long-term demand for our services and solutions remain strong, but we did experience lower-than-expected starts on existing defense contracts and a few large awards slipped to the right.
We expect these to be resolved over the next few months.
In civil, revenue growth was 7% in the third quarter.
Here, we believe the chaotic postelection period shifted some awards to the right.
In addition, there was a pause on a large cyber program due to funding availability.
We expect the pause to have a larger impact on the fourth quarter.
But given that it is a critical cybersecurity program for the customer, we believe work will ramp up again longer term.
Lastly, I would note that we expect increasing demand in civil as the new administration starts implementing its priorities.
Revenue from our intelligence business declined 3% in the third quarter.
Our focused efforts to reshape that portfolio continue, and we expect to see stronger performance in FY '22.
Lastly, Q3 revenue in global commercial, which accounted for approximately 3% of our total revenue, declined 35% year-over-year.
The drop was driven by our international business based in part on market dynamics, but also due to our own decision to shift our strategic focus to our cyber business in the US in the port of that, we made a minority investment in Tracepoint, a digital forensic rand incident response company serving clients in the public and private sectors.
We are excited to partner with Tracepoint and see a significant opportunity to cross-pollinate with Booz Allen's own digital forensics expertise.
That covers the demand side.
Now let me step through the supply side dynamics as well as our expectations for the rest of the year.
In the first half of the year, given the limited ability to travel during the pandemic, our employees took very little time off from work.
We encouraged our people to take PTO in the interest of their personal health and expected a gradual return to normal productivity levels as a result.
Instead, PTO utilization returned back to historic levels in November, and we believe that trend may continue.
We note that the timing around the rollout of a COVID vaccine could have a material influence on PTO utilization.
Regarding headcount, while attrition remained low, we did not add as much headcount in the third quarter as we had planned, in part due to a strategic contract divestiture.
Our hiring needs were somewhat lessened in the first half of the year due to unusually strong staff productivity, but we intend to pick up the pace on recruiting.
This will take us some time to address, but we expect to be back on track by early next year.
We ended the quarter with 27,566 employees, an increase of 390 or 1.4% year-over-year.
Excluding the impact of the 110-person workforce transferred as a part of the army-related contract divestiture, we would have ended the quarter with 1.8% headcount growth year-over-year.
On Slide 7, you'll see that total backlog increased 6.1% to $23.3 billion.
Funded backlog was up 2.8% to $3.6 billion, unfunded backlog grew 12.5% to $6 billion and price options rose 4.3% to $13.7 billion.
Our book-to-bill for the quarter was 0.3 times, and our last 12 months book-to-bill was 1.2 times.
The relatively low quarterly number is attributable to two factors.
First, seasonality following our historical pattern, and second, the aforementioned delay in awards.
Note that we continue to expect volatility in quarterly book-to-bill as we pursue larger and more technically complex bids.
Moving to the bottom line.
Adjusted EBITDA for the third quarter was $205 million, up 7.7% year-over-year.
Adjusted EBITDA margin was 10.8%.
Adjusted EBITDA performance was driven by strong execution across the portfolio and ongoing prudent management of discretionary expenses.
Adjusted EBITDA margin was also impacted by lower billable expenses.
Third quarter net income and adjusted net income grew 29% and 28% year-over-year to $144 million and $145 million, respectively.
Diluted earnings per share and adjusted diluted earnings per share each increased 30% to $1.03 and $1.04, respectively.
The increases were due to solid operating performance and the release of a large tax reserve stemming from our previous Aquilent acquisition in fiscal year 2017.
This reserve release was factored into our previous guidance.
We generated $233 million in operating cash during the third quarter, an increase of 133% over the prior year.
Cash ended the quarter at $1.3 billion.
Exceptional operating cash flow was driven by the overall growth of the business, continued strength in collections and reduced payables attributable to cost management.
These first three quarters of cash generation represent our strongest year-to-date performance since our IPO, a truly phenomenal result.
Capital expenditures for the quarter were $16 million.
This year, we continue to prioritize technology and tools that enable a virtual work environment.
Also, we are nearing the implementation of our next-generation financial system, which will support the company's growth into the future.
During the quarter, we repurchased $27 million worth of shares at an average price of $83.76 per share.
Including dividends and the minority investment, we deployed a total of $142 million in the third quarter.
As Horacio noted, our share repurchase authorization has expanded.
As of January 26, with the $400 million increase, we now have a total authorization of $747 million.
In addition, the company has authorized a dividend of $0.37 per share payable on March 2 to stockholders of record on February 12.
With $1.3 billion in cash on hand, we continue to view our balance sheet as a strategic asset.
We remain committed to preserving and maximizing shareholder value through patient, disciplined capital allocation.
We see ourselves as well positioned to act quickly on opportunities as they arise.
Now on to our updated guidance.
Please move to Slide 9.
While revenue growth was slower than expected, we are proud of our team's ability to manage the business and gain efficiencies amid the many macro environmental challenges of this fiscal year.
Margins, ADEPS and cash flow are all trending above our expectations.
In our view, this speaks to the strength and resilience of the Booz Allen business model.
In the fourth quarter, we are focused on fundamentals.
We plan to continue investing in our people and our long-term growth initiatives.
We will continue to recruit aggressively to sustain long-term organic growth and intend to reward our people for their strong execution through the first three quarters.
We are also nearing implementation of our new financial system, which will further support our business leaders.
Our revised guidance reflects these efforts, in addition to the third quarter performance and trends I just outlined.
Let me run through the numbers.
For the full fiscal year, revenue growth is now expected to be in the range of 4.8% to 6%.
Our revised range reflects $150 million to $250 million of revenues tied to the second half uncertainties we outlined earlier, the election, the budget and COVID-19.
They break down as follows.
Temporary programmatic shifts of $50 million to $100 million, $50 million of risk tied to a material incremental step down in staff utilization, and lastly, lower than forecast billable expenses of $50 million to $100 million, largely from lower pandemic-related travel.
For your models, we also note that fourth quarter working days will have a difficult year-over-year comp because last year was a leap year.
We expect adjusted EBITDA margin for the year to be in the mid-to-high 10% range.
We have raised the range for adjusted diluted earnings per share by $0.10 to between $3.70 and $3.85.
On operating cash, we have raised the range by $25 million to between $625 million and $675 million for the full year.
And finally, our outlook for capital expenditures is unchanged at $80 million to $100 million.
We have confidence in exceeding 80% ADEPS growth over the three-year period.
This growth is supported by 6% to 9% annualized revenue growth since fiscal year 2018 at mid-to-high 10% EBITDA margins in fiscal year 2021.
We also are proud of our option value initiatives over the period and our progress toward $1.4 billion in capital deployment.
I am pleased to say that we are well positioned to exceed our three-year ADEPS growth goal organically while, retaining the strongest balance sheet in the history of the company in spite of the turbulence of the last three years.
As we move toward our next investment thesis, I believe that the people of Booz Allen will rise above the challenges that emerge in order to continue meeting the high standard our shareholders have come to expect.
We remain confident in the long-term trajectory of the business and focus on maintaining our role as the industry leader.
Operator, please open the lines.
| quarterly diluted earnings per share of $1.03.
expects adjusted earnings per share growth to exceed three-year investment thesis ending with fiscal year 2021.
qtrly adjusted diluted earnings per share of $1.04.
adjusts full year guidance at the top and bottom line.
increased quarterly dividend by $0.06 to $0.37 per share.
sees for fiscal 2021 revenue growth in 4.8 to 6.0 percent range.
sees fiscal 2021 adjusted diluted earnings per share $3.70 - $3.85.
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Today, we will review the fourth quarter and full year results of 2020.
With me on the phone today are Norman Schwartz, our Chief Executive Officer; Ilan Daskal, Executive Vice President and Chief Financial Officer; Andy Last, Executive Vice President and Chief Operating Officer; Annette Tumolo, President of the Life Science group; and Dara Wright, President of the Clinical Diagnostics group.
Our actual results may differ materially from these plans and expectations and the impact and duration of the COVID-19 pandemic is unknown.
We cannot be certain that Bio-Rad's responses to the pandemic will be successful, that the demand for Bio-Rad's COVID-19 related products is sustainable or that Bio-Rad will be able to meet this demand.
Our remarks today will also include references to non-GAAP net income and non-GAAP diluted income per share, which are financial measures that are not defined under generally accepted accounting principles.
Now before I begin the detailed fourth quarter and full year discussion, I would like to ask Andy Last, our Chief Operating Officer, to provide an update on Bio-Rad's operations in light of the current pandemic-related environment that we are experiencing globally.
I'd just like to take a few minutes to review our current state of operations around the world.
As an opening comment, I would like to recognize the tremendous contributions and flexibility of our employees around the world during 2020.
Their response to the shifting needs of operating in a pandemic have been truly exemplary.
So at the onset of the pandemic, we set ourselves three key areas of focus to manage through this challenging period, which we continue with into 2021.
As a quick reminder, these are; the ongoing safety of our employees, continuing manufacturing operations to ensure product supply and support of our customers, and making sure we continue to make progress on our cost strategies.
As we close out 2020 and entered into 2021, we've now achieved a steady state for operating in the pandemic reflecting employee safety, work from home and adoption of company and local policy and practices.
Overall, we have experienced minimal internal transmission of COVID across the company and where we have suspected cases, have found the internal testing of employees in the U.S., using our droplet digital PCR platform, to be very valuable in maximizing productivity.
As we enter 2021, we are well positioned to meet market and customer demands driven by the pandemic and our manufacturing sites, and R&D is operating effectively.
In addition, our commercial organization has deployed digital tools where appropriate to minimize onsite visits to only the essentials required to keep customers up and running on our platforms.
So with that brief overview, I will pass it back to Ilan.
And now would like to review the fourth quarter and full year results for 2020.
Net sales for the fourth quarter of 2020 were $789.8 million, which is a 26.5% increase on a reported basis, versus $624.4 million in Q4 of 2019.
On a currency neutral basis, sales increased 24.4%.
The fourth quarter sales included $32 million of damages award related to intellectual property litigation with 10x Genomics, covering the period between 2015 and 2018.
Excluding the $32 million, the fourth quarter year-over-year currency neutral revenue growth was 19.4%.
The fourth quarter year-over-year revenue growth also benefited from an easy compare of about $10 million revenue carryover to Q1 of 2020, related to the December 2019 cyberattack.
On a geographic basis, we experienced currency neutral growth across all three regions.
We saw strong demand for products associated with COVID-19 testing and related research.
Generally, we are seeing most academic and diagnostic labs now running between 70% and 90% capacity, which is similar to what we saw in Q3.
We estimate that COVID-19 related sales were about $132 million in the quarter.
Sales of Life Science group in the fourth quarter of 2020 were $428.5 million, compared to $242 million in Q4 of 2019, which is a 77.1% increase on a reported basis and a 73.9% increase on a currency neutral basis, and it was driven by our PCR product lines, as well as strong performance in the biopharma segment.
The fourth quarter revenue also included a $32 million damages award related to intellectual property litigation.
Excluding that $32 million damages award, the currency neutral revenue growth was 60.9%.
The year-over-year growth in the fourth quarter was across all of the Life Science key product areas.
Process media which can fluctuate on a quarterly basis so strong double-digit year-over-year growth in the quarter, over the same quarter last year.
Excluding process media sales and the $32 million damages award, the underlying Life Science business grew 64.6% on a currency neutral basis versus Q4 of 2019.
Growth in the overall Life Science segment was offset by continued softness in academic research demand, as these labs around the globe are still operating below capacity.
However, we believe that some of the demand was associated with larger than normal end of year budget release.
On a geographic basis, Life Science currency neutral year-over-year sales grew across all regions.
Last month, the FDA granted an EUA for our COVID qPCR assay kit, which runs on Bio-Rad's existing CFX PCR platforms, as well as qPCR systems from other providers.
The assay kit is a multiplex test that targets two separate regions in the viral genome, to ensure greater sensitivity and tolerance to potential mutations.
In addition, earlier today, we received an EUA approval from the FDA for COVID FluA and FluB qPCR syndromic multiplex test.
These tests, which allows discrimination between each of these three different viruses, also runs on Bio-Rad's CFX PCR platforms, as well as qPCR systems from other providers.
Sales of Clinical Diagnostics products in the fourth quarter were $359.6 million compared to $379 million in Q4 of 2019, which is a 5.1% decline on a reported basis and a 6.6% decline on a currency neutral basis.
During the fourth quarter strength in our quality controls products was offset by weakness across the rest of the diagnostics portfolio.
Resurgence of COVID cases during the fourth quarter, the impact of the recovery of routine testing trends and the elective surgeries.
On a geographic basis, the Diagnostics group was relatively flat in the Americas, but posted declines in the other regions.
The reported gross margin for the fourth quarter of 2020 was 58.3% on a GAAP basis and compares to 52.9% in Q4 of 2019.
The current quarter gross margin benefited mainly from better product mix, lower service costs, higher manufacturing utilization, as well as $23 million [Phonetic] gross margin benefit, associated with the 10X Genomics damages award.
Amortization related to prior acquisitions, recorded in cost of goods sold was $4.6 million compared to $4.5 million in Q4 of 2019.
SG&A expenses for Q4 of 2020 were $219.1 million or 27.7% of sales compared to $214.2 million, or 34.3% in Q4 of 2019.
The year-over-year SG&A expenses benefited from ongoing cost savings initiatives and lower discretionary expenses, and was offset somewhat by higher employee-related expenses.
Total amortization expense related to acquisitions recorded in SG&A for the quarter was $2.4 million versus $2.1 million in Q4 of 2019.
Research and Development expense in Q4 was $65.8 million or 8.3% of sales compared to $57.1 million, or 9.1% of sales in Q4 of 2019.
Q4 operating income was $175.2 million or 22.2% of sales, compared to $59.2 million or 9.5% of sales in Q4 of 2019.
Looking below the operating line, the change in fair market value of equity securities holdings added $904 million of income to the reported results and this is substantially related to holdings of the shares of Sartorius AG.
During the quarter, interest in other income resulted in a net expense of $1 million compared to $5.8 million of expense last year.
Our GAAP effective tax rate for the fourth quarter of 2020 was 22.2% compared to 20.9% for the same period in 2019.
Our GAAP tax rate in 2020 and 2019 were affected by the large unrealized gains in equity securities.
In addition, the 2019 tax rate included a discrete benefit, which allowed us to apply higher foreign tax credits.
Reported net income for the fourth quarter was $839.1 million, and diluted earnings per share were $27.81.
This is an increase from last year and is again substantially related to changes in the valuation of the Sartorius Holdings.
Moving on to the fourth quarter non-GAAP results.
Looking at the results on a non-GAAP basis, we have excluded certain atypical and unique items that impacted both the gross and operating margins, as well as other income.
Looking at the non-GAAP results for the fourth quarter.
In sales, we have excluded the $32 million damages award.
In cost of goods sold, we have excluded $8.7 million IP-license costs associated with the damages award.
$4.6 million of amortization of purchased intangibles, and a small restructuring benefit.
These exclusions moved the gross margin for the fourth quarter of 2020 to a non-GAAP gross margin of 58.2% versus 54.1% in Q4 of 2019.
Non-GAAP SG&A in the fourth quarter of 2020 was 28.2% versus 31.7% in Q4 of 2019.
In SG&A on a non-GAAP basis, we have excluded amortization of purchase intangibles of $2.4 million, legal related expenses of $6.3 million and restructuring and acquisition-related benefits of $3.1 million.
Non-GAAP R&D expense in the fourth quarter of 2020 was 8.7% versus 8.2% in Q4 of 2019.
In R&D, on an non-GAAP basis, we have excluded a small restructuring benefits.
The cumulative sum of these non-GAAP adjustments result in moving the quarterly operating margin from 22.2% on a GAAP basis to 21.4% on a non-GAAP basis.
These non-GAAP operating margin compares to a non-GAAP operating margin in Q4 of 2019 of 14.3%.
We have also excluded certain items below the operating line, which are the increase in value of the Sartorius equity holdings of $904.3 million, $2.1 million associated with venture investments and $3 million of interest income, associated with the 10X damages award.
Our non-GAAP effective tax rate for the fourth quarter of 2020 was 24.3% compared to 17.7% in 2019.
The non-GAAP tax rate for the fourth quarter of 2019 was lower compared to 2020, due to a discrete benefit, which enabled us to apply higher foreign tax credits.
And finally, non-GAAP net income for the fourth quarter of 2020 was $121 million or $4.01 diluted earnings per share, compared to $70 million and $2.32 per share in Q4 of 2019.
Moving on to the full year results, net sales for the full year of 2020 were $2.546 billion on a reported basis, excluding the 10X damages award of $32 million, sales were $2.514 billion which is 8.9% growth on a currency neutral basis.
We estimate that COVID-19 related sales were about $313 million.
Sales of Life Science group for 2020 were $1.23108 billion.
Excluding the 10X damages award of $32 million, the year-over-year growth was 35% on a currency neutral basis.
The majority of the year-over-year growth was driven by our four PCR products, droplet digital PCR and process media.
On a geographic basis, Life Science currency neutral full year-over-year sales grew across all three regions.
Sales of Clinical Diagnostics products for 2020 were $1.305 billion which is down 7.1% on a currency neutral basis.
On a full year basis, clinical labs have seen a significant negative impact of the pandemic, which was slightly offset by growth within quality controls.
On a geographic basis Clinical Diagnostics full year-over-year sales, saw declines across all regions.
The full year non-GAAP gross margin was 56.9% compared to 55% in 2019.
The year-over-year margin increase was driven mainly by product mix and manufacturing efficiencies, which was somewhat offset by higher logistics costs.
Full year non-GAAP SG&A was 30.9% compared to 34.4% in 2019.
The lower SG&A was driven by our ongoing cost savings initiatives and lower discretionary expenses, offset somewhat by higher employee related expenses.
Full year non-GAAP R&D was 9.1% versus 8.5% in 2019 and full year non-GAAP operating income was 17% compared to 12% in 2019.
Lastly, the non-GAAP effective tax rate for the full year of 2020 was 24%, compared to 24.1% in 2019.
The non-GAAP effective tax rate for 2020 was consistent with our guidance of 24%.
Moving on to the balance sheet; total cash and short-term investments at the end of 2020 was $997 million, compared to $1.120 billion at the end of 2019 and $1.160 billion at the end of the third quarter of 2020.
In December, we repaid the $425 million of outstanding senior notes.
Year-end inventory decreased by about $18 million from the third quarter of 2020.
The decrease in inventory was driven by higher demand for COVID-19 related products.
During the fourth quarter, we did not purchase any shares of our stock.
We have a total of $273 million available for potential share buybacks.
Full year share buybacks was about 292,000 shares for $100 million.
In 2019, we purchased about 88,000 shares of our stock for $28 million.
For the fourth quarter of 2020, net cash generated from operating activities was $284.7 million, which compares to $159.8 million in Q4 of 2019.
For the full year of 2020, net cash generated from operations was $575.3 million versus $457.9 million in 2019.
The adjusted EBITDA for the fourth quarter of 2020 was 25.2% of sales.
The adjusted EBITDA in Q4 of 2019 was 18.7%.
Full year adjusted EBITDA, included the Sartorius dividend, was $546.4 million or about 21.7% compared to 17.5% in 2019.
Net capital expenditures for the fourth quarter of 2020 were $39.2 million and full year capex spend was $98.9 million.
Depreciation and amortization for the fourth quarter was $36.2 million and $138.1 million for the full year.
In December, we communicated our long range plan.
We project revenues to grow to an overall range of $2.75 billion and $2.85 billion by the end of 2023.
This growth will be driven by droplet digital PCR, single cell applications, Clinical Diagnostics, bio production and increasing growth in biopharma customers.
We expect non-GAAP gross margin in 2023 to land in a range of 57% to 57.5%.
We expect this positive increase to come from footprint optimization and better capacity utilization.
Adjusted EBITDA margin should be in the range of 23% and 24%, based on top-line growth, productivity improvements, and SG&A leverage.
Last week, we initiated a strategy driven restructuring plan, to improve operating performance as part of our 2023 goals.
The restructuring plan primarily impacts our operations in Europe, and includes the elimination of certain positions, the consolidation of certain functions, and the relocation of certain manufacturing operations from Europe to Asia.
The restructuring plan is expected to eliminate a total of approximately 530 positions, approximately 200 positions in manufacturing, and 330 positions across our SG&A and R&D functions.
And subsequently creation of a total of about 325 new positions, approximately 100 new positions in manufacturing and 225 new positions across SG&A and R&D functions.
The restructuring plan will be implemented in phases over the next two years.
As a result of this restructuring plan, we expect to incur between approximately $125 million and $130 million in total costs, which we anticipate will consist of approximately $86 million cash expenditures, in the form of one-time termination benefits to the affected employees.
Approximately $19 million in capital expenses associated with the restructuring plan, and about $20 million to $25 million in one-time transaction cost.
We anticipate about $80 million to $90 million of restructuring charges related to this restructuring plan will be recorded in the first quarter of 2021, with the balance recorded by the end of 2022.
Moving on to the non-GAAP guidance for 2021.
While we are pleased with the overall performance in 2020, we continue to be uncertain about the duration and impact of the COVID-19 pandemic, although we assume a gradual return to pre-pandemic activity levels and normalized business mix.
We are guiding a currency neutral revenue growth in 2021 to be between 4.5% and 5%.
We estimate about 10% to 11% revenue growth for the Diagnostics group.
The Life Science group year-over-year revenue is expected to be about flat, as we projected COVID-related sales in 2021 to be about half versus 2020.
We continue to assume that we will experience quarterly revenue fluctuations for process media, although we estimate an overall double-digit growth for the full year.
Full year non-GAAP gross margin is projected between 56.2% and 56.5%, and full year non-GAAP operating margin to be between 16% and 16.5%.
We estimate the non-GAAP full year tax rate to be between 24% and 25%.
Capex is projected between $120 million and $130 million and full year adjusted EBITDA margin of about 21%.
I don't really have a lot to add.
I do think companies would say that that 2020 is certainly one for the history books.
As I think back on the year and I think as Andy alluded to in the beginning, it was certainly an all-out effort this last year, to manage a myriad of challenges and not to lose sight of where we're headed in the longer term.
I think as well -- as Ilan, pointed out, the COVID-related revenues are expected to moderate in 2021.
But I do feel that there is still a big question of when the pandemic will come under control.
So in the meantime, we'll continue to work on our core initiatives to allow us to make progress over the next few years and certainly we appreciate your continued interest in Bio-Rad.
| q4 non-gaap earnings per share $4.01.
q4 earnings per share $27.81.
q4 sales $789.8 million versus refinitiv ibes estimate of $686.8 million.
for 2021, anticipates non-gaap currency-neutral revenue growth of about 4.5 to 5.0%.
sees 2021 estimated non-gaap operating margin of about 16.0% to 16.5%.
|
Joining me for the call today are Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer.
But before we get into the details of the quarter, I want to share a couple of broader and contextual comments.
I am very proud of the way our team continues to navigate the pandemic and related economic downturn.
Their dedication, combined with our investments in talent and digital capabilities, continue to serve the company, our clients, our communities, and our shareholders well.
Throughout 2020, we successfully executed what I call our dual mandate.
By that, I mean responding to the pandemic, which is a real humanitarian and economic crisis, while continuing to position Key for both growth and success.
We have taken countless steps to ensure that our teammates and our clients are both safe and well-served.
Additionally, we've provided billions of dollars in credit to our clients.
In 2020, we originated more than 43,000 loans amounting to $8 billion through the first round of the Paycheck Protection Program.
In fact, we are currently assisting our clients through the second round of the Paycheck Protection Program as we speak.
As part of our national community benefits plan, we provided billions of dollars in support to our communities.
This included affordable housing, home lending and small business lending in low and moderate-income communities, transformative philanthropy, and renewable energy financing.
Our commitment also includes programs to advance social justice and economic inclusion across all the communities we serve.
I am now turning to Slide 3.
Getting back to our performance in the fourth quarter, we achieved a record level of revenue for both the quarter and the year.
The growth in net interest income and fee income.
Net interest income was up almost 4% from the prior quarter with an 8-basis-point increase in our net interest margin.
Fee income, also a record, up double -- double digits for both the prior quarter and the year-ago period.
We continue to benefit from investments that we have made across our company, which drove both fee income and balance sheet growth.
Let me touch on three specific areas.
We achieved record volume in the fourth quarter with $2.5 billion in funded loans.
For the full year, our consumer mortgage originations were $8.3 billion, up 90% from the prior year.
This drove both balance sheet growth, as well as a 179% increase in fee income.
Approximately one-half of our originations last year were purchase mortgages.
Our pipelines remain strong and we expect to continue to both grow and take share.
The second area I will highlight is investment banking.
This is an area where we have invested in talent and made targeted acquisitions to enhance our capabilities, including areas such as healthcare and technology.
In the fourth quarter, we generated $243 million in fees, which represents a record quarter.
We enjoyed broad-based growth across the platform with particular strength in M&A and loan syndications.
2020 was a record year for investment banking and debt placement fees.
Our investment banking pipelines remain strong.
We believe this business will continue to be a growth engine for us in the future.
The third area is Laurel Road and, more broadly, the investments we have made in digital across our company.
Laurel Road continues to originate high-quality loans that provide us with an opportunity to build broader digital relationships with healthcare professionals.
Last year, Laurel Road originated over $2.3 billion in loans.
At the end of March, we will launch our digital bank, serving the healthcare segment, expanding our consumer franchise nationally.
This launch will broaden our offering for Laurel Road clients to include deposits, additional lending products, and other value-added services.
We believe that both Laurel Road and consumer mortgage will continue to be relationship-based growth engines for our consumer business.
Our expenses this quarter were elevated.
They were elevated due to higher production-related incentives, severance, and the funding of our philanthropic foundation.
Additionally, COVID-related expenses and costs associated with our prepaid card also remained elevated again this quarter.
Don will cover the outlook in his remarks, but we expect expenses to come down in 2021 while concurrently investing in talent and digital capabilities.
This year, we will also be accelerating the pace of branch closures.
We expect to consolidate over 70 branches, representing 7% of our network.
Most of these closures taking place in the first half of the year.
Our decisions are driven by client behavior as more activity continues to move to our digital channels.
It's also informed by our robust analytics.
We expect limited client attrition as a high percentage of the impacted branches are located within two miles of another Key facility.
Importantly, we expect to continue to grow our retail business while reducing operating expenses and improving overall profitability.
Credit quality remained strong this quarter with net charge-offs of 53 basis points within our targeted over the cycle range.
Additionally, nonperforming loans declined by almost $50 million this quarter.
We will continue to support our clients while maintaining our moderate risk profile and concurrently positioning 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.
In the fourth quarter, our Common Equity Tier 1 ratio increased 30 basis points to 9.8%, which is above our targeted range of 9% to 9.5%.
The results of our recent stress tests af -- affirm that Key is a different company today with loss rates and loss-absorbing capital among the best in our peer group.
Our strategic positioning allows us to continue to execute against each of our capital priorities: supporting organic growth, paying dividends, and, of course, share repurchases.
Last week, our board of directors authorized a new share repurchase program of up to $900 million over the next three quarters.
We also approved our first-quarter common stock dividend of $18.5 a share.
In closing, despite the challenging environment of the last year, we were able to support our clients, invest in and grow our businesses while maintaining our strong risk practices.
Our success was driven by our dedicated team, the strength of our business model, and our relentless focus on executing our strategy.
I am confident in Key's future.
We are positioned to succeed and continue to deliver on all of our commitments.
I'm now on Slide 5.
As Chris said, it was a very strong quarter for us with record net income from continuing operations of $0.56 per common share, up 37% from the prior quarter and 24% from the prior year-ago period.
Return on average tangible common equity for the quarter was over 16%, up over 400 basis points from the third quarter.
Turning to Slide 6, total average loans were $102 billion, up 9% from the fourth quarter of last year, driven by growth in both commercial and consumer loans.
Commercial loans reflect an increase of over $7.5 billion from the PPP loans.
Consumer loans benefited from the continued growth from Laurel Road and, as Chris mentioned, strong performance from our consumer mortgage business.
Laurel Road originated $590 million of loans this quarter and $2.3 billion for the full year, up over 20% from the full-year 2019.
We also generated ano -- another record, $2.5 billion of consumer mortgage loans in the quarter, bringing the total for the year to $8.3 billion.
The investments we have made in these areas continue to drive results and, importantly, add high-quality loans to our portfolio.
Linked-quarter average loan balances were down 3%, reflecting pay downs from a heightened commercial loan draws, as well as a small reduction in PPP balances related to initial forgiveness.
Line utilization rates are at the pre-pandemic levels given the strong liquidity levels in the -- in the environment.
Importantly, we have remained disciplined with our credit underwriting and have walked away from business that does not meet our moderate risk profile.
We remain committed to performing well through the business cycle and we manage our credit quality with this longer term perspective.
Continue on the Slide 7.
Average deposits totaled $136 billion for the fourth quarter of 2020, up $23 billion or, 21%, compared to the year-ago period and up 0.6% from the prior quarter.
The linked-quarter increase reflected a broad-based commercial growth, as well as growth from our -- from higher consumer balances.
The growth was offset by a continued and expected decline in time deposits.
Growth from the prior year was driven by both consumer and commercial clients.
The total interest-bearing deposit costs came down 11 basis points from the third quarter of 2020, exceeding our guidance of a 6 to 9-basis-point decline, continue to have a strong stable core deposit base with consumer deposits accounting for over 60% of the total deposit mix.
Turning to Slide 8.
Taxable equivalent net interest income was $1.043 billion for the fourth quarter of 2020, compared to $987 million a year ago and just over $1 billion from the prior quarter.
Our net interest margin was 2.70% for the fourth quarter of 2020, compared to 2.98% for the same period last year and 2.62% from the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by the 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 significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter, net interest income increased $37 million, and the margin improved by 8 basis points.
The increase in both net interest income and net interest margin quarter over quarter are largely due to the lower interest-bearing deposit cost and the higher loan fees from PPP forgiveness.
We saw the average rate paid on interest-bearing deposits declined 11 basis points from the prior quarter.
The forgiveness of the PPP loans accelerated about $28 million of additional fee recognition this quarter.
These were partially offset by continued elevated liquidity levels, which had a 5-basis-point negative impact on the margin.
Moving to Slide 9.
Our fee-based businesses hit all-time highs in the fourth quarter.
Noninterest income was $802 million for the fourth quarter of 2020, compared to $651 million for the year-ago period and $681 million for the third quarter.
Compared to the year-ago period, noninterest income increased $151 million.
The primary driver was a record quarter for investment banking and debt placement fees, which reached $243 million, up $62 million from the year-ago period.
Stronger M&A and loan syndication fees drove most of the increase this quarter.
This business also had a record year with $661 million of total fees.
Record mortgage originations drove consumer mortgage fees this quarter, which were up $22 million from the fourth quarter of '19.
Cards and payments income also increased $30 million related to higher prepaid card activity from the state government support programs.
Compared to the third quarter, noninterest income increased by $121 million.
The largest driver of the quarterly increase was once again the record quarter for investment banking, which was up $97 million.
Commercial mortgage servicing fees also had a strong quarter, up $14 million.
I'm now turning to Slide 11 -- excuse me, Slide 10.
Total noninterest expense for the quarter was $1.128 billion, compared to $980 million last year and $1.037 billion in the prior quarter.
The increase from the prior year is primarily in personnel costs, driven by higher production-related incentive from our record fee production, as well as higher severance costs.
Year over year, payments-related costs reported and other expense were $40 million higher, driven by higher prepaid activity, and we incurred COVID-19 related expenses to ensure the health and safety of our teammates.
Compared to the prior quarter, noninterest expense increased $91 million.
The increase was largely due to $40 million of higher production-related incentives, $22 million of severance, $12 million of higher stock-based compensation related to the share price, and a $15 million additional contribution to our charitable foundation.
Marketing expense was also up $8 million from the prior quarter.
Turning to Slide 11.
Overall, credit quality remains strong.
For the fourth quarter, net charge-offs were $135 million or 53 basis points of average loans.
Slightly below our guidance range.
Our provision for credit losses was $20 million.
This was determined under the CECL methodology and based on our continued strong credit metrics and leading indicators, as well as our outlook for the overall economy, credit migration, and loan production.
Nonperforming loans were $785 million this quarter, or 78 basis points of period in loans, compared to $834 million, or 81 basis points, from the prior quarter.
Additionally, 30 to 89 de -- day delinquencies actually improved quarter over quarter with a 9-basis-point decrease while the 90-day plus category remained relatively flat.
We've continued to monitor the level of assistance request we receive from our customers.
Over the past quarter, the number of requests for loan forbearance has decreased dramatically.
As of December 31, loan subject to forbearance terms were less than $600 million, down from a peak of $5.2 billion, equating to about 0.5% of our outstanding balances.
One mo -- one more observation this quarter, and as Chris mentioned earlier, in late December, the results of the most recent stress test results were published.
Key results reinforce the commitments we have been making over the past several years that we are a different company with a better risk profile than Key showed through the -- the Great Recession.
Our stress credit losses for the -- from the test were peer leading.
We've been managing the company over the last decade to outperform during challenging times and believe we have positioned the company to achieve this.
Turning to Slide 12.
We updated our disclosure that highlights certain pre -- portfolios that are receiving greater focus in this environment.
These areas represent a small percentage of the total loan balances.
Each relationship in these focus areas continues to be subject to active reviews and enhanced monitoring.
Importantly, as a group, they continue to perform consistent with our expectations.
Now in the Slide 13.
Key's capital position remains an area of strength.
We ended the fourth quarter with a Common Equity Tier 1 ratio of 9.8%, up 30 basis points from 9.5% in the third quarter.
This places us above our target range of 9% to 9.5%.
This provides us with the sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, the results of the recent stress tests support and highlight our strong credit profile and loss absorbing capital.
Last week, our board of directors approved a new share repurchase authorization of up to $900 million for the next three quarters.
They also approved our first-quarter 2021 common dividend of $18.5 per share.
On Slide 14, we provide our full-year 2021 outlook.
This builds on our performance in 2020 and reflects our expectation that we will deliver positive operating leverage for the year.
Guidance range definitions are provided at the bottom of the slide.
Average loans are expected to be relatively stable.
Although at this point, I would expect a little downward bias to this range.
This reflects participation in the next round of PPP and continued growth in our consumer loan portfolio from both Laurel Road and our consumer mortgage business.
We expect deposits to be up low single-digits and we will continue to benefit from our low-cost deposit base.
Net interest income should be relatively stable.
Our net interest income will benefit from our higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity, offset by the ongoing impact of low rates.
Noninterest income should be up low single-digits, reflecting growth in, but most of our core fee-based businesses.
As Chris mentioned, noninterest expense should be down in 2021, somewhere in the low single-digit range.
We will continue to benefit from our continuous improvement efforts and accelerated branch closures.
We also plan to continue to invest in talent and to stay at the forefront of our digital offerings.
Moving on the credit quality.
Net charge-off to average loan should be in the 50 to 60-basis-point range, which is consistent with our through the cycle range of 40 to 60 basis points.
And our guidance for our GAAP tax rate should be around 19% for the year.
Our guidance also assumes some variability over the course of the year.
First quarter will reflect normal seasonality, including a lower day discount and an increase in personnel expense, driven by heightened employee benefit costs.
Finally, shown at the bottom of slide, our long-term targets.
As Chris said, we expect to deliver positive operating leverage for 2021.
We also maintain our moderate risk profile and over time continue to improve our efficiency and overall returns.
I'll close with where Chris started, recognizing the effort of our team to support our clients and to deliver strong results for both the quarter and the year despite the challenging environment.
We are well-positioned as we head into 2021 and plan to deliver on our commitments to all of our stakeholders.
| compname reports record fourth quarter 2020 net income of $549 million, or $0.56 per diluted common share.
q4 earnings per share $0.56 from continuing operations.
announced new common share repurchase authorization of up to $900 million.
provision for credit losses was $20 million for q4 of 2020, compared to $109 million for q4 of 2019.
taxable-equivalent net interest income was $1.043 billion for q4 2020.
net loan charge-offs for q4 of 2020 totaled $135 million comparde to $99 million for q4 of 2019.
|
I'm joined by John Peyton, CEO; Vance Chang, CFO; Jay Johns, President of IHOP; and John Cywinski, President of Applebee's.
We're pleased with our strong Q2 results, and I'm excited to hear from Vance Chang, our talented new CFO.
I'll start by defining this moment in time.
The restaurant renaissance is clearly driving our rebound at Dine Brands and Americans are returning to indoor dining.
And now that Americans are back, we're pivoting from triage to acceleration.
And what I mean by that is we're accelerating the innovation and the reinvention of the guest experience.
Today, I'm thrilled to report that our investments in innovation and the resiliency of our franchisees and team members is clearly paying off.
During Q2, both Applebee's and IHOP posted significant improvements in comp sales.
And this is important, both brands are fundamentally improved businesses due to off-premise sales.
And I'm seeing that for myself.
I've been on the road.
I've now met with 61 franchisees and toured our restaurants in Ohio, New York City, Connecticut, New Jersey, Vegas and Atlanta.
And each conversation with a franchisee or a team member or a restaurant manager reinforces for me our unique advantages that ensure our business is built to win.
First, we've got two iconic brands that thrive based on guest connection.
Collectively, Applebee's and IHOP has been serving communities for more than 100 years.
Both brands are beating their comp set because our guests have long-lasting emotional connections that endure even during these tough times.
Second, our guest satisfaction is strong, and that's impressive because many of our restaurants are operating with less labor than they're used to.
And finally, we work side-by-side with experienced, talented franchisees who are doing extraordinary things and as a result, are emerging from the pandemic with stable financial fundamentals.
So here we go.
I'll recap second quarter highlights, including comp sales, EBITDA, free cash flow, off-premise growth and development.
So first, according to Black Box, and this is terrific, Applebee's and IHOP, each outperformed their segments in Q2, and both brands' second quarter comp sales improved compared to the first quarter.
Specifically, Applebee's second quarter comps increased by 10.5%, and IHOP's comps declined by 3.4%, which reflects an improvement of 17.8 percentage points compared to the first quarter.
We achieved revenue of $233.6 million and EBITDA of $71.7 million, which reflects the continued strength of our franchise model and a gradual return to steady state.
We generated free cash flow of $107.3 million during the first six months of the year, which is consistent with Dine's track record of generating strong and stable adjusted free cash flow.
And finally, in Q2, we opened 10 new restaurants signaling the growing confidence our franchisees have in our brands and in putting their capital back to work.
Now despite what is still a fluid and unpredictable environment due to the delta variant and COVID-19, we remain cautiously optimistic, and there are two main reasons why.
First, improving consumer confidence is approaching pre-pandemic levels.
It looks like federal spending will continue this time via the Infrastructure Bill and low unemployment are all meaningful tailwinds.
Now that said, our optimism is somewhat tempered by continued volatility.
For example, the labor shortage is affecting wages, hours of operation and the availability of certain SKUs in our supply chain.
Inflation is also in concern for our guests as well as for our network.
We're seeing its effect on the cost of paper and packaging, oils, poultry, pork products and eggs.
And based upon current conditions, we now expect commodity inflation in the range of approximately four percent to five percent for the full year.
And the final unknown, of course, is the delta variant, which is largely regional at this time.
Our outlook would certainly be impacted if large areas of the country return to lockdowns or restaurant guests become uncomfortable dining out.
And now that I've covered our performance, I want to give you a more complete picture of how we're accelerating innovation through digital technology.
At Dine, we're leaning into our scale.
Our strategy is to build one common digital architecture for both Applebee's and IHOP that enables us to do more for both brands than either brand could invest on its own.
So far, just in 2021, we've implemented a new CRM and digital platform that enables sophisticated offer management, strengthens our digital marketing and marketing analytics and improves our management of customer data while also serving as the backbone for our loyalty programs.
We've also rolled out upgrades to our apps and our websites.
Now we provide a more seamless food order experience.
For example, guests now have more ability to customize their orders, and it takes fewer clicks to navigate the menu.
And these new apps and websites provide us a more comprehensive understanding of our guest purchasing preferences and online behavior.
We've also added cool functionality like geo sensing to track guest arrival in advance of car side or in-restaurant pickup and delivery.
And in our call center, approximately 150 Applebee's are on our new AI and fully automated voice ordering platform.
In 2021, we've also introduced tech to improve the on-premise dining experience.
That includes handheld devices for servers that are now in 500 Applebee's restaurants.
Those handhelds drive faster table turns, additional drink orders and most importantly, one of our servers in Atlanta told me that she's earning more money because she's turning her tables faster.
We also introduced pay-and-go that enables guests to pay at the table using their own device, and the digital wallet that allows guests to redeem offers and coupons from their phone.
And finally, later this year, IHOP will begin to roll out new point-of-sale and kitchen display technology.
We expect the new POS and KDS systems to reduce the cost of labor, ensure food is served hot and with improvements in order accuracy.
And importantly, the new POS and KDS will integrate order flow between digital and on-premise to seamlessly support car side and to-go orders.
All of these digital set capabilities are new in 2021.
And by end of the year, approximately 75% of our digital technology tools will be modernized or new.
And this is the most robust delivery of digital tech in Dine's history.
Our franchisees will be adopting the on-premise technology in the restaurants throughout 2021 and 2022.
I'll wrap up by emphasizing that our performance, our brands and our finances are strong.
We understand that today's environment remains fluid, and we're drawing on our deep experience and guest insights to continue to share -- to continue to grow share today and in the future.
Our new CFO, Vance Chang, is going to share more information about our financial results in just a moment.
But first, let me proudly introduce the newest member of our leadership team.
Vance spent the past 20 years in both banking and building high-growth consumer and healthcare companies.
Vance is here because he's an operations-oriented CFO.
He'll lean into our domestic and international businesses and work with those teams to fuel growth and improve profitability for Dine and for our franchisees.
Vance is a high-impact executive who's got a track record of driving innovation and delivering on execution.
And that's exactly the profile we need as we pivot from the crisis to innovation that accelerates our growth.
I'm excited to be here today, and we look forward to working with all of you in the months and years ahead.
It's great to be with everyone on my first earnings call as CFO of Dine.
During my first month at the company, I've been meeting with team members and franchisees in reviewing plans.
The onboarding process was instrumental and reinforced my confidence in the business and our direction.
I spent the past 20 years in my career in advising, investing and building high-growth consumer healthcare companies providing strategic leadership during times of meaningful change.
While we all continue to emerge from the pandemic, we know there are very real challenges still ahead of us, and I recognize the obligation we have as leaders within our industry.
For me, it's a humbling responsibility as we work together to maximize the full potential of the enterprise and to deliver profitable growth for all of our stakeholders, including our shareholders, franchisees and team members.
John just highlighted some of our baseline results, but let me spend now a few minutes talking about the financials.
I'll begin my remarks with a review of our cash position.
The continued improvement in our business has helped us maintain our strong cash position.
We finished the second quarter with a total unrestricted cash of $259.5 million.
This is a 44% increase over the first quarter's unrestricted cash balance of $179.6 million.
Turning to our operating results.
Franchise revenues for the second quarter were $167 million compared to $67.9 million for the same quarter of 2020.
Turning to the company restaurant segment.
Sales for the second quarter were $38.2 million compared to $16.8 million for the second quarter of 2020.
Rental segment revenue for the second quarter of 2021 were $27.4 million compared to $23.7 million for the same quarter of 2020.
The improvement was due to an increase in percentage rental income based on franchisees' retail sales.
Adjusted earnings per share for the second quarter of 2021 was $1.94 compared to an adjusted net loss per diluted share of $0.87 for the same quarter of 2020.
The improvement was due to an increase in gross profit as our business continued to recover from the effects of the pandemic.
Regarding our GAAP effective tax rate.
Our effective tax rate for the second quarter of 2020 was 24% expense compared to an 8.2% benefit for the same quarter of last year.
The main reason for the variance was due to the nondeductible impairment of goodwill in the second quarter of 2020.
G&A for the second quarter of 2021 was $39.3 million compared to $30.9 million for the same quarter of 2020.
The increase was primarily due to higher personnel costs associated with our incentive compensation accrual based on company performance.
Turning to the cash flow statement.
Cash from operations for the first six months of 2021 was $106 million compared to cash used in operating activities for the first six months of 2020 of $10.5 million.
The improvement was primarily due to the recovery of our business, as discussed earlier.
We believe the positive trend in our liquidity and comp sales will allow us to strategically invest for growth and innovation.
Now I would like to share some thoughts about the back half of the year.
We expect G&A to be higher in Q3 and Q4 relative to the first half of the year.
As a reminder, our G&A does include noncash expenses such as depreciation and stock-based comp that we normally add back as EBITDA, but expected increase in G&A is primarily driven by two factors: first, we pushed professional services and travel expenses to the second half of the year given the uncertainties that we faced during the first half of the year.
Second, higher incentive compensation is expected in the second half which is a variable component of G&A that will fluctuate based on our business performance.
Additionally, I would point out that our Q2 financial performance reflects strong pent-up demand that we may not experience at the same level in Q3 and Q4 in addition to the normal trends that we typically experience in the second half of the year.
We also have more restaurants in the first half than we will have in Q3 and Q4 due to recent closures.
Turning to our 2021 financial performance guidance.
I would like to highlight a revision to our G&A guidance primarily due to the factors discussed earlier.
We now expect G&A to range between $168 million and $178 million.
This compares to our previous expectation for G&A to range between $160 million and $170 million.
Our guidance for capex of approximately $90 million for 2021 remains unchanged.
Moving on to capital allocation.
We took proactive measures to reinforce our financial flexibility in early 2020, which included the temporary suspension of our quarterly cash dividend and share repurchase program.
On past calls, when asked about our plan to return cash to shareholders we have indicated that we wanted to see several quarters of improving performance before reinstating a dividend or buyback program.
Since the start of the year, our fundamentals have continued to improve contributing to our strong adjusted free cash flow position as referenced earlier.
As we enter the back half of the year, we will have a shareholder return strategy to share with you and are considering all options to maximize shareholder return and deliver sustained long-term profitable growth for the system.
We will have more details on our third quarter call.
And a few points on our capital structure.
In early 2020, Dine took pre-emptive steps to mitigate the effects of the pandemic on its operations and its franchisees including voluntarily increasing the interest reserve for our securitized debt from the required $16.4 million to $32.8 million.
I would like to highlight that due to the improved -- strong improvement in our business over the last 12 months, we have decided to reduce the interest reserve back to $16.4 million.
Our leverage ratio as of June 30 was 4.9 times compared to four times as of March 31.
With our leverage ratio back below 5.25 times, we will no longer be required to make principal payments on our 2019 Class A-2 notes after September.
I would also like to highlight that we continue to have significant cushion in our debt service coverage ratio, or DSCR, at 4.6 times as of June 30.
This is an improvement from the DSCR of 3.45 times as of March 31.
As a reminder, the first key DSCR measurement is not tripped until the ratio falls below 1.75 times.
Maintaining our financial flexibility to meet our debt service obligations is one of our highest priorities.
We'll continue our disciplined approach to monitoring liquidity, especially during these times of uncertainty due to the pandemic.
We're very pleased with our achievements and remain cautiously optimistic about our recovery.
We've done a lot of the heavy lifting to build a solid foundation for long-term growth.
Your timing is good.
I'm very pleased to report that Q2 was an exceptional quarter for the Applebee's brand.
When compared with our 2019 baseline, April, May and June comp sales were positive 11.7%, positive 8.1% and positive 11.4%, respectively.
This combined plus 10.5% result marks the best quarterly sales performance throughout the 14-year history of Dine Brands.
Of course, that excludes the anomaly of the 2021 versus 2020 pandemic year.
Restaurant sales delivered approximately $53,000 per week throughout the quarter.
To put this in proper perspective, the months of March, April, May and June in sequence ranked as Applebee's four highest weekly sales months under Dine's ownership.
I'm particularly proud of our franchisee partners and the entire Applebee's team as they continue to showcase their restaurant-level excellence within an obviously challenging environment.
According to Black Box Intelligence, Applebee's has now outperformed the casual dining category on comp sales for 25 consecutive weeks by an average of 596 basis points.
As expected, with guests returning to our dining rooms, we experienced a natural shift from off-premise sales to dine-in sales in Q2.
To better understand this trajectory, dine-in mix moved from 67% in April to 72% in June, with 16% Carside To-Go and 12% delivery in June, reflecting this gradual migration to a normalized post-pandemic mix.
Applebee's off-premise weekly sales in June was $14,700 per restaurant.
And as a percentage of total sales, it's reasonable to assume our off-premise mix may ultimately settle in the low to mid-20% range.
I should note, this represents about double our pre-pandemic off-premise mix of 12%, illustrating Applebee's enhanced relevance within this convenience-driven occasion.
Given the importance of this business, we are expanding our initial drive-through test to include an additional six units in Q4 for a total of seven dedicated Applebee's pickup windows.
Now this off-premise mix includes our Cosmic Wings virtual brand, which we were planning to expand to DoorDash, as you recall, in early May.
However, due to significant chicken wing supply challenges across America, we postponed our DoorDash expansion to a date to be determined contingent upon supply availability.
We anticipate meaningful incremental demand with this expansion, and we want to ensure supply -- sufficient supply to properly satisfy this demand.
In the meantime, I'll hold off commenting further on Cosmic Wings results until we pull this lever with DoorDash hopefully at the end of Q4.
Turning to restaurant execution.
Applebee's continues to resonate with our guests on key operational metrics such as guest satisfaction, brand affinity and visit intent.
This is noteworthy given persistent labor challenges throughout the industry.
To address this challenge, we executed our first National Hiring Day back on May 17.
Leveraging our extensive digital assets, we offered a free appetizer in return for an application and an interview, something we playfully branded, Applebee's app for an app.
Hoping to generate 10,000 applications, our franchise partners ended up securing more than 40,000 applications with a single day event, ultimately hiring about 5,000 new team members that week, a terrific result.
And our success here once again illustrates the benefits of scale and brand reputation in navigating this tough labor environment.
Applebee's continues to lead the casual dining category on affordability, menu variety, to-go awareness, brand awareness and advertising awareness, which remain important attributes for us in this competitive landscape.
With smart and strategic media allocation, our teams introduced a balance of new salads, bowls and beverage innovation throughout Q2 with our newest menu hitting restaurants in two weeks.
We also shifted our brand messaging to focus on the genuine emotional connection Applebee's has with its guests, a connection we believe is more important and relevant than ever given all this country has endured over the past 16 or 17 months.
I'm proud of the authenticity and resonance this work delivered in Q2.
And since music is so much a part of our brand DNA, I also wanted to highlight that the current number one song in iTunes in Billboard's top country music is titled Fancy Like from artist Walker Hayes.
And this is important because this song lyrically is all about date night at Applebee's, and it's gone viral in a big way on social media, TikTok, Instagram and YouTube, providing great buzz for the Applebee's brand.
Additionally, we entered into a very exciting relationship with The Walt Disney Company in support of their current number one film Jungle Cruise as a way to celebrate and encourage the return to dinner and a movie this summer, a wonderfully familiar part of Americana that we all weren't really able to enjoy for a very long time.
Hopefully, you've had a chance to see our advertising featuring Dwayne, The Rock Johnson and Emily Blunt, set to the classic tunes Rock the Boat and Born to be Wild.
Both of those debuted in the NBA championship game on July 20.
And to capitalize on the synergy, we've also developed a business partnership with Dwayne Johnson, the entrepreneur to introduce his new and fastest-growing premium tequila brand, Teremana into all Applebee's restaurants in July.
Dwayne has proven to be a tremendous partner as these signature $7 Mana Margaritas are now available everywhere and proving to be extremely popular with our guests.
As we look forward, you can expect our Q3 and Q4 media spending to remain substantial and favorable when compared with the same quarters in 2019.
To wrap up, while Applebee's momentum remains strong, it would be unrealistic to expect these unprecedented double-digit sales to sustain in the back half of this year.
With that said, Eatin' Good in the Neighborhood has never been more relevant than it is today, and I'm confident in Applebee's ability to continue to thrive in this environment.
I'll now turn it to Jay Johns for an overview of the IHOP business.
Congratulations on another great quarter.
I'm pleased to report that IHOP's solid trajectory continued this quarter.
Our second quarter comp sales improved sequentially by 17.8 percentage points compared to the first quarter and outperformed the family dining category as well by 150 basis points according to Black Box.
Another indication of the health and stand of our business is the growth in domestic average weekly sales every month in the first half of the year.
For the second quarter, average weekly sales were 28% higher than Q1.
Average weekly sales per week were approximately $38,000 in April and increased to just over $39,000 by June, reaching a high for the quarter of approximately $40,000.
As dining room capacity restrictions were eased and consumers satisfied the longing for a sit-down meal to favorite IHOP, our off-premise sales mix moderated as anticipated.
Off-premise sales accounted for 26.1% of sales mix for the second quarter compared to 33.3% for the first quarter.
However, we continue to believe that we'll retain the majority of the off-premise sales growth attained over the last 15 months, partly due to changes in consumer behavior.
According to a May 2021 survey by McKinsey & Company, consumers intend to continue with many digital behaviors even after COVID-19 subsides, including restaurant curbside pickup.
In fact, our net off-premise sales in dollars improved each month in the second quarter.
Additionally, off-premise comp sales increased 169% in the second quarter of 2021 compared to the same period of 2019.
For the second quarter, our sales mix consists of 73.9% dine-in, 13.9% delivery and 12.2% To-Go.
Approximately 85% of our domestic restaurants are open for standard operating hours or greater and approximately 27% are operating 24/7.
We believe that having more restaurants operating on standard hours or longer, reduced capacity restrictions and higher vaccination rates could be a potential tailwind in the second half of the year.
To drive traffic and sustainable long-term growth, we're executing a multi-pronged strategy.
This includes our new approach to marketing, launching a loyalty program, developments and virtual brands.
I'll provide some color on each of these.
We're adopting a new marketing tone aimed at leveraging the emotional connection of our guests that they have for IHOP.
Our new creative is designed to remind consumers why they love the brand.
We're taking a multichannel approach to better utilize our resources such as increasing our digital exposure.
We believe doing so will allow for more effective one-to-one marketing and better targeted messaging to different audiences.
I'm pleased to say the marketing transformation is already underway.
Regarding our loyalty program.
We plan to launch a loyalty program in the fourth quarter to increase guest engagement.
Our goal is to drive trial and importantly, incremental visits from existing IHOP guests.
At IHOP, the pandemic forced us to reflect and refocus on our relationships with our guests within a transforming restaurant industry.
At the same time, we actually grew our investments in CRM and customer-facing technologies, delving down our commitment to modernize our guest relationships.
Over the past 12 months, we've invested in CRM, loyalty and digital experiences.
While much of this work has been foundational, we expect to see some of these elements coming to life later this year.
We're focused on returning to strong unit growth.
I highlighted last quarter, we have the advantage of being able to provide our franchisees with four platforms to accommodate their development needs.
These include our traditional platforms, nontraditional, a new small prototype is scheduled to test this year and our first Flip'd by IHOP locations, which we plan to open in the next few months.
Regarding Flip'd, we now plan to open our first location in Lawrence, Kansas in the third quarter.
This location will be approximately 3,500 square feet and is a freestanding structure with 55 seats.
Our second Flip'd location is now scheduled to open late in the third quarter in New York City.
This location is a conversion space that will be approximately 1,800 square feet with only 25 seats.
Both locations will have the same menu that will address all three dayparts while leveraging the equity of IHOP that guests love.
Importantly, IHOP provides franchisees with conversion opportunities across all of these platforms, which can be very cost effective.
At the sites we've approved for the future this year, approximately 42% are conversions.
For 2021, we believe the brand can develop 40 to 50 new restaurants.
Looking ahead in the next three years, our development strategy includes a blend of our four development platforms.
And with the addition of Flip'd and the introduction of small prototype, we believe the brand can significantly exceed its historical annual run rate over the last decade.
Turning to virtual brands.
While our focus so far this year has been on restarting and have strong development, we believe the time is appropriate to start evaluating third parties with several brands to partner with.
Given that approximately 70% of our domestic restaurants have two full kitchens, we have capacity that can accommodate multiple virtual brands.
We're currently reviewing our daypart strategy and assessing how to best utilize our existing capacity.
Due to the fact we're in the preliminary stage of this, it's too early to discuss who we may work with as a virtual brand partner.
We've made good progress over the last year.
Our business has improved significantly, off-premise sales remained strong even as dining room capacity restrictions were generally eased.
The majority of our domestic restaurants are operating on standard hours or longer, and we believe there's additional upside as well as restaurants resume standard operating hours later than the year.
We have a multipronged plan in place for long-term growth.
The road ahead for IHOP looks bright, and I'm very pleased with our position.
| q2 adjusted earnings per share $1.94.
believes that its consolidated financial results for 2021 could continue to be materially impacted by covid-19.
revises expectations for general and administrative expenses for 2021 to range between about $168 million and $178 million.
qtrly total revenues $233.6 million versus $109.7 million.
dine brands global - looking ahead, optimism is somewhat tempered by continued volatility, which include labor shortages and variants of covid-19.
|
I guess I'd first say that it's pretty clear the diversity and the relevancy of our offerings as well as the outstanding effort from our colleagues has resulted in another great quarter.
Our strategy and efforts are clearly yielding results as we delivered a 70% increase in fee revenue with really strong profitability, earnings per share of $1.37 and an adjusted EBITDA margin of 20.7%, and these results are the continuation of our momentum over recent quarters and our performance speaks to our agility and importantly to the purpose for decisions and deliberate actions we've taken not only over the last few quarters but over the last several years, and now they've come together in a critical mass of opportunity.
As a result, today's Korn Ferry is poised to seek the opportunities of tomorrow.
And those opportunities begin with a world of work that's in a massive state of transition and maybe always will be.
Companies reimagining their businesses, from strategy, to people, to culture, career Nomads, aging demographics, a real war for talent, work from anywhere, anytime, and last but not least, the digitization of everything.
These are the features of our new landscape of work.
And we don't see that changing anytime soon.
In response, companies are rethinking their org structures, their roles, responsibilities, how they compensate, engage, motivate and upscale their workforce, as well as the type of agile talent they hire and how they hire that talent, and they're all going to need to lead differently.
And as I said, this new world is creating opportunities for Korn Ferry.
The mega changes that I described align very nicely with our businesses.
Today, wherever and whenever leadership meets talent, Korn Ferry is at that cross section, enabling agility in a world in transition and driving performance for our clients.
To position our Company for long-term success, we remain relentlessly focused on this dynamic world of work.
Our scaled capabilities include org strategy, leadership and professional development, assessment, succession and rewards and talent acquisition, and of course, the judgment and expertise built from decades of experience and insight into the questions companies are grappling with across industries.
We're going to continue to drive an integrated go-to-market strategy through our marquee and regional accounts, which represent about 35% of our portfolio.
And this facilitates not only growth and enduring partnerships, but also is key to more scalable and durable revenues.
In the quarter, about 30% of our revenue was driven by cross referrals, an all-time high, which I think demonstrates the effectiveness of our go-to-market strategy.
Today, the fight for talent is absolutely more profound than we've ever seen.
This new world is driving a robust market for our talent acquisition expertise, from Executive Search to Pro Search to RPO, we're helping companies find the right talent, fitting the right needs.
And looking at our digital and consulting businesses, we've been actively marrying our capability with today's mega trends.
The result is larger projects with greater sustainability and more durable revenue, in areas such as D&I and organizational transformation, as well as core solutions such as assessment, pay and governance, and leadership and professional development.
Looking ahead, I truly feel we have the right strategy with the right people at the right time to help our clients drive performance in this new world, and our results are clearly affirming this belief.
With that, I am joined by Gregg Kvochak and Bob Rozek.
Our financial results in the first quarter were outstanding and they continue to push to new highs.
Our unique mix of organizational consulting solutions continue to grow in relevance and it gives us a greater share of strengthening global markets.
Clients are embracing our solutions to help them navigate today's unprecedented and rapidly changing work and social environment, and that's driving our fee revenue and profitability to new heights.
Now let me touch on a couple of highlights from the first quarter.
As Gary mentioned, fee revenue in the first quarter was up $241 million or 70% year-over-year and $30 million or 5% sequentially, and that's reaching an all-time high of $585 million.
Now that's quite an accomplishment hitting consecutive highs and only the third and then fourth quarter removed from the trough.
Consolidated fee revenue growth in the first quarter measured year-over-year was up 81% in the Exe Search, 103% in RPO and Pro Search, 50% in Consulting and 44% in Digital.
Also our new business growth in the first quarter was very strong.
Our results continue to demonstrate the success of our go-to-market strategy.
Revenue generated from our marquee and regional accounts continues to steadily grow.
In the first quarter, revenue from our marquee and regional accounts was up 70% year-over-year and 4% sequentially.
And as Gary mentioned, in the first quarter, over 35% of our consolidated fee revenue was generated from these accounts.
In addition, cross line of business referrals continue to grow.
In the first quarter, about 30% of fee revenue was generated from cross line of business referrals, which is up from 25.5% and 28.5% in the first and fourth quarters of fiscal '21, respectively.
Now earnings and profitability also reached new highs in the first quarter.
Adjusted EBITDA grew $111 million year-over-year and $8.5 million or 7.5% sequentially to $121 million, with an adjusted EBITDA margin of 20.7%.
Now, that's our third consecutive quarter with an adjusted EBITDA margin over 20%.
Our earnings and profitability continue to benefit from higher consultants and execution staff productivity and lower G&A spend, driven by virtual delivery processes and reduced levels of related business development spend.
Fully diluted earnings per share also reached a record level in the first quarter, improving to $1.37, which was up from $1.56 compared to adjusted fully diluted earnings per share in the first quarter of fiscal '21 and up $0.16 or 13% sequentially.
I would like to point out that in the first quarter our fully diluted earnings per share benefited by $0.07 to $0.08 from a lower tax rate of 23.8%.
Now, currently we don't believe that this rate is sustainable, and for all of fiscal '22 we're projecting an effective tax rate in the range of 26% to 27%.
Now turning to new business, which also grew to record levels by accelerating each consecutive month of the quarter.
We're pleased to share that our new business generation in each of the last six months is in our top 10 ever with three of the months occupying spots, one, two and three.
Now that's a clear demonstration of the relevance of our solutions in the world today.
Now more specifically on a consolidated basis, new business awards, excluding RPO were up 59% year-over-year and up approximately 2% sequentially.
New business growth was strongest for Professional Search, which was up 14% from the fourth quarter of fiscal '21.
RPO new business had another strong quarter in the first quarter with $113 million of total contract awards.
Our investable cash balance also improved.
At the end of the first quarter, cash and marketable securities totaled $904 million.
Now when you exclude amounts reserved for deferred comp arrangements and for accrued bonuses, the global investable cash balance at the end of the first quarter was approximately $614 million, which is up $103 million or 20% year-over-year.
Now of that amount, approximately $220 million was in the United States.
It continues to be our priority to invest back into our business and that's to maximize our future growth.
This includes the hiring of additional fee earners and execution staff.
Over the last quarter, total new fee earner consultants grew by 127, which includes both new hires in recent promotions.
Additionally, consistent with our balanced approach to capital allocation, we repurchased approximately $3 million of stock in the first quarter and paid a quarterly cash dividend of approximately $6.9 million.
Let's start with the KF Digital.
Global fee revenue for KF Digital was $81 million in the first quarter, which was up nearly 44% year-over-year and flat sequentially.
The subscription and license component of KF Digital fee revenue continues to steadily improve.
In the first quarter, subscription and license fee revenue was $24 million, which was up approximately 14% year-over-year.
More importantly, global new business for KF Digital in the first quarter was $108 million, with 36% of this new business related to subscription and license services, up 69% year-over-year -- on a year-over-year basis.
Earnings and profitability remained strong for KF Digital in the first quarter with adjusted EBITDA of $25.6 million and a 31.8% adjusted EBITDA margin.
Now turning to Consulting.
In the first quarter, Consulting generated $148.5 million of fee revenue, which was up approximately $49 million or 50% year-over-year.
Fee revenue growth was broad-based across all solution areas and strongest regionally in North America, which was up over 70% year-over-year.
Consulting new business was also very strong in the first quarter, growing approximately 36% year-over-year and 2% sequentially to a new all-time high.
Additionally, while the volume of engagements over $500,000 has remained strong, in the first quarter the volume of smaller assignments, those under $500,000 in value grew sequentially, potentially signaling a rebound in demand and spending by our smaller regional clients who tend to buy focus point solutions.
Regionally, new business growth was broad-based in the first quarter with both EMEA and APAC having the best quarter of new business in over two years.
Adjusted EBITDA for Consulting in the first quarter was $26.8 million with an adjusted EBITDA margin of 18.1%.
Growth for RPO and Professional Search continued to accelerate in the first quarter.
Globally, fee revenue was $139.3 million, which was up 103% year-over-year and approximately $19 million or 16% sequentially.
Both RPO and Professional Search continued to take advantage of the surge in demand for skilled professional labor.
RPO fee revenue grew approximately 98% year-over-year and 11% sequentially, while Professional Search fee revenue was up approximately 112% year-over-year and up 24% sequentially.
New business wins for both RPO and Professional Search were also extremely strong in the first quarter.
Professional Search new business was up 14% sequentially and RPO was awarded $113 million of new contracts consisting of $45 million of renewals and extensions and $68 million of new logo work.
Adjusted EBITDA for RPO and Professional Search continue to scale in the first quarter, improving to $34 million with an adjusted EBITDA margin of 24.4%.
Finally in the first quarter, global fee revenue for Executive Search reached a new all-time high of $217 million, which was up 81% year-over-year and 8% sequentially.
Growth was also broad based and led by North America, which grew 100% year-over-year and over 6% sequentially.
Our international regions continue to accelerate sequentially.
Fee revenue in EMEA and APAC were up approximately 4% and 22%, respectively.
We continue to aggressively invest in expanding our network of consultants in the first quarter.
The total number of dedicated Executive Search consultants worldwide at the end of the first quarter was 565, up 55 year-over-year and up 41 sequentially, including 22 colleagues who were recently promoted.
Annualized fee revenue production per consultant in the first quarter improved to a record $1.59 million and the number of new search assignments opened worldwide in the first quarter was up 57% year-over-year and 2% sequentially to 1,745.
In the first quarter, global Executive Search adjusted EBITDA grew to approximately $61.6 million, which was up $53.5 million year-over-year and up $11.7 million or 23.5% sequentially.
Adjusted EBITDA margin in the first quarter was 28.4%.
As I mentioned, new business in the first quarter grew to a new all-time high.
So we're really starting the second quarter with a strong backlog of work.
Now August is historically a seasonal month influenced by summer vacations, but new business for August was up approximately 41% year-over-year and was in line with our expectations.
Now if monthly trends in each of our lines of business are consistent with historical patterns and market conditions remained strong, we expect demand to continue to accelerate with new business up sequentially in September, peaking at a quarter high in October.
Additionally, as previously discussed, we're going to continue to make near term investments in consultants and execution staff to fuel future growth and we do expect employee productivity to remain strong and G&A spend to remain at or near current levels in the second quarter, keeping both earnings and profitability strong.
Now assuming no major Delta variant related lockdowns or changes in worldwide economic conditions, financial markets or foreign exchange rates, we expect our consolidated fee revenue in the second quarter of fiscal '22 to range from $585 million to $615 million and our consolidated diluted earnings per share to range from $1.30 to $1.44.
Now as we've begun our new fiscal year, we continue on a path of strong financial performance, leaving no doubt about our strategy or the durability of our business model.
Today, we stand alone in industry of one, going to market with unique end-to-end organizational consulting solutions that continue to grow in relevance.
Our robust new business generation over the past six months is a true barometer of marketplace recognition.
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.
| q1 earnings per share $1.37.
sees q2 earnings per share $1.30 to $1.44.
sees q2 fee revenue to be in range of $585 million and $615 million.
|
As you may recall, on our Q2 call in July, we were still somewhat apprehensive as we had just surpassed last year's COVID-impacted leasing velocity and the emerging Delta variant was creating uncertainty around universities plans to move forward with in-person classes and a return of campus social activities.
At that time, based on historical leasing velocity data, we continued to believe that the industry's COVID recovery would not fully materialize until the fall of 2022.
Today, just three months later, we are extremely pleased to report that students all across the nation continue to flock back to their college towns and leased well into the months of August and September, and universities continued to press forward with their plans to return to in-person activities, including full attendance at college football stadiums across America.
The result, the student housing industry has emerged from the COVID pandemic in the fall of 2021 with its investment thesis fully intact and with the sector having tailwinds, the like of which we haven't seen in many years.
As outlined in our interim update earlier this month, we're pleased that the execution of our fall '21 lease-up produced an opening fall occupancy of 95.8% for our total portfolio and rental rate growth of 330 to 380 basis points for our 2021 and 2022 same-store property groupings, respectively.
All these metrics are above the assumptions in the high end of our prior lease-up guidance.
In addition to the extremely successful lease-up, our operational and financial results also exceeded our expectations in the third quarter, with ancillary income and operating expenses beating our forecast.
In addition, the ongoing development and commencement of operations at Flamingo Crossings Village, our community serving the Disney College Program, are also going quite well.
During the quarter, we delivered the fifth phase of development and have now achieved 85% occupancy, in line with our expectations for this fall.
Notably, since the DCP program recommenced only five months ago, we have already executed leases with and moved in more than 4,500 residents, demonstrating the continued vibrant demand for the Disney College Program.
Our lease-up results and recent operational outperformance allowed us to increase the midpoint of our financial guidance by 4% to $2.08 per share, which is above the high end of our prior guidance range.
Based on the progress we've made this year, total property NOI returned to prepandemic levels this quarter, a full year earlier than we previously anticipated.
And more impressively, rental revenue is expected to exceed prepandemic levels in the fourth quarter for our same-store properties from 2019.
We now expect to grow earnings by 3% to 7% over 2020.
All in all, the company's recovery and financial performance this year has certainly exceeded our expectations as cumulatively, we have exceeded our original guidance for the first three quarters of the year by $0.12 per share or almost 10%, as students continue to return to college campuses throughout the year.
I'd like to now turn to the fundamentals of our industry.
As reported by owners and operators attending the NMHC Student Housing Conference earlier this month, occupancy and supply demand fundamentals of the sector are strong.
And again, the industry is experiencing some of the most substantial tailwinds we've seen in many years.
The broader comparable sector represented by the RealPage/Axiometrics 175 returned to prepandemic occupancy levels of approximately 94%, while also producing attractive rent growth of 2.5%.
We saw robust admission applications at four-year public and private universities we serve and target.
The strength in admission applications appears to have directly led to the highest level of first year student enrollment growth we have seen.
In the 48 of 68 university markets for which we are able to collect first year enrollment data, there was an increase of 7.4% over fall 2020 and 6.4% above prepandemic fall 2019.
For perspective, for four-year public institutions, in the prior 30-year period, average first year enrollment growth was approximately 2%.
This level of significant growth in first year students occurring this year indicates the emerging post-COVID era demand from students wanting to attend high-quality universities in person and should provide significant recurring housing demand in the years to come.
The record number of first year students, the reinstatement of on-campus housing policies and the resumption of in-person campus activities will once again allow us to implement our in-person and exclusive sports marketing program activities in the 2022 leasing season.
Historically, these programs have been an integral part of our early leasing season velocity outperformance and our final fall occupancy outperformance as compared to our peers.
The significant increase in first year students led to the highest level of total enrollment growth in recent years, up over 1.5% versus academic year 2020 and prepandemic academic year 2019.
In 62 of the 68 ACC markets for which we've been able to collect total enrollment data, this represents the addition of over 30,000 students.
Sector tailwinds also include a reduction in national new supply, continuing at least through the 2022-2023 academic year.
This includes a projected decrease of over 25% in ACC markets and represents the lowest level of new supply we have seen in over a decade.
In total, we are tracking new supply of only 15,500 beds with only 1/3 of our NOI being produced in markets seeing new supply.
This compares to 55% to 67% of NOI being produced in new supply markets over the last three years.
We're also seeing significant demand from universities seeking to modernize their on-campus housing.
During the quarter, we were awarded new third-party developments at Emory University and the University of Texas.
And this month, we started a new third-party development on the campus of Princeton University.
In all, we are tracking more than 60 universities that are evaluating privatized residential projects, a continuing increase compared to prepandemic levels.
In summing it up, we're extremely pleased with the progress that we and the sector have made in managing through the global pandemic.
Finally, with our sector's resiliency and investment thesis fully intact as we emerge from COVID, institutional capital is once again focusing on the sector, with several notable transactions recently occurring in the space.
We are highly confident in our ability to fund our business through strategic capital recycling and free cash flow generation, while producing attractive earnings growth for our shareholders.
With the sector's COVID recovery now largely complete, we believe the current transaction environment affords us the opportunity to accretively fund recent and ongoing development activity and further strengthen our balance sheet in 2022.
As such, we intend to accelerate $200 million to $400 million of disposition activity, which fully satisfies our projected funding needs.
Including the strategic capital recycling, we believe that FFOM per share growth in the range of 12% to 15% is achievable in 2022.
Based on the positive fundamentals in the student housing industry and the accretive contribution from our ongoing development program, we are excited about the prospects for continued growth beyond 2022.
We believe we are now well positioned to produce long-term earnings growth, net asset value creation and superior returns for our investors in the years ahead.
| american campus communities - maintaining recently increased guidance range for year ending dec 31, 2021.
|
Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported financial results in accordance with GAAP.
We were generally pleased with the second quarter results with net income of $23.9 million, earnings per share of $0.24, a pre-tax pre-provision ROA of 1.61% and the core efficiency ratio of 57.2%.
First, provision expense fell to $6.9 million from $31 million in the first quarter, as three non-performing loans were resolved.
The second quarter reserve increased from $2 million to $81 million or 1.28% of total loans, excluding PPP loans as we added another $5.5 million in qualitative reserves to reflect the economy and our COVID overlay.
We believe that ratio compares favorably to other incurred banks, although our second quarter reserve of $81 million was calculated using the incurred loss model.
Adding our previously disclosed day-one CECL increase would put reserves into the mid $90 million range.
That would put the reserve coverage in the mid-150s, which we believe would compare favorably with CECL banks our size, even with no further reserve build.
That's all because of the strong reserve build we did in the first quarter.
Our first quarter loan deferral figure of $1.1 billion or 17.6% of total loans fell all the way $186 million or 2.7% of total loans as of July 24.
Most of our deferrals were 90 days and our approach to customers, consumers, and businesses in March and early April shifted from accommodative and customer service oriented to a more credit-oriented approach in May and June.
The team is exercising extraordinary oversight with regard to credit.
This is warranted particularly if the ongoing reopening of the economy cannot safely continue in the ensuing quarter or two, and as the impact of the initial shorter-term government stimulus dissipates.
In the second quarter, our credit and banking teams did a name-by-name commercial loan review and spoke with some 1,600 clients in total.
Brian Karrip, our Chief Credit Officer will provide more credit commentary shortly.
Second, the team helped roughly 5,000 local businesses, preserve roughly 80,000 jobs at a median loan size of only $32,000 through the Payroll Protection Program.
Excluding $571 million of PPP loans, our portfolio grew 2.7% annualized, driven by record mortgage volumes, strong indirect loan originations and corporate banking growth.
Our Ohio markets accounted for all of the net new loan growth in the second quarter, further validating our Ohio expansion over the past few years.
As an aside, over $20 million in PPP loan fees were wired to First Commonwealth in June from the SBA and will accrete into income in the second half of the year, as we expect that the majority of our PPP loans will be forgiven.
Third, the net interest margin of 3.29% fell as expected.
But after adjusting for the dilutive effects of the PPP loans at 1% and an excess of low-yielding cash on our balance sheet, the NIM of our company was closer to 3.41%.
Jim Reske, our CFO, will provide commentary on margin expenses and other important items.
Fourth, non-interest income of $21.8 million in the second quarter increased some $2.5 million as the company set quarterly records in both mortgage originations and debit card interchange income.
Regarding the former, some $203 million in mortgage originations, increased gain on sale income from $1.7 million to $4.2 million.
On the latter, we added 10% more debit cards with our Santander branch acquisition last year.
And in the second quarter, consumer debit card swipes were up as retailers had a strong preference for cards versus cash.
This produced $5.9 million in debit card interchange income, $600,000 more than last quarter.
Fifth, our capital levels remained strong.
We have over $200 million of excess capital and together with our ALLL, this would allow us to absorb losses equal to roughly 5% of the entire loan portfolio at once, and still remain well capitalized.
Jim Reske will elaborate on this as well, but we want to enter 2021 and sustain through the year of $51 million to $52 million quarterly non-interest expense run rate.
At the onset of the COVID pandemic and after the first Federal Reserve cuts in March, the Executive team started a broad-based initiative dubbed, Project THRIVE, as we focused on one growth, expense and efficiency, NIM, and capital, with the expressed goal of emerging on the other side of the pandemic stronger than ever.
We now have two dozen initiatives, some small, some large in the works.
Yesterday, we announced the consolidation of 20% of our branches across our footprint into adjacent offices that will be completed by year-end.
This comes at a time that we are setting quarterly company records with online mobile account opening, mobile deposit activity and debit card activity with our new contactless cards.
In the ensuing months, we expect to launch our third generation of P2P payments and the fourth generation of an integrated mobile online banking platform after the successful launch of a new treasury management platform for our commercial clients in June.
Customer preferences continue to change meaningfully and the COVID crisis has pushed all things digital, well past traditional servicing.
Just one example; in the second quarter, we opened 992 deposit accounts via our mobile online platform, some three times our first quarter figure, which by the way was not bad.
Our investment in digital leaves us well prepared for the future.
Lastly, the First Commonwealth team will remain focused on a handful of items that will simply make us a better bank, namely accentuating opportunities to grow our core business and geographies as we continue to build the first Commonwealth brand.
Second, realizing efficiencies at a time when margins are compressed and could remain there for the foreseeable future.
Third, executing a handful of key digital initiatives in the ensuing months and continuing to build competitive advantage on that front.
And lastly, navigating the COVID environment to deliver good, through the cycle credit and net interest margin outcomes for our shareholders.
I'd like to now turn the time over to Jim Reske.
Core earnings per share of $0.24 rebounded strongly from last quarter.
This brings our trailing four quarter non-core earnings per share average to $0.21, well in excess of our current dividend of $0.11 per share.
Second quarter results were driven by relatively positive credit experience and the net interest margin.
Brian will discuss credit in detail in a moment, so my remarks will be focused on margin, expenses and changes in our loan deferrals.
The net interest margin fell from 3.65% last quarter to 3.29%.
The primary driver of NIM compression was, not surprisingly, rate resets on the bank's variable-rate loans following the Fed's 150 basis points of rate cuts.
However, there was also a pronounced effect on NIM from the addition of low rate PPP loans and the excess cash on the balance sheet as these loans were mostly disbursed in the customer deposit accounts.
We also saw inflows from other sources such as federal stimulus checks.
As a result, we had quarter-over-quarter growth in average deposits of $758 million.
Non-interest-bearing deposits alone increased by $537 million to 29.4% of total deposits, up from 25.3% last quarter.
This strong deposit growth resulted in an average of $212 million of excess cash in the quarter.
In fact, excess cash peaked at over $480 million in mid-July or nearly 5% of total assets.
This of course had a suppressive effect on the NIM.
We estimate that the impact of PPP loans and the like amount of associated deposits on NIM to be approximately 12 basis points in the second quarter, which would imply a core NIM of 3.41% for the quarter.
That represents 24 basis points of NIM compression, which is within the range of previous guidance, albeit at the higher.
Our ability to lower deposit costs in the second quarter, helped to blunt the impact of downward rates.
For example, the average rate on interest-bearing demand in saving deposits, which had over $4 billion, is our largest deposit category, was cut in half in the quarter from 48 basis points to 24 basis points.
Looking forward, we still have nearly $800 million of time deposits, at an average rate of 1.51%, which will reprice downward over time and should help offset the impact of negative loan replacement yields, though not completely.
As a result, even though we expect some further NIM compression, we believe the pace of compression should slow.
Adjusting for the impact on NIM from PPP loans and excess cash, we expect the core NIM to drift down to 325 to 335 by year-end.
To offset the impact of the low rate environment, we remain firmly focused on continuing our long and successful track record of controlling expenses.
The quarter-over-quarter increase of $2.5 million in non-interest expense was strongly affected by the unfunded commitment reserve, which was a negative $2.5 million last quarter but a positive $0.9 million this quarter for a $3.4 million negative quarter-over-quarter swing.
The other notable event in NAIE [Phonetic] was about $419,000 of COVID-related expense in the second quarter.
Going forward, we expect significant expense reductions from the branch consolidation project, Mike discussed earlier.
We expect this and other contemplated expense containment initiatives to enable us to maintain a non-interest expense run rate of between $51 million to $52 million per quarter for the foreseeable future.
Now, let me provide a few general remarks on our loans and deferrals and how they are trending.
Last quarter, we reported that deferrals totaled $1.1 billion or 17.6% of total loans as of April 24, the Friday before our first quarter earnings call.
Deferrals peaked during the quarter at approximately $1.4 billion.
We would note that most of our deferrals were for 90-day periods that began in the last week of March and continued through April.
As such, the initial 90-day period for most of these loans has been coming to an end only in the last few weeks.
But we would encourage caution in drawing conclusions from what is only early experience.
However, as Mike mentioned, as of July 24, last Friday, they remained $186.3 million of loans in deferral status or 2.7% of total loans.
While that reduction is an early positive sign, we firmly believe that it's too early to draw any conclusions until we see more evidence of actual payment history on these loans.
We have therefore, increased qualitative reserves held against consumer forbearances by $1.2 million in the second quarter.
Last quarter, volatility in forecast model gave us pause as to the efficacy of those models, and now volatility continues with the current debate over V, W, U and swoosh recoveries.
As I mentioned last quarter, we saw no advantage in CECL adoption at the time and we continue to believe that's the case.
So, we have, in fact, allowed us to observe the various industry approach of CECL adoption and refine our models accordingly.
However, even though we are on incurred, as shown on Page 6 of our supplement, we did a significant reserve build in the first half of this year, resulting in a coverage ratio that we believe compares favorably with incurred banks as well as many CECL adopters, and we continue to build qualitative reserves in the second quarter.
Although we're in the early innings of the economic recession, we're pleased with our asset quality trends for the second quarter.
Our NPLs decreased approximately $3.1 million, improving from 0.93% of total loans in Q1 to 0.88%, excluding PPP.
Reserve coverage of NPLs rose from 133.53% to 145%.
NPAs decreased $4.5 million from 0.74 of total assets in Q1 to 0.66.
Classified loans as a percentage of total loans excluding PPP decreased from 1.42% to 1.21%.
These improving trends form the backdrop of our approach for loan loss reserve in the second quarter.
We continue to build reserves under the incurred loss model by approximately $2.4 million.
Our allowance of total loans grew to 1.28%.
Provision for the quarter was $6.9 million, driven by modest loan growth and overall decrease in NPLs of approximately $3.1 million.
The decrease in specific reserves of approximately $2.9 million [Technical Issues] changes in our qualitative reserves.
Our standard qualitatives increased by $3.4 million quarter-over-quarter, reflecting the economic conditions.
As Jim mentioned, our COVID qualitative overlay increased by $2.1 million to $9.9 million.
Recall, from the last quarter, we developed a framework to capture the incremental risk of loss due to COVID.
The framework included eight higher risk commercial portfolios.
Additionally, we developed consumer overlay based on our internal PD/LGD models to address the risk associated with consumer forbearances.
We attribute our solid performance in the quarter to our continued adherence to our credit principles.
Over the past several years, we've managed concentration risk in both levels, creating granularity in our commercial loan portfolios.
As of June 30, we only had 27 relationships over $15 million.
To better identify portfolio risk, we have prepared internal industry studies for each commercial real estate segment as well as certain C&I segments, including dealer floor plan and energy.
Our industry study is a valuable tool to identify and vantage certain portfolio risk.
Additionally, we use our industry studies to manage our geographic diversification and diversification with industry sectors.
One of our great strengths is that we use our size, speed, and flexibility to our advantage.
For example, over the course of the second quarter, we performed a comprehensive loan review, covering approximately 1,600 borrowers and $3.6 billion in commercial loans.
We reviewed commercial credits as small as $350,000, so as to better understand COVID-related impacts on our commercial clients and small businesses.
The review is founded on the notion that, in this current economic environment, financial statements look at customers through the rearview mirror.
And we want to look through the windshield.
During our loan reviews, we relied on our experience and customer knowledge to evaluate the health of our borrowers on a name-by-name basis.
These loan reviews helped us to identify potential risk and to adjust risk ratings accordingly.
| first commonwealth declares quarterly dividend.
q2 earnings per share $0.24.
compname reports q2 earnings per share $0.24.
|
Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
The team and I are pleased with the quarter and we're enjoying playing some offense in our consumer lending businesses.
Over the last several years, we've made significant investments in our digital capacity, our regional business model to spur growth, our fee businesses and a stronger consumer lending platform.
The fruits of these investments are apparent in our third quarter results.
With several recent efforts like Project Thrive, we have made these investments while maintaining positive operating leverage and improving our efficiency.
Third quarter core earnings per share of $0.24 was consistent with last quarter, even as we further increased loan loss reserves.
The core efficiency ratio improved to a record low of 54.45% and the core pre-tax pre-provision ROAA strengthened to 1.74%.
Core pre-tax pre-provision net income was $41.1 million, up some 14% over the second quarter.
The Company achieved record quarterly fee income of $26.7 million, an increase of $4.9 million from the previous quarter.
This more than offset a $4.4 million increase in provision expense to $11.2 million.
Several important themes continue to unfold, namely, first in the third quarter, credit was solid and we continue to build loan loss reserves to recognize the impact of the pandemic.
Excluding PPP balances, the allowance for loan losses as a percentage of total loans increased 10 basis points to 1.38%.
Including previously disclosed day one CECL adjustment, the coverage ratio excluding PPP loans would increase to 1.59%, as seen on Page 10 of the earnings supplement.
The reserve build was driven by several qualitative factors in our incurred loss model, which Brian will cover during his remarks.
Our non-performing loans fell from $56 million at the end of the second quarter to $49.7 million at the end of the third quarter.
On Page 13 of the earnings supplement, COVID-19 deferrals totaled 2.68%, as of July 24th.
Those deferrals fell to 17 basis points as of October 23rd or last Friday.
Similarly, on Page 12 of the earnings supplement, deferrals on the commercial portfolios most impacted by COVID declined again from 3.4% on July 24th to 14 basis points as of last Friday.
I believe we are well positioned at this stage of the pandemic with a strong balance sheet that can weather uncertainty.
Next, third quarter fee income as a percentage of revenue was 28.8%.
We are particularly proud of this number as it reflects years of focus and investment, as we've diversified our revenue stream.
Our third quarter fee income was driven by strength across multiple business lines.
First, interchange income was $6.4 million, up roughly $500,000 over the second quarter.
The team's retention of households and execution through its five smaller acquisitions has really borne through here.
Mortgage gain on sale income was $6.4 million with a record quarter of $240 million in production.
As an aside, 40% of these loans were not sold and remain on our balance sheet.
Again, we de novo-ed our way into this business, just over five years ago.
Despite a lackluster industrywide small business demand, SBA gain on sale income was $1.4 million, which also contributed to fee income.
Despite our smaller size in some of our larger metropolitan markets in which we compete, our 2020 SBA origination performance now ranks us number two in Western Pennsylvania and number four in Northern Ohio.
Also on the fee income front, trust revenue totaled a record $2.6 million as well.
The third theme is loans.
Loans grew $33 million or 2% on a linked-quarter basis, as the consumer lending business led the way.
In commercial lending, however, utilization of lines credit fell some $55 million from 38% at the end of June to 34% at the end of September, as business' investment and working capital utilization has stalled.
Our mortgage branch based consumer and indirect lending businesses had been robust, even as underwriting standards have been tightened.
Fourth, the net interest margin contracted about 18 basis points to 3.11% in the third quarter, despite respectable loan growth and resilient loan spreads, particularly on the consumer side.
Net interest income, however, was virtually unchanged, falling only $300,000 to $66.7 million.
Excess liquidity and negative replacement yields on loans were the primary drivers of the decrease in NIM.
Jim will provide more color here.
Fifth, core non-interest expenses were down $63,000 for the quarter to $52.3 million even -- $52.3 million, even as we continue to invest in our digital platform and tools for our client.
Importantly, the team launched a new digital platform in mid-September called Banno, which replaced both our online banking and mobile banking platforms.
The team also completed the conversion of our larger business customers to our new Treasury Management System.
We also added the person-to-person payment option of Zelle.
These launches impacted well over 200,000 consumers and small businesses and by all accounts went smoothly.
This is a very solid quarter for us.
Core earnings per share matched last quarter's results even with $6.9 million of reserve build.
And we hit consensus estimates even without any PPP forgiveness.
This is a significant point that's easy to overlook.
While our provision expense of $11.2 million came remarkably close to the consensus expectation of $11.1 million, our spread income came in roughly $3.5 million lower than consensus expectations and yet we still hit consensus.
To be completely fair, this differential in spread income is likely the result of our own previous guidance that PPP forgiveness would take place in the third and fourth quarter of this year, and as such, it would have been perfectly reasonable to expect third quarter net interest income to benefit from the acceleration of PPP premium amortization.
In reality, we had no such PPP forgiveness income in the third quarter.
Instead, strong fee income made up for the lack of PPP forgiveness income.
At this point, we do not expect any significant PPP forgiveness until the first and second quarter of next year.
Our core earnings figures excluded two non-recurring expense items from our results; $3.3 million of expense associated with a voluntary early retirement program and $2.5 million of expense associated with the branch consolidation effort, both of which have been previously disclosed.
These efforts combined with other expense initiatives are expected to help keep non-interest expense flat in 2021, not only by allowing us to continue the reduction in total salary expense that we have benefited from in 2020, due to our hiring freeze, but also by absorbing increases in other expenses as we return to a more normal operating environment.
Brian will provide commentary in a moment on credit, but I'd like to provide a little more color on a few things before turning it over to Brian.
First, our stated NIM was 3.11%, but was affected by negative replacement yields; a shift in mix toward consumer loans; and most importantly, an average excess cash position during the quarter of approximately $343.3 million or about 4% of average earning assets.
Consistent with prior disclosure, we calculate a core NIM, excluding the impact of PPP loans and excess liquidity of 3.28% in Q3.
The NIM should benefit in the near term from time deposit and other deposit repricing as well as some balance sheet management efforts designed to move excess customer funds off balance sheet, thereby reducing excess cash.
These efforts are expected to help offset negative replacement yields and keep the core NIM relatively stable in the near-term.
Over the course of next year, however, we currently expect the core NIM, ex-PPP to continue a path of modest contraction in the 3.20% to 3.30% range.
Second, Mike mentioned that our fee income of $26.9 million was very strong in Q3, up by nearly $5 million from last quarter.
Because much of this was driven by mortgage, fee income is expected to seasonally adjust to approximately $24 million to $25 million in the fourth quarter.
And finally, I know Mike already mentioned this, but if you look at Page 10 of the supplement, you will see graphically what we have verbally explained in prior quarters, that even though we delayed the adoption of CECL, the addition of our day one CECL number to our current incurred ALLL results in a reserve of $101.2 million and a reserve coverage ratio of 1.59%.
I can add that reserve figure is not materially different from our internal parallel CECL runs as of September 30th.
So even though facts and circumstances may change before we adopt CECL next quarter, not the least of which is the economic forecast, our cumulative reserve building in 2020 under the incurred model has left us in a very good position ahead of CECL adoption next quarter.
It's good to be with you again.
As outlined in our investor deck, credit quality was solid for the third quarter in spite of the uncertain economic environment.
As expected, delinquencies ticked up modestly due to the run-off of stimulus and the reduction in payment release.
We are cautiously optimistic by the improvement in unemployment and the reopening of the economies in Western Pennsylvania and Ohio.
We continue to be watchful of our deferral roll off reports to evaluate our borrowers as they resume full payment status.
Net charge-offs for Q3 were $4.3 million, which includes approximately $1.2 million in consumer charge-offs.
Net charge-offs annualized were 0.27%.
Our NPLs improved approximately $6.3 million to $49.7 million, improving to 0.78% from 0.88% of total loans excluding PPP loans.
This is the second consecutive quarter for us to report an improvement in NPLs.
Reserve coverage of NPLs rose to 177% from 145%, again excluding PPP loans.
Similarly, our NPAs improved $6.7 million to 0.80% of total loan assets from 0.91%.
We've conducted yet another loan-by-loan review of the higher risk portfolios and adjusted risk ratings as appropriate.
Our proactive approach to risk ratings resulted in criticized loans increasing approximately $60 million, while classified loans increased modestly.
These trends form the backdrop of our approach for loan loss reserve in the third quarter.
As shown in the slide deck, the provision for the quarter totaled $11.2 million, which resulted in a reserve build of $6.9 million under our incurred loss model.
The allowance for loan loss as of September 30th totaled $88.3 million as compared to $81.4 million at June 30th.
The reserve balance grew to 1.38% excluding PPP loans from 1.28%.
Let me offer some color related to the reserve build for the quarter.
Net charge-offs were $4.3 million.
We have a slight increase in specific reserves of approximately $500,000.
Our standard qualitative reserves increased approximately $900,000 quarter-over-quarter, reflecting a mix of economic conditions.
Our COVID qualitative overlying reserve increased by $4.7 million for Q3 to $14.6 million.
We released approximately $1.9 million in consumer reserves due to improving deferral experience as well as improved economic conditions.
We increased our high-risk portfolio reserves by approximately $6.6 million, largely due to increases in the overlay reserves for our hospitality and retail portfolios.
And operator, we'll now take questions.
| q3 revenue $41.1 million.
|
I'm Larry Mendelson, Chairman and CEO of HEICO Corporation.
The dedication to HEICO's customers and to the safety of their fellow team members has been commendable.
I'd now like to take a few moments to address the impact of COVID-19 on HEICO's recent operating results.
Results of operations in the first six months and the second quarter of fiscal '21 continue to reflect the adverse impact from COVID-19.
Most notably, demand for our commercial aviation products and services continues to be moderated by the ongoing depressed commercial aerospace market which, we know, is beginning to rebound and return to normal.
Looking ahead to the remainder of fiscal '21, we are cautiously optimistic that the ongoing worldwide rollout of COVID-19 vaccines will have and, in fact, is having a positive influence on commercial air travel and will generate more favorable economic environments in the markets that we serve.
Summarizing the highlights of the first six months and second quarter of fiscal '21, we are pleased to report record quarterly net sales within the ETG Group, and our third consecutive sequential increase in quarterly net sales and operating income of the Flight Support Group.
The ETG Group set a quarterly net sales and operating income record in the second quarter of fiscal '21, improving 11% and 9%, respectively.
These increases, principally reflect the impact from our profitable fiscal '20 and '21 acquisitions, as well as very strong organic growth of 19% for our other electronic products.
The Flight Support Group reported sequential growth in operating income and net sales in the second quarter of fiscal '21, and they improved 37% and 16% respectively, as compared to the first for fiscal '21.
Our total debt to shareholders' equity reduced and improved to 27.1% as of April 30, '21 and that compared to 36.8% as of October 31, '20.
Our net debt, which is total debt less cash and cash equivalents, of $199 million as of April 30, '21 compared to shareholders' equity ratio improved to 9.2% as of April 30, '21 and that was down from 16.6% as of October 31, '20.
And this provides HEICO with substantial acquisition capital in the balance of our $1.5 billion unsecured revolving credit facility as well as other available capital.
We are not a capital constrained company.
Our net debt to EBITDA ratio improved to 0.47 times as of April 30, '21, down from 0.71 times as of October 31, '20.
During fiscal '21, we successfully completed one acquisition, and we completed -- we have completed five acquisitions over the past year.
We have no significant debt maturities until fiscal '24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes, which will accelerate growth and maximize shareholder returns.
Cash flow provided by operating activities remained strong, increasing 2% to $210.1 million in the first six months of fiscal '21 and that was up from $205.9 million in the first six months of fiscal '20.
In March '21, we acquired all of the business assets and certain liabilities of Pyramid Semiconductor.
Pyramid is a specialty semiconductor designer and manufacturer, which offers a well-developed line of processors, static random-access memory, electronically erasable programmable read-only memory and logic products on a diverse array of military, space and medical platforms.
We do expect this acquisition to be accretive to earnings within the first 12 months following the closing.
The Flight Support Group's net sales were $429.6 million in the first six months of fiscal '21, as compared to $553 million in the first six months of fiscal '20.
The Flight Support Group's net sales were $230.3 million in the second quarter of fiscal '21, as compared to $252 million in the second quarter of fiscal '20.
The net sales decrease in the first six months and second quarter of fiscal '21 is principally organic, and reflects lower demand for the majority of our commercial aerospace products and services resulting from the significant decline in global commercial air travel attributable to the pandemic.
The Flight Support Group's operating income was $61.3 million in the first six months of fiscal '21, as compared to $109.6 million in the first six months of fiscal '20.
The operating income decrease in the first six months of fiscal '21 principally reflects the previously mentioned lower net sales, as well as a lower gross profit margin, higher performance-based compensation expense and the impact from lost fixed cost efficiencies stemming from the pandemic.
The Flight Support Group's operating income was $35.5 million in the second quarter of fiscal '21, as compared to $47.5 million in the second quarter of fiscal '20.
The operating income decrease in the second quarter of fiscal '21 principally reflects higher performance-based compensation expense, directly resulting from the strong improvement in operations during the past three consecutive quarters.
The Flight Support Group's operating margin was 14.3% in the first six months of fiscal '21, as compared to 19.8% in the first six months of fiscal '20.
The operating margin decrease in the first six months of fiscal '21 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher performance-based compensation expense and lost fixed cost efficiencies, and the lower gross profit margin.
The Flight Support Group's operating margin was 15.4% in the second quarter of fiscal '21, as compared to 18.9% in the second quarter of fiscal '20.
The operating margin decrease in the second quarter of fiscal '21 principally reflects the previously mentioned higher performance-based compensation expense.
The Electronic Technologies Group's net sales increased 9% to a record $466.6 million in the first six months of fiscal '21, up from $427.4 million in the first six months of fiscal '20.
The net sales increase in the first six months of fiscal '21 principally reflects our fiscal '20 and '21 acquisitions as well as organic growth of 1%.
The organic growth principally reflects increased demand for other electronic and space products, partially offset by demand for commercial aerospace products.
The Electronic Technologies Group's net sales increased 11% to a record $243.1 million in the fiscal second quarter of '21, up from $219 million in the second quarter of fiscal '20.
The net sales increase in the second quarter of fiscal '21 principally resulted from our fiscal '20 and '21 acquisitions, as well as organic growth of 3%.
The organic growth principally reflects increased demand for our other electronic and defense products, partially offset by decreased demand for commercial aerospace products.
The Electronic Technologies Group's operating income increased 7% to a record $131.4 million in the first six months of fiscal '21, up from $123 million in the first six months of fiscal '20.
The operating income increase in the first six months of fiscal '21 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin mainly from lower net sales of defense and commercial aerospace products that were partially offset by an increase in net sales of certain other electronic products.
The Electronic Technologies Group's operating income increased 9% to $71.3 million in the second quarter of fiscal '21, as compared to $65.5 million in the second quarter of fiscal 2020.
The operating income increase in the second quarter of fiscal '21 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin mainly from a less favorable product mix for our defense products, as well as a decrease in net sales of commercial aerospace products that were partially offset by a net increase in sales of certain other electronic products.
The Electronic Technologies Group's operating margin was 28.2% in the first six months of fiscal '21, as compared to 28.8% in the first six months of fiscal '20.
The Electronic Technologies Group's operating margin was 29.3% in the second quarter of fiscal '21, as compared to 29.9% in the second quarter of fiscal '20.
The operating margin decrease in the first six months and second quarter of fiscal '21 principally reflects the previously mentioned gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales mainly from efficiencies gained from the previously mentioned net sales growth.
Moving on to details, the diluted earnings per share, consolidated net income per diluted share was a $1.03 in the first six months of fiscal '21, and that compared to $1.44 in the first six months of fiscal '20.
The decrease in the first six months of fiscal '21 principally reflects the previously mentioned lower operating income of Flight Support and higher income tax expense, and that was partially offset by the previously mentioned higher operating income of the ETG Group and lower interest expense.
Consolidated net income per diluted share was $0.51 in the second quarter of fiscal '21, as compared to $0.55 in the second quarter of fiscal '20.
The decrease in second quarter fiscal '21 principally reflects the previously mentioned lower operating income of Flight Support, partially offset by lower income tax expense as well as higher operating income of the ETG Group and lower interest expense.
Depreciation and amortization expense totaled $22.9 million in the second quarter of fiscal '21, that was up from $21.7 million in the second quarter of fiscal '20, and totaled $45.9 million in the first six months of fiscal '21, up from $43.3 million in the first six months of fiscal '20.
The decrease in the second quarter and first six months of fiscal '21 principally reflects incremental impact from the fiscal '20 and '21 acquisitions.
R&D expense increased to $34.2 million or 3.9% of net sales in the first six months of fiscal '21, and that was up from $33.1 million [Phonetic] or 3.5% of net sales for the first six months of fiscal '20.
R&D expense increased to $18 million or 3.9% of net sales in the second quarter of fiscal '21, and that was up from $16.8 million or 3.6% of net sales, second quarter fiscal '20.
We note that significant ongoing new product development efforts are continuing at both ETG and Flight Support.
Our consolidated SG&A expense were $161.2 million in the first six months of fiscal '21, as compared to $157.8 million in the first six months of fiscal '20.
Consolidated SG&A expenses were $83 million in the second quarter of fiscal '21, and that compared to $70.7 million in the second quarter of fiscal '20.
The increase in consolidated SG&A expense in the first six months and second quarter of fiscal '21 principally reflects higher performance-based compensation expense and the impact from our fiscal '20 and '21 acquisitions, partially offset by reductions in other G&A expenses and selling expenses.
Consolidated SG&A expenses as a percentage of net sales increased to 18.2% in the first six months of '21, up from 16.2% in the first six months of fiscal '20.
Consolidated SG&A expense as a percentage of net sales increased to $17.8 million [Phonetic] in the second quarter of fiscal '21, and that was up from 15.1% in the second quarter of '20.
The increase in consolidated SG&A expense as a percentage of net sales in the first six months and the second quarter of fiscal '21 principally reflects higher performance-based compensation expense.
Interest expense decreased to $4.5 million in the first six months of fiscal '21, down from $8 million in the first six months of fiscal '20.
Interest expense decreased to $2.1 million in the second quarter of fiscal '21, and that was down from $3.8 million in the second quarter of fiscal '20.
The decrease in the first six months and second quarter of fiscal '21 was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.
Other income in the first six months and second quarter was not significant.
Talking about income taxes.
Our effective rate in the first six months of fiscal '21 was 12%, as compared to 0.3% in the first six months of fiscal '20.
As previously mentioned, HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '21 and '20, and that accounted for the majority of the decrease in the year-to-date effective tax rate.
The tax benefit from stock option exercises in both periods was the result of strong appreciation in HEICO's stock price during the optionees' holding period, and the larger benefit recognized in the first quarter of fiscal '20 was the result of more stock options exercised in that period.
Our effective tax rate decreased to 19.5% in the second quarter of '21 -- fiscal '21, and that was down from 22.6% in the second quarter of fiscal '20.
The decrease principally reflects the favorable impact of higher tax exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan.
Net income attributable to non-controlling interest was $11.5 million in the first six months of fiscal '21, and that compared to $13.4 million in the first six months of fiscal '20.
The decrease in net income attributable to non-controlling interest in the first six months of fiscal '21 principally reflects a decrease in the operating results of certain subsidiaries of the Flight Support Group, in which non-controlling interest are held, and that was partially offset by higher allocations of net income to non-controlling interest as a result of certain fiscal '20 acquisitions, as well as an increase in the operating results of certain subsidiaries of the ETG Group in which non-controlling interest are held.
Net income to non-controlling interest was $5.8 million in the second quarter of fiscal '21, as compared to $5.5 million in the second quarter of fiscal '20.
For the full fiscal '21 year, we continue to estimate a combined effective tax rate and non-controlling interest rate of between 24% and 26% of pre-tax income.
Now let's talk about the balance sheet and cash flow.
One thing I want to mention that in the second quarter of fiscal '21, cash flow from operations was a 146% of reported net income.
So the net income was $70.7 million and the cash flow was almost $103 million.
Our financial position and forecasted cash flow remain very strong.
As we discussed earlier, cash flow provided by operating activities increased 2% to $210.1 million in the first six months of fiscal '21, and that was up slightly from $205.9 million in the first six months of fiscal '20.
Our working capital ratio was 4.5 times, '21 as of April 30, compared to 4.8 times as of October 31, '21 [Phonetic].
Our days sales outstanding of receivables improved to 41 days as of April 30, '21, that was down slightly from 44 days as of April 30, '20.
We continue to closely monitor receivable collection in order to limit our credit exposure.
No one customer accounted for more than 10% of net sales.
Our five -- top five customers represented approximately 23% and 24% of consolidated net sales in the second quarter of fiscal '21 and '20, respectively.
Inventory turnover rate was 153 days for the period ending April 30, '21 compared to 139 days for the period ended April 30, '20.
The increased turnover rate principally reflects lower sales volume from the pandemic's impact on demand for certain of our commercial aerospace products and services.
Despite the increased turnover rate, our subsidiaries has done an excellent job controlling inventory levels in the first six months of fiscal '21, and we believe that's appropriate to support expected future net sales as well as our increased backlog as of April 30, '21, which increased by $51 million to $895 million.
Looking ahead, as we look ahead to the remainder of fiscal '21, we are cautiously optimistic that the ongoing worldwide rollout of COVID-19 vaccines will have a positive influence and, in fact, is having a positive influence on commercial air travel, and it will generate favorable economic environments in the markets that we serve.
The pace of recovery in the global travel remains difficult to predict, and can be negatively influenced by new COVID variance and varying vaccine adoption rates.
Given those uncertainties, we cannot provide fiscal '21 net sales and earnings guidance at this time.
We continue to estimate capital expenditures of approximately $40 million for fiscal '21.
That strength will manifest from the culture of ownership, mutual respect for each other and the unwavering pursuit of exceeding our customers' expectations.
I want to remind the listeners that a very high percentage of HEICO members are HEICO shareowners through their 401(k) plans.
We have many millionaires, multi-millionaires and wealthy team members who all support the operation of HEICO.
| compname reports q2 earnings per share of 51 cents.
q2 earnings per share $0.51.
cannot provide fiscal 2021 net sales and earnings guidance at this time.
|
We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially.
With Josh and me on the phone today are Mark Olear, our Chief Operating Officer, and Brian Dickman, our new Chief Financial Officer.
I've known Brian for many years and we are all enjoying working with him and looking forward to his contributions at Getty for years to come.
I'll begin today's call by providing an overview of our fourth quarter and full-year 2020 performance, update everyone on our business in the context of the ongoing COVID-19 pandemic, touch on our 2021 strategic objectives and then we'll pass the call to Mark and Brian to discuss our portfolio and financial results in more detail.
We closed out 2020 with a highly productive quarter, which saw each aspect of our business pose significant accomplishments.
During the year, we maintained high monthly rent collections and stable occupancy in our portfolio, acquired 34 properties and completed six redevelopment projects.
The net result was the continued growth of both our revenues from rental properties, which increased by 3.5% for the quarter and 5% for the year.
And our adjusted funds from operations per share, which grew by 12% for the quarter and 7% for the year.
In a normal year, we'd be proud to report on this growth.
When you consider the countless challenges brought upon us by COVID-19, I can say with great satisfaction that these results were only possible due to the extraordinary efforts put forth by the entire Getty team this year.
I believe these results reflect the value of our portfolio and combined with our strong and flexible balance sheet and growing pipeline of investment prospects position the Company well for success as we work toward 2021 and beyond.
I'm pleased to report that our fourth quarter results continue to demonstrate the stability of our triple-net lease rents and growth platform.
Our portfolio of convenience stores, gas stations and other automotive assets produced another strong quarter of rent collections, operating performance and growth at Getty.
We saw the rent collection rate increase to 98.7% and we collected substantially all of the deferred rent and mortgage payments that were due to us in the fourth quarter.
We entered 2021 with a small balance of COVID-related deferrals, which we expect to collect throughout this year.
In addition, Getty completed several leasing and disposition transactions in the quarter, which we -- which will serve to stabilize the small number of assets where we were experiencing difficulties with rent collections.
Looking ahead, although uncertainty remains regarding the forward impact of COVID-19 to the broader economy, we are encouraged by the strength exhibited by our tenants and assets since the beginning of the pandemic.
We will continue to be vigilant in monitoring the health of our tenants as we believe the severity of the COVID-19 pandemic on the US economy will continue to impact the consumer and retail activity through at least the first half of 2021, and therefore, could negatively affect Getty's rent collections and financial results.
The execution of the Company's acquisition strategy was an important driver of Q4 and full year 2020 performance.
For the quarter, Getty acquired 10 properties for $45.1 million and for the year, we acquired 34 properties for $150 million, which represents significant growth over the Company's acquisition activity in the prior year.
These high-quality assets are located in numerous markets across the country and include portfolios of both convenience stores which offer consumers food, traditional merchandise and fuel as well as car washes.
We also continued the momentum of our redevelopment program as we completed our third project with AutoZone, bringing our total of completed projects for the year to six.
We are closing in on completing 20 projects since the inception of our redevelopment strategy further demonstrating the value of the real estate we hold in our portfolio.
Our balance sheet also ended 2020 in excellent condition as we successfully issued a $175 million, 3.4% debt private placement in December and we issued approximately $65 million of equity under our ATM program during the year.
Our leverage continues to be less than 5 times and with a revolver that is almost completely undrawn, Getty has significant capacity to fund its growth plans.
As we enter 2021, we feel encouraged about our portfolio of nearly 1,000 properties.
The convenience store industry and other automotive businesses are essential and largely internet resistant.
Our rents 65% of which come from the top 50 MSAs in the US continue to be well covered.
In fact, despite COVID-related challenges, our rent coverage ratio remained stable throughout the year and ended 2020 at a healthy 2.6 times.
Our portfolio is built around serving the needs of the car driving individual and it's continuing to do so whether it's stopping for convenience store items, fuel, getting snacks, meals, or getting your car washed or reserviced.
These are needs that continue to be in high demand today and which we believe will be stable for the mobile consumer for years to come.
Our team is more focused than ever on executing our growth initiatives, including maximizing the quality of our input portfolio through continued active asset management, enhancing our portfolio through accretive acquisition in stores and other automotive assets which serve the mobile consumer and unlocking embedded value through our selective redevelopments.
We are confident in our targeted investment strategy, which focuses on acquiring high-quality real estate in Metropolitan markets across the country and in our ability to continue to successfully execute on these strategic objectives.
Our approach and focus on driving growth should result in driving additional shareholder value as we move through the remainder of 2021 and beyond.
During 2020, Getty's underwriting of potential transactions grew as we added resources to focus on convenience store and other automotive opportunities.
For the year, we reviewed approximately $2.1 billion of opportunities, which met our initial screen process.
Convenience store opportunities represented 62% and other automotive represented 38% of the total.
As Chris mentioned, we remain highly committed to growing our portfolio in terms of both the convenience store industry, which offers consumers food, traditional merchandise and fuel, and with other automotive-related assets that are tied to mobile consumer spending.
Going forward, we anticipate growing both areas of our underwriting platform as we view the businesses as highly complementary and the underwriting characteristics to be very similar.
To review a few highlights of our investment activities, for the fourth quarter, we invested $45.1 million in 10 highly -- high quality convenience store and car wash assets.
In October, we completed a sale-leaseback with CEFCO Convenience Stores, one of the leading independent convenience store operators in the Southern United States.
In this transaction, Getty acquired six properties for $28.7 million, all of located throughout the state of Texas.
These properties are subject to unitary triple-net lease with a 15-year base term and multiple renewal options.
They have an average lot size of 2.7 acres and an average store size in excess of 5,300 square feet, which reflect that the assets we acquired have all the attributes of today's modern full service convenience store.
Our initial cash yield is in line with our historical acquisition cap rate range.
In addition, we acquired four car wash assets in individual transactions with Go Car Wash and Zips Car Wash for $16.4 million in the aggregate.
For the year, we acquired 34 properties for $150 million.
Our weighted average initial return on acquisitions for the year was 7%.
Finally, the weighted average initial lease term of the properties acquired for the year was 14.6 years.
Overall, our acquisition team remains busy sourcing and underwriting potential investments and we continue to feel strongly that the volume of opportunities we are underwriting will produce additional growth as we progress through this year.
We expect that our future acquisition activity will remain focused on the convenience store and other automotive sectors and that we will pursue direct sale-leasebacks, acquisitions of net leased properties and funding for new to industry construction.
Finally, we remain committed to our core underwriting principles of acquiring high quality real estate and partnering with strong tenants in our target asset classes.
Moving to our redevelopment platform.
For the year, we invested approximately $2.9 million in both our completed projects and sites which are in progress.
In the fourth quarter, we returned one redevelopment project back to the net lease portfolio bringing our total for completed rent commencement projects to six in 2020 and 19 since the inception of our program.
Specifically, in October, rent commenced on project with AutoZone in New Jersey.
In this project, we invested $0.2 million and we expect to generate a return on our investment of more than 45%.
In terms of redevelopment projects, we ended the quarter with 10 signed leases or letters of intent, which includes six active projects and four signed leases on properties, which are currently subject to triple-net leases, but which have not yet been recaptured from the current tenants.
We expect to have rent commencements at several sites during 2021 with remainder completing within three years.
On the capital spending side, we have invested approximately $1.8 million in the 10 redevelopment projects in our pipeline and estimate that these projects will require total investment by Getty of $5.8 million.
We project these redevelopments will generate incremental returns to the company in excess of where we could invest these funds in the acquisition market today.
We remain committed to optimizing our portfolio and continue to anticipate redevelopment opportunities over the next five years, possibly involving between 5% and 10% of our current portfolio with targeted unlevered redevelopment program yields of greater than 10%.
We sold 11 properties during 2020 realizing proceeds of approximately $6 million.
These properties are sold -- sold were vacant or returned to us by tenants for the terms of their lease agreements.
We expect the net financial impact of these dispositions will be minimal.
In addition, during the year, we exited 10 properties, which we previously leased from third-party landlords.
As we look ahead, we will continue to selectively dispose of properties where we have made the determination that the property is no longer competitive as a convenience store location or does not have redevelopment potential.
The net result is our portfolio is now 35 states plus Washington DC and 65% of our annualized base rent comes from the top 50 national MSAs.
We ended the year with 946 net lease properties, six active redevelopment sites and seven vacant properties.
Our weighted average lease term is approximately 9.5 years, and our overall occupancy, excluding active redevelopments, increased to 99.3%.
I'm excited to be here with Chris, Mark, Josh and the rest of the Getty team and I look forward to interacting with all of you going forward.
I'll start with a recap of earnings.
Hopefully, everyone's had a chance to see yesterday's release.
AFFO, which we believe best reflects the Company's core operating performance, was $0.48 per share for the fourth quarter and $1.84 per share for the full year, representing year-over-year increases of 12% and 7% respectively.
FFO was $0.91 per share for the fourth quarter and $2.32 per share for the full year.
Both periods were impacted by non-recurring legal settlement in the company's favor.
Our total revenues were $37.1 million in the fourth quarter and $147.3 million for the full year, representing year-over-year increases of 3.3% and 4.7% respectively.
Rental income, which excludes tenant reimbursements and interest on notes and mortgages receivables grew 3.9% to $31.8 million in the fourth quarter and 7.1% for the full year to $128.2 million.
Acquisition activity, rent escalators in our leases, and the completion of redevelopment projects, all contributed to the growth in our rental income.
On the expense side, we benefited from a reduction in property costs in both the fourth quarter and full year, primarily due to decreases in third-party rent expense and professional fees related to property redevelopments.
Environmental expenses increased in the fourth quarter versus the prior year, although the amounts were credits in both periods, a decrease for the full year versus 2019.
Environmental expenses are subject to a number of estimates and non-cash adjustments and continue to be highly variable.
G&A expenses increased in both the fourth quarter and full year primarily due to increases in employee-related expenses, including stock-based compensation and certain legal and other professional fees.
As previously mentioned, in the fourth quarter, we had a non-recurring benefit of $20.5 million as a result of the settlement of a litigation matter.
Turning to the balance sheet and our capital markets activities.
During the fourth quarter, we issued $175 million of new 10-year unsecured notes at 3.43% via direct private placements at three life insurance companies.
We used the proceeds to retire the full $100 million outstanding under our 6% Series A notes, which were coming due in early 2021 and to repay borrowings under our credit facility.
As a result of this transaction, we incurred a $1.2 million debt extinguishment charge which is included in GAAP net earnings and FFO.
We are also active with our at-the-market equity program during the quarter, raising $25.1 million at an average price of $28.45 per share.
For the full year, we raised $64.4 million through the ATM at an average price of $29.16 per share, which helped to fund our growth and maintain our low leverage profile.
As of December 31, we had total debt outstanding of $550 million, including $25 million outstanding under our credit facility and $525 million of long-term fixed rate unsecured notes.
Our weighted average borrowing cost was 4.1% and the weighted average maturity of our debt is 7.3 years.
In addition, our total debt to total market capitalization was 32%, our total debt to total asset value was 40% and our net debt to EBITDA is 4.9 times.
With no debt maturities until June of 2023, other than our credit facility, which matures in March of next year that has a one-year extension option in our election.
As we look ahead and think about our capital needs, we remain committed to maintaining a conservative, well-laddered and flexible capital structure.
With respect to our environmental liability, we ended the quarter and year at $48.1 million, which was down $2.6 million from the end of 2019.
For the fourth quarter and full year, net environmental remediation spending was approximately $1.6 million and $6.4 million respectively.
And finally, we are introducing our 2021 AFFO per share guidance at a range of $1.86 to $1.88 per share.
Our guidance includes transaction activity today but does not otherwise assume any potential acquisitions or capital markets activities for the remainder of 2021.
Specific factors, which impact our guidance this year include the full year impact of our 2020 investment and capital raising activities, our expectations that operating cost will generally continue to increase, our expectation that we will forego rent when we recapture properties for redevelopment and our expectation that we will remain active in pursuing acquisitions and redevelopment, which could result in additional expenses for deals ultimately not completed.
| q4 adjusted ffo per share $0.48.
q4 ffo per share $0.91.
established 2021 affo guidance at a range of $1.86 to $1.88 per diluted share.
qtrly total revenues $37.1 million versus $35.9 million.
|
Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
Third quarter net income of $34.1 million produced core earnings per share of $0.36, accompanied by core return on assets of 1.43% and core pre-tax pre-provision ROA of 1.79%.
This was a very good quarter for First Commonwealth with solid profitability, growth in credit metrics.
Other headlines for the quarter include first, excluding PPP loan payoffs, we're pleased with loan growth of 8.2% or $132.3 million in the third quarter with ongoing strength in indirect lending, home equity lending, commercial lending and mortgage lending.
Our growth is broad-based between commercial and retail lending disciplines and has become increasingly granular over the years.
As an aside, our loan growth over the first -- over the last two quarters has not yet benefited from higher line of credit utilization.
Second, the loan growth and improved margin enabled a $2.4 million quarter-over-quarter increase in net interest income to $70.9 million.
Jim will have more color on the net interest margin.
Third, non-interest income or fees grew $1.2 million quarter-over-quarter to $27.2 million on the strength of improvement in SBA and mortgage gain on sale income as well as higher wealth management income.
Importantly, our card-related interchange business generated $7.1 million in fee income.
Our regional business model has been a strong contributor to fee income growth with better teamwork and collaboration enabling us to deliver a broader set of solutions for our clients.
Fourth, our efficiency ratio increased to 55.27% as core non-interest expense rose some $3.7 million, primarily due to higher personnel expense, including higher incentive accruals based upon increased production, higher wages, particularly in entry level positions driven by inflationary pressure, higher hospitalization expense and then the hiring of the management team of the equipment finance division.
It is increasingly clear that we are not immune to expense headwinds in the current environment.
Fifth and importantly on the credit side, we guided last quarter to stronger credit metrics in the second half of the year in 2021.
That's exactly what is happening.
The third quarter represented our lowest loan charge-offs in nine quarters, a decrease in specific reserves for troubled credits coupled with general improvement in economic conditions led to a provision of just $330,000 down from $5.4 million in the second quarter.
Our reserves now represent 1.3% of total loans, excluding PPP and a 247% of non-performing loans.
The level of non-performing loans improved significantly from $52.8 million in the second quarter to just $38.1 million in the third quarter or 56 basis points of total loans.
Similarly, non-performing assets of $39 million at quarter end now stand at 41 basis points of total assets.
Subsequent to quarter end in early October a $6.9 million troubled credit was resolved and will be reflected in Q4 results.
Other notable third quarter items follow.
First Commonwealth earned the number one SBA lender ranking in Pittsburgh for the fiscal year ending September 30, 2021.
This is a significant accomplishment and reflective of both the talent in the SBA lending team coupled with the partnership enabled by the regional business model alluded to earlier.
In the third quarter, we continued to transform our technology to include the selection of a new loan origination system, as well as introducing several new cash management solutions or TM Solutions for our business clients.
We continue to be pleased with our adoption of our new mobile banking app, which is growing at an annualized rate of 18%.
As we work through our three year strategic plan, I would share three of our six areas of focus that might be most relevant to investors.
First, this accelerates the growth trajectory of our company, and we'll do this primarily through organic, broad-based loan growth across both our commercial and consumer loans.
Second, continue to increase digital relevance to drive customer satisfaction, ease of use and brand identity, primarily through the continued investment in customer-facing technology.
And third, anticipate and offset expense pressure to maintain operating leverage over a multi-year horizon.
I say this because we realize that building new businesses like equipment finance from the ground up will negatively impact operating leverage at first, but can have a powerful impact on operating leverage in the long run.
Regarding growth, we've received many good questions about our equipment finance efforts, so let me provide an update on our progress.
As you recall, we did a lift out from our large -- from a larger bank in June of a Philadelphia team with a 20-year track record of performance.
As we enter the business we expect the funds small ticket loans and leases on equipment on a nationwide basis.
The group's primary experience has been with essential used commercial equipment diversified across industries and equipment type.
The manufacturing, construction and professional service industries represent more than half of their originations by industry.
Primary equipment types included utility trucks, highway trucks, machine tools, trailers and manufacturing and packaging equipment.
A good example of a piece of essential use equipment would be a machine tool like a lathe that a small business needs to run its business.
We expect the average ticket size to be about $80,000 and an average term of 60 months.
Based on the historical performance of this team, we expect yields in the mid-5% range and spreads in the mid-4% range with charge-offs typically ranging from 55 basis points to 75 basis points.
If all goes according to plan, we believe that we can generate some $200 million to $250 million of equipment finance assets on our books by the end of 2022 before really hitting our stride in '23 and '24.
As Mike already mentioned, we were pleased with our financial performance this quarter.
Hopefully I can provide you with a little more detail on our net interest margin fee income and expenses.
The GAAP net interest margin expanded by 6 basis points this quarter to 3.33%.
Net expansion was driven by strong organic loan growth of just over 8% annualized.
The NIM expansion wasn't impacted by PPP.
Total PPP income in the third quarter was $5.7 million, up by only $200,000 from last quarter.
As of September 30, we had $152 million of PPP remaining on the books with $6.3 million in fee income that remains to be recognized.
We expect that most of the remaining PPP balances will be forgiven in the fourth quarter, which should help the GAAP NIM.
The core NIM which we calculate to exclude the effects of PPP and excess cash fell from 3.20% last quarter to 3.16% this quarter because we purchased $134 million of securities in the quarter.
Had we not purchased the securities and just let the money sit in cash, we would have excluded that cash from the core NIM calculation based on the way we calculate it and the core NIM would have dropped by only 1 basis point to 3.19%.
We think that the core NIM has bottomed out and should drift upwards from here as we redeploy excess cash into loans.
Our cost of deposits in the third quarter was down to only 6 basis points.
I'm pleased to report that our last remaining tranche of high cost deposits totaling $52 million at a cost of 1.65% repriced on October 13 subsequent to quarter end.
That alone will save us nearly $1 million a year in interest expense at about a point of NIM.
We will reap the benefit of that starting in the fourth quarter.
With that behind us, we're down to about $400 million in time deposits remaining at a cost of 36 basis points, three quarters of which will mature by the end of 2022.
So while some deposit repricing opportunity remains we are very far along in repricing our entire deposit book leaving us very well-positioned if rates rise.
With that in mind, we've taken a hard look at the deposit beta assumptions in our interest rate and risk sensitivity calculations.
In light of unprecedented levels of liquidity, we are revising our interest rate risk assumptions to reflect the ability to lag deposit rate increases for the first two 25 basis point rate hikes.
The result will be what we believe to be a more accurate picture of our asset sensitivity in the current environment.
You'll see this in our IRR tables once we published our 10-Q but to give you a preview a 100 basis point parallel shock will show an increase in the first year net interest income of over 5%.
That's roughly double the previous level of sensitivity so we wanted to explain the reason for the change.
Even without a rate hike however the NIM story in 2022 will be driven by the redeployment of excess cash and loans especially since we believe that deposit balances will remain relatively stable throughout 2022 and any loan growth above cash levels can be funded by cash flow from the securities portfolio.
This effectively rotates lower earning assets into higher earning ones.
This asset rotation should benefit NIM in 2022 even if rates don't rise and then if rates do rise our asset sensitivity will kick in and expand the margin even further.
Turning now to fee income; fee income of $27.2 million in the quarter remains a bright spot and seems to be one aspect of our company that is consistently underappreciated.
There's been talk of slowdown in mortgage all year but our mortgage gain on sale income actually increased by $400,000 over the last quarter.
SBA is another fee income engine that continues to gain momentum now that PPP is mostly behind us with SBA gear and sale income up by $700,000 from last quarter to $2.4 million.
Card related interchange income continues at new record levels for us of approximately $7 million a quarter, and deposit service charges after the off pace for much of the pandemic due to heightened cash levels and customer accounts have returned to more normalized levels.
Turning to non-interest expense, last quarter, our guidance was $53 million to $54 million, and we came in at $55 million for the reasons Mike described.
Like many of our peers, we are experiencing expense pressures mostly related to people costs like salaries and benefits.
While there are some normal variability and costs quarter-to-quarter, it's difficult to see NIE falling from current levels.
Fortunately, the pace of our loan growth gives us confidence that our revenue can outpace expense growth.
Finally, we repurchased 997,517 shares of stock during the third quarter at an average price of $13.35.
While we ended the quarter with approximately $10.3 million remaining of our $25 million share repurchase authorization we are also pleased to announce that our board authorized an additional $25 million share repurchase authorization yesterday.
We increased the authorization so that we could have repurchase authority available to redeploy expected excess capital generation in the fourth quarter and into next year.
And with that, we'll take any questions you may have.
| compname announces q3 earnings per share of $0.36.
compname announces third quarter 2021 earnings; declares quarterly dividend and authorization of a $25 million share repurchase program.
q3 earnings per share $0.36.
corp - qtrly net interest income (fte) of $70.9 million increased $2.4 million from previous quarter.
|
The slides that accompany today's call are also available on our website.
We'll refer to those slides by number throughout the call today.
This cautionary note is also included in more detail for your review in our filings with the Securities and Exchange Commission.
We also have other Company representatives available for a Q&A session after Lisa and Steve provide updates.
Slide 4 shows our quarterly and full-year financial results.
IDACORP's 2020 fourth quarter earnings per diluted share were $0.74, a decrease of $0.19 per share over the last year's record fourth quarter.
IDACORP's earnings per diluted share for the full year 2020 were $4.69, an increase of $0.08 per diluted share from 2019.
Today, we also issued our full year 2021 IDACORP earnings guidance estimate to be in the range of $4.60 to $4.80 per diluted share with our expectation that Idaho Power will not need to utilize in 2021 any of the additional tax credits that are available to support earnings in Idaho under its regulatory settlement stipulation.
These, of course, are our estimates as of today, and those estimates assume normal weather conditions over the balance of the year and includes customer usage returning closer to pre-COVID-19 levels as we progress through the year.
However, as you would expect, it is difficult to predict the full impact of evolving economic conditions on Idaho Power's customers and suppliers and how that could affect the upper end of the earnings guidance range or the use of tax credits.
The COVID-19 pandemic created unforeseen difficulties for our customers and our employees.
Economic uncertainty and interruptions to our daily lives became the norm.
Our nearly 2,000 employees were challenged daily as we continued to carry out our mission as an essential service provider.
And yet, through it all, IDACORP and Idaho Power continue to achieve tremendous results.
As noted on Slide 5, 2019 through 2020 were our two safest years in company's history.
I am so grateful for the continued focus of our employees on safety despite all the distractions surrounding their daily routine.
Turning to Slide 6.
We also saw some of our best third-party customer satisfaction rating being the top ranking utility among peers in the segments for overall customer satisfaction and fifth highest in the nation for business customer satisfaction.
And our reliability numbers remained among the best in the industry as we capitalized on 99.96% of the time.
The success we achieved in the continuation of our operations without significant interruption over the past year serve as testament to our great people.
Whether they were adapting to remote or hybrid work, finding innovative ways to serve our customers, meeting company goals or implementing additional measures to keep themselves, our customers and our community safe.
Our dedicated employees rose to the occasion and powered through it together.
In addition to outstanding operating results, I am happy to report that IDACORP marked its 13th consecutive year of growth in earnings per share, as detailed on Slide 7.
We believe this achievement is unparalleled among investor-owned utilities in the U.S. in recent history and it is particularly noteworthy in a year filled with economic headwinds and uncertainties.
We're pleased to continue to share the successes of the company with our owners by increasing IDACORP's quarterly common stock dividend again in 2020 from $0.67 to $0.71 per share, marking our 9th consecutive year with an increase to the dividend.
As noted on Slide 8, Idaho Power's service area continues to experience substantial customer growth.
According to U.S. News & World Report and the United States Census Bureau, Idaho was once again the fastest growing state in the country during 2020 and Idaho Power's customer base grew 2.7%.
A national study by United Van Lines also ranked Boise as the number 3 metropolitan area for inbound moves during 2020.
Idaho Power now serves more than 587,000 customers and we view the reliable, affordable, clean energy our company provides as an important factor in continuing to attract the business and residential customers to Southern Idaho and Eastern Oregon.
It does not seem that long ago that we crossed the 500,000 customer mark.
Looking ahead at future loads, increase for large load project came in at a strong pace during 2020.
On Slide 9, you'll see the highlighted notable milestones, including the announcement of a 240,000 square foot True West Beef facility, the opening of Amazon's 2.5 million square foot fulfillment center and the announcement of a 90,050,000 square foot expansion to an existing Lamb Weston potato processing plant.
Amidst the global pandemic, the economy within Idaho Power service areas continues to outperform national trend.
Moody's predicts sustained economic growth going forward after experiencing a GDP decrease of 1.7% in 2020 with Moody's forecast calls for growth of 6.1% in 2021 and 6.8% in 2022.
Unemployment within Idaho Power's service area is at 4.7%, an increase over recent years, but still well below the 6.7% reported at the national level.
As I mentioned earlier, IDACORP was pleased to announce a dividend increase of 6% this past fall.
Going forward, management expects to recommend the Board of Directors future annual increases in the dividend of 5% or more with the intent of keeping the company within our target payout ratio of between 60% and 70% of sustainable IDACORP earnings.
As outlined on Slide 10, IDACORP continues its strategy into 2021, starting toward our cornerstone goals of growing financial strength, improving the core business, enhancing Idaho Power's brand and keeping employees safe and engaged.
As we execute on these goals, we work to balance the interest of our owners, customers, employees and other stakeholders.
We are committed to working for sustainable financial results and strong credit ratings by continuing to provide safe, reliable, affordable service to customers from an already clean and increasingly cleaner reliable mix of generation resources.
Idaho Power's goal to achieve a 100% clean energy by 2045 fits well into our overall strategy as we expected to meet the new investment in system improvements that will enhance the customer experience.
You'll see highlighted on Slide 11 that the Boardman to Hemingway project or B2H continues to advance.
This project is a key energy pathway that will allow us to buy transport and sell more clean energy across the North West.
Last July, the Oregon Department of Energy issued a proposed order recommending authorization of the transmission line.
Idaho Power anticipates finalizing B2H permitting in 2022 with the line planned to be in service in 2026 or later.
Discussions are ongoing about the ownership structure of the line with the Idaho Power -- with Idaho Power exploring with the partners, both its planned share of ownership as well as the potential additional investment opportunity.
Our path toward a cleaner tomorrow continued in 2020 has been jointly on Boardman's coal-fired power plant in Oregon East operation in October.
Idaho Power has previously ended its participation in 1 unit at the North Valmy coal-fired plants in Nevada at the end of 2019.
And depending on further analysis on economics and system reliabilty, the remaining Valmy unit could follow with exit plan as early as next year, but no later than 2025.
We also continued to explore options with our partner for the appropriate end of life of the Jim Bridger coal-fired plant in Wyoming, which will be our final coal plant in the Idaho Power energy mix.
Our most recent integrated resource plant calls for a full exit from coal-fired generation by 2030.
Receiving a new long-term federal license for the three dam Hells Canyon Complex is another top priority to help ensure Idaho Power's clean energy future.
Significant steps in 2020 include filing a supplement to Idaho Power's final license application with the Federal Energy Regulatory Commission or FERC and preparing draft biological assessments in consultation with the U.S. Fish and Wildlife Service and the National Marine Fisheries Service that were also filed with the FERC.
The FERC can issue the license as early as 2022 but as of today, we believe issuance is more likely in 2023 or thereafter.
The FERC also recently formally initiated the relicensing proceeding for the American Falls hydropower facility, which is Idaho Power's largest hydropower facility outside of the Hells Canyon.
Idaho Power currently expects the first to issue a new license for this facility prior to the 2025 expiration.
Last quarter, we stated Idaho Power did not plan to file a general rate case in Idaho or Oregon in the next 12 months.
That remains true today as we look at 2021.
Customer growth, constructive regulatory outcomes, major project completion dates and effective cost management all play significant roles as we look at the need and timing of the future general rate case.
As part of our overall regulatory strategy, I'll highlight that Idaho Power filed an application last month with the Idaho Public Utilities Commission, requesting authorization to defer the Idaho portion of O&M expenses, including insurance cost and depreciation expense of certain capital investments expected to be necessary to implement its recently enhanced Wildfire Mitigation Plan or WMP.
This WMP outlines actions Idaho Power is taking or plans to implement in the future to reduce wildfire risk and to strengthen the resiliency of its transmission and distribution systems to wildfire.
These enhancements are in part the response to the degree of annual destruction from wildfires that the Western U.S. has experienced in recent years.
We expect to spend approximately $47 million in incremental WMP and wildfire-related O&M expenses and $35 million in incremental capital expenses over the next five years.
The case is now pending at the Idaho Public Utilities Commission.
Next, I'd like to highlight our newest Board member, Dr. Mark Peters, who was appointed last week.
Dr. Peters is currently the Executive Vice President for the laboratory operations at Battelle Memorial Institute with responsibilities for governance and oversight of U.S. Department of Energy and U.S. Department of Homeland Security National Laboratory, for which Battelle has a significant lab management role.
Previously, he was the Director of the Idaho National Laboratory since 2015.
Mark is a highly respected leader in our Idaho community as well as an internationally recognized expert in his field, including energy and security.
I will close with a look at weather on Slide 12.
The most current projections from the National Oceanic and Atmospheric Administration suggest normal conditions from March to May.
Our mountain regions have received some good precipitation in recent weeks and we are hopeful the resulting snowpack should provide decent conditions for generating low-cost hydropower and to provide irrigation customers with enough water to operate in 2021.
As a reminder, our power cost adjustment mechanisms in Idaho and Oregon significantly reduce earnings volatility related to changes in our resource mix and associated power supply costs that can fluctuate greatly due to weather.
With that, I will hand things over to Steve for an overview of last year's financial performance.
Let's now move to Slide 13 where you'll see our full year 2020 financial results as compared to the same period in 2019.
Overall, we had solid results during a challenging year driven by customer growth in our service area and continued successful efforts to control costs.
First up on the table is our strengthening customer growth of 2.7%, which added $14 million to operating income.
Higher usage per residential and irrigation customer of 1% and 11% respectively more than offset the negative used impacts of the pandemic, which contributed to decreased commercial and industrial sales volumes by a respective 4% and 1% during the year.
Irrigation sales volumes benefited from a return to more normal spring precipitation levels over 2019.
Residential customer usage was partly impacted by weather variations but many customers also spent more time at home due to the public health crisis.
The net result was a relatively modest $0.9 million increase in overall usage per customer.
Also on the table you will see that the increase in residential sales was offset by a $1 million decrease in fixed cost adjustment revenues.
Next, changes in net power supply expenses led to a $2.6 million decrease in retail revenues per megawatt hour largely due to fewer opportunities processed in sales than in the prior year.
Transmission wheeling-related revenues also decreased $2.2 million primarily due to a 13% decline in Idaho Power's open access transmission tariff rate in October of 2019.
This decrease was partially offset by an increase in wheeling volumes this past summer related to warmer weather in the Southwest, U.S. and California as well as roughly 10% increase in tariff rate beginning October 1 of 2020.
Next on the table, other operating and maintenance expenses decreased by $3.7 million.
A portion of this decrease was expected due to Idaho Power's exit from either one of the North Valmy plant last year.
But much of the decrease resulted from lower costs related to discretionary maintenance projects at the jointly owned coal plant as well as lower performance-based variable compensation accruals.
In prior quarters, we mentioned a small deferral of expenses related to COVID-19.
As of year end, the current amount is nominal.
However, Idaho Power plans to continue to monitor these -- those related ongoing costs.
Finally, our higher pre-tax earnings led to an increase in income tax expense of $2.1 million this quarter.
The changes collectively resulted in an increase to Idaho Power's net income of $8.8 million.
Other IDACORP net income changes were lower primarily because distributions from the sale of low income housing properties in 2018 did not recur in 2020.
IDACORP's full year net income for 2020 was a net $4.5 million higher than 2019.
IDACORP and Idaho Power continue to maintain strong balance sheets, including investment grade credit ratings and sound liquidity, which enable us to fund ongoing capital expenditures and distribute dividend to shareowners.
IDACORP's operating cash flows along with our liquidity positions as of the end of 2020 are included on Slide 14.
Cash flows from operations were about $22 million higher than the prior year.
The increase was mostly related to working capital and deferred tax fluctuations offset partially by the timing of net collections of regulatory assets and liabilities.
The liquidity available under IDACORP's and Idaho Power's credit facilities is shown on the middle of Slide 14.
At this time, we do not anticipate issuing additional equity in 2000 -- or in 2021 other than nominal amounts under our compensation plans.
While cash flows have been minimally affected by the pandemic thus far, our combined liquidity along with expected regulatory support from our annual adjustment mechanisms is a substantial backup -- backed up to our expected capital and operating needs.
As we did last year, Idaho Power contributed $40 million to its pension plan during 2021, which would be above its required contribution.
Slide 15 shows our initiated full year 2021 earnings guidance and our key financial and operating metrics estimates.
We currently expect IDACORP's 2021 earnings to be in the range of $4.60 and $4.80 per diluted share.
At or above the midpoint of this guidance range, IDACORP would achieve its 14th consecutive year of growth in earnings per share, which approaches a 5% cumulative average growth over the past five years.
Our guidance assumes Idaho Power would use no additional tax credits and assumes normal weather condition.
Of course, our guidance could also be negatively impacted if the economy or the pandemic worsens significantly.
And such scenarios could require us to use additional tax credits.
Our strong, consistent financial results and sustained cost management efforts during the past decade have preserved the full $45 million of tax credits available to support our current Idaho jurisdictional return on equity support level of 9.4% under our regulatory stipulation and we plan to continue our efforts to preserve as many of those credits as we can going forward.
Our full year O&M expense guidance is expected to be in the range of $345 million to $355 million.
This will be the ninth straight year of nearly flat O&M expense, which represents the sustained commendable effort of our entire team over those years.
It's fair to say this goal is being impacted by the level of growth we are experiencing and depending on how this year progresses, it could be challenging to meet.
Our capex spending is expected to increase to the range of $320 million to $330 million, and our expectation of hydropower generation is expected to be in the range of 6 to 8 million megawatt hours, the upper end of which could be close to our normal annual generation over the past 30 years.
On the subject of capex, turning to Slide 16, you'll note that the current five-year capital plan reflects significant increases relative to our prior five-year plan.
As a portion of the construction cost for some of the larger projects Lisa discussed like B2H have been folded into the outlook along with other anticipated capital improvement.
We now expect our capital expenditures over the next five years to approach $2 billion and it shows roughly at 7% compound average growth over our previous five-year plan.
| sees fy 2021 earnings per share $4.60 to $4.80.
q4 earnings per share $0.74.
|
I am pleased to share our fourth quarter results and our full-year performance in what was clearly an unprecedented year.
Importantly, our industry rose to meet the challenges and effectively deliver on our commitments.
I'm very proud of our CNA employees who effectively served the needs of our agents and brokers, as well as our insurers, and have positioned us well to continue to take advantage of the hardening market conditions.
Before I provide detail on the quarter, here are a few highlights for the full-year.
Core income was $735 million, or $2.70 per share, and net income for the year was $690 million, or $2.53 per share.
This compares to $979 million and $1 billion in 2019, respectively.
The shortfall from the prior year primarily attributed to the impact of the elevated pre-tax catastrophe losses of $550 million, which included our reserve charge for the pandemic of $195 million that we announced in the second quarter of 2020 as compared to $179 million of catastrophe losses in 2019.
On the other hand, our P&C underlying underwriting profit for the full-year increased 38% to $498 million as the underlying combined ratio improved 1.7 points to 93.1%.
It is the fourth consecutive year of improvement in the underlying combined ratio.
The improvement in the underlying combined ratio came from both the loss ratio and the expense ratio.
Our underlying loss ratio improved 0.8 points from 2019.
A half a point of the improvement reflected the favorable claim frequency from the shelter-in-place directives.
The frequency benefit was relatively muted for us because, as I said on the second quarter call, a substantial portion of our insureds are in essential industries, such as healthcare, construction and manufacturing, which were not subject to shelter-in-place restrictions.
The expense ratio improved 0.9 points from 2019 to 32.6%, which reflected our disciplined approach to managing expenses as we grow the business and continue to make meaningful investments in talent, technology and analytics.
The all-in combined ratio was 100.9% with 7.7 points of catastrophe losses and flat prior period development.
Gross written premium growth ex-captives grew 9% in 2020 despite the impacts of the economic downturn, which reduced our exposure almost 3 points from the prior year.
Net written premium increased 6% for the full-year.
We successfully achieved rate increases of 11% for the full-year, more than double our 2019 rate increases, and new business was up 6% for the year.
We continue to leverage this hardening market to build margin, all else equal, as rates continue to earn-out above our long run loss cost trends.
The 11% of written rate we achieved in 2020 was 8 points on an earned basis for the full-year, while our long run loss cost trends were about 4 points.
However, as I have said before, we are going to continue to be prudent on how we act on any margin due to the global pandemic's disruptive impact obfuscating claim trends [Phonetic], in particular social inflation.
Moreover, the economy has not recovered nor have court dockets reverted to pre-pandemic activity, therefore, we are staying the course.
Turning to the fourth quarter.
Our results in the quarter evidenced our strong execution in every aspect of our business, including significant growth driven by double-digit rate, strong new business growth, and improved retention, as well as an improved underlying loss ratio and expense ratio.
We also benefited from a low catastrophe quarter and strong investment performance.
Core income for the quarter was a record $335 million, $1.23 per share, an increase of $70 million over the prior year fourth quarter.
The increase was largely driven by improved underlying underwriting profits.
Net income for the quarter was $387 million, or $1.42 per share, and was an increase of $114 million over 2019's fourth quarter.
The P&C underlying combined ratio was 92.7%, a significant improvement over last year's fourth quarter results and in line with Q3 results, both of which are the best two underlying combined ratios CNA has had in over 10 years.
The all-in combined ratio was 93.5%, slightly more than 2 points of improvement compared to the fourth quarter a year ago, driven by commercial, which improved 4.4 points to 96.2% and international, which improved 3.4 points to 96.9%.
Although specialty had less favorable prior period development in the fourth quarter a year ago, they had a very strong combined ratio of 89.4%.
Pre-tax catastrophe losses were benign at $14 million, or 0.8 points of the combined ratio.
Our estimated ultimate losses from COVID-19 are unchanged at $195 million as claim activity continues to unfold slowly, as we expected.
Prior period development had no impact on the combined ratio in the quarter.
The underlying loss ratio was 60.5% for the quarter, a 0.4 point year-over-year improvement and consistent with Q3.
Specialty was 60%, commercial was 61.1%, and international was 60.1%.
In the fourth quarter, the expense ratio was 32%, 1.7 points better than the prior year quarter as we maintained a disciplined approach to managing expenses as we continue to grow the business.
We are pleased with the improvement and as our growth continues to earn out through 2021, we expect that to drive additional improvement.
Gross written premium ex our captive business grew 15% in the quarter with significant contributions across all operating segments, with specialty at plus 17% and commercial at plus 13%.
International was also strong at plus 14%, fueled by strong rate in the quarter in our London operation and strong rate and new business growth in our Canadian operations.
Net written premium for total P&C increased 12% in the quarter.
In the quarter, the hardening market persisted as evidenced by our continued double-digit rate achievement of plus 12%, while increasing our retention by 3 points to 85% from the third quarter.
We achieved strong rate across the board with specialty at plus 13%, commercial at plus 12%, and international at plus 18%.
In addition to double-digit rate achievement for the quarter, we continued to implement tighter terms and conditions across our portfolio.
These improved terms and conditions, as I have mentioned before, are equally important to strong pricing as they improve attritional loss ratios, help prevent unintended coverage, and are typically slower to be relaxed once market conditions start to soften.
New business growth was strong in the quarter, 17% higher compared to last year's fourth quarter.
Specialty grew 23% and commercial 22%, while international remained slightly negative.
We are writing high-quality accounts within our target market segments.
Examples, we continue to grow our profitable specialty affinity portfolio, we grew our very profitable construction segment within commercial, and we are building our management liability portfolio at a time when we can get excellent terms and conditions.
We carefully monitor pricing on new business relative to renewal policies, and the new to renewal relativities have been stable all year across the portfolio, indicating rate on new business has increased commensurately and obviously contributed to the overall growth in new business.
We are well positioned to grow in these hardening market conditions and indeed, we believe it is the best time to grow.
In addition to restoring pricing to these levels and improving terms and conditions, the disruption from insured dislocation in a hardening market causes broad remarketing by agents and brokers that also ferrets out tremendous high-quality new business opportunities, and we have been able to secure more of these opportunities as we are leveraging all the investments we have made in the last few years to deepen our specialized underwriting expertise and provide improved solutions to our customers.
Finally, we completed our annual asbestos and pollution reserve review, which resulted in a non-economic after-tax charge of $39 million, which compares to last year's after-tax charge of $48 million, and we also had positive core income of $26 million from our life and group operations.
Al will provide more detail on this, as well as our asbestos and pollution review.
As Dino mentioned, I will provide more detail on the Life & Group results, as well as our corporate segment, including the asbestos, environmental reserve review.
Before I do that, let me just highlight a few items related to our overall results, as well as our P&C operations.
Core income for the quarter was a record at $335 million, 26% higher than the prior year quarter results.
With a core ROE of 11.4% for the period, we are certainly pleased with the close to 2020 and the significant progress made to build upon our underlying underwriting profitability.
Dino spoke about this progress with regards to our combined ratio improvement.
A meaningful contributor was the expense ratio.
I would like to highlight the advancements made during 2020.
Our fourth quarter expense ratio of 32% reflects significant progress on a year-over-year basis, as well as on a sequential quarter basis during 2020.
The expense ratio improvement was reflected in all three of our P&C business segments, especially in international notably recording improvements of 2 and 3 points, respectively, versus the prior year quarter.
We are particularly pleased with the international results as the efforts to reduce acquisition costs as part of our reunderwriting strategy is paying dividends.
Likewise, with respect to specialty and commercial, the significant progress we have made on our expense ratio reflects our ability to grow while being disciplined about our expense spend and also making investments back into the business.
Considering the trajectory of our net written premium, we would expect that our earned premium growth will further aid our progress on the expense ratio in 2021.
Turning to net prior period development and reserves, for the fourth quarter overall P&C net prior period development was flat compared to 2.2 points of favorable development in Q4 2019.
Favorable development in specialty during the quarter driven by professional and management liability was offset by adverse premium development on general liability within commercial.
For the full-year 2020, overall development was essentially flat versus 0.7 points of favorable development in 2019.
In terms of our COVID reserves, we have made no changes to our catastrophe loss estimates during the quarter.
We continually review our COVID reserves and our previously established estimate of ultimate loss remains appropriate, and our loss estimate is still virtually all in IBNR.
Finally, with regards to the P&C operations, on January 1 several of our reinsurance treaties were renewed, the main ones being for management liability and casualty lines of business.
These treaties renewed with more favorable terms and conditions relative to expectations given current market conditions.
Now, turning to Life & Group.
This segment produced core income of $26 million in the quarter and $9 million for the full-year.
This compares with Q4 2019 loss of $4 million and a full-year 2019 loss of $109 million.
Favorable long-term care results for full-year 2020 relative to 2019 reflects the lower reserve charge in the current year relative to the prior year, as well as better-than-expected morbidity experienced in 2020 amid the effects of COVID-19.
Specifically, since the onset of COVID, we've experienced lower-than-usual new claim frequency, higher claim termination, and more favorable claim severity as policyholders favor home healthcare versus the use of long-term care facilities.
The higher level of claim terminations is largely being driven by an elevated level of mortality and claimant recoveries.
As referenced in the previous quarters, given the uncertainty of these trends, we've been taking a cautious approach from an income recognition perspective, and accordingly, we've been holding a higher level of IBNR reserves.
As well, in our annual gross premium valuation review completed in third quarter of 2020, we did not build any of this favorable experience into our ongoing reserving assumptions.
With all of this in mind, we are closely evaluating these favorable claim trends to assess the extent to which they may persist beyond the pandemic.
Our Corporate segment produced a core loss of $60 million in the fourth quarter and $108 million for the full-year.
This compares to a $68 million loss in Q4 2019 and $102 million loss for the full-year 2019.
The loss for Q4 2020 was driven by our annual asbestos, environmental reserve review concluded during the quarter.
The results of the review included a non-economic after-tax charge of $39 million driven by the strengthening of reserves associated with higher defense and indemnity costs on existing claims, and this compares to last year's non-economic charge of $48 million.
Following this review, we have incurred cumulative losses of $3.3 billion, well within the $4 billion limit of our loss portfolio transfer cover that we purchased in 2010, and paid losses are now at $2.1 billion.
You will recall from previous years' reviews that while we continue to be covered under this OPT limit, there is a timing difference with respect to recognizing the benefit of the cover relative to incurred losses as we can only do so in proportion to the paid losses recovered under the treaty.
As such, the loss recognized today will be recaptured over time through the amortization of the deferred accounting gain as paid losses ultimately catch up with incurred losses.
As previously announced, we've entered into a loss portfolio transfer transaction with a subsidiary of Enstar Corporation and related to legacy excess worker comp reserves.
This non-core portfolio has been in runoff for over 10 years and the transaction enables us to strengthen our focus on going forward operations while reducing potential future reserve volatility.
The transaction closed on February 5.
Going forward, we'll report the impacts associated with this line of business and the associated loss portfolio transfer through the Corporate segment.
Turning now to investments.
Pre-tax net investment income was $555 million in the fourth quarter, compared with $545 million in the prior year quarter.
The results reflected more favorable returns from our limited partnership and common equity portfolios relative to the prior year, more than offsetting the decline in net investment income from our fixed income portfolio and attributable to lower reinvestment yields.
As a point of reference, pre-tax effective yield on our fixed income holdings was 4.4% at Q4 2020 compared to 4.7% as of Q4 2019.
Pre-tax net investment income for the full-year was $1.9 billion, compared with $2.1 billion in the prior year.
While lower interest rates have certainly been a headwind for our net investment income, it's also driven the increase of our unrealized gain position on our fixed income portfolio, which stood at $5.7 billion at year end, up from $5 billion at the end of the third quarter and $4.1 billion at the end of 2019.
The change in unrealized during the quarter was driven by the tightening of credit spreads across the market, our risk-free rates have remained low.
Fixed income invested assets that support our P&C liabilities had an effective duration of 4.5 years at quarter end.
The effective duration of the fixed income assets that support our Life & Group liabilities was 9.2 years at quarter end.
Our balance sheet continues to be very solid.
At quarter end, shareholders' equity was $12.7 billion, or $46.82 per share, reflective of the increase in our unrealized gain position during the quarter.
Shareholders' equity excluding accumulated other comprehensive income was $11.9 billion, or $43.86 per share.
Book value per share ex-AOCI and excluding the impact of dividends paid has grown by 6% over the last year.
We have a conservative capital structure with a leverage ratio below 18% and continue to maintain capital above target levels in support of our ratings.
In the fourth quarter, operating cash flow was strong at $367 million, compared to $160 million during Q4 2019.
On a full-year basis, operating cash flow was $1.8 billion versus $1.1 billion for 2019, a significant increase substantially driven by the improvement in our current accident year underwriting profitability and a lower level of paid losses.
In addition to our strong operating cash flow, we continue to maintain liquidity in the form of cash and short-term investments and have sufficient liquidity to meet obligations and withstand significant business variability.
Finally, we are pleased to announce an increase in our regular quarterly dividend to $0.38.
This increase reflects our confidence that we can continue to grow our underwriting profits and build upon our financial strength.
In addition, notwithstanding an extraordinary year in 2020, including the elevated impact of catastrophe on our results, we were pleased to declare a special dividend of $0.75 per share.
In summary, we had a great quarter generating record core income as we effectively leveraged the opportunities from the hardening market, as we did throughout the year, and we are confident in our ability to continue to do so as these market conditions persist in 2021.
| compname posts q4 earnings per share $1.42.
compname announces q4 2020 net income of $1.42 per share and core income of $1.23 per share.
compname announces full year 2020 net income of $2.53 per share and core income of $2.70 per share.
q4 core earnings per share $1.23.
q4 earnings per share $1.42.
book value per share $46.82 at december 31, 2020 versus $45.00 at december 31, 2019.
|
Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
Net income in the second quarter of $29.6 million produced core earnings per share of $0.31, a core pre-tax pre-provision ROA of 1.82% and a core efficiency ratio of 53.1%.
Importantly, pre-tax pre-provision net revenue of $42.9 million was slightly ahead of the consensus estimate, reflecting good underlying second quarter momentum in our key businesses.
Lending rebounded in the second quarter, increasing year-to-date loan growth to 5.3% annualized rate, and that excludes PPP loans.
The loan growth was broad-based and although indirect lending and corporate banking led the way, mortgage, branch-based consumer lending and small business all contributed meaningfully.
Our corporate bank had several big wins and is seeing deepening pipelines.
Bucking national trends, our branch team has originated $209 million in home equity loans year-to-date, which represents a 12% increase year-over-year.
Geographically, Ohio continues to lead the way with the majority of our loan growth, although PA production remains strong.
Our regional business model and a focus on execution have been key elements in driving balance sheet and fee income growth.
We have also lifted out some talented lenders from large competitors over the last past year.
Consumer and small business household growth helped fuel noninterest income, which remained strong at $26.1 million, even as mortgage gain on sale income tapered.
Card-related interchange income at $7.4 million was a quarterly company record by a wide margin.
At $2.7 million, trust revenue was a quarterly record as well.
Our SBA business contributed $1.6 million to gain on sale income and SBA pipelines have never been stronger.
This is four quarters in a row of strong contribution by the SBA business.
Importantly, in this discussion around growth, business conditions in the second quarter in our markets recovered faster than we anticipated, and our business customers are generally positive about the outlook ahead.
Expenses remain well controlled, and the core efficiency ratio was an impressive 53.21%.
Over the last six years, First Commonwealth's revenue base has broadened considerably with significant investment in new commercial lending teams, a de novo mortgage business, indirect lending, SBA lending, credit card and new digital platforms to include online loan and deposit account opening.
We have expanded -- also expanded our footprint through five strategic M&A opportunities.
Even as we've made these significant investments and transformed our company, at the forefront of our planning is adhering to the core principle of maintaining positive operating leverage.
Jim will provide important detail in a few minutes.
But at a very high level, I believe our NIM is benefiting from our long-term approach to building a diversified loan portfolio that is balanced between commercial and consumer loans.
At a time when banks are struggling to deploy excess cash, our consumer loan growth has been strong all year, and our commercial loan growth picked up steam as the second quarter progressed.
We like the contribution margin a new consumer loan brings versus having money parked at the Federal Reserve or in investment security.
And we also have the potential of cross-selling a new consumer customer as an added bonus.
We're also enthused about the lift-out of an equipment finance team from a larger institution that we recently announced as well as the momentum in our SBA business.
Both of these businesses are scalable and will enable our margin to expand by generating high -- higher-yielding assets.
Importantly, we're very pleased with the adoption of our new digital platform.
The second quarter, our active mobile users increased an annualized 22%.
Additionally, we continue to bring new capability forward, and we'll be introducing a new mobile mortgage platform in August where our customers can easily apply for and track their mortgage status from anywhere at any time.
Lastly, regarding credit, we feel our asset quality is solid and coupled with improving economic conditions, we expect credit to be a tailwind in the back half of the year.
As Mike already mentioned, we were pleased with our financial performance this quarter, especially with regard to loan growth, fee income and expense control.
Hopefully, I can provide you with a little more detail on our NIM, asset quality, fee income and expenses.
Our net interest margin for the second quarter was 3.17%, down from 3.40% last quarter.
Loan yields fell by 11 basis points, but we were able to offset most of that by reducing the cost of interest-bearing liabilities by seven basis points.
But to understand our NIM, you have to look at the effects of PPP and changes in our asset mix, especially cash.
For example, we began the quarter with $479 million in PPP loans.
By June 30, that figure had shrunk to $292 million.
Similarly, excess cash dropped from $414 million to $189 million over the period.
These changes don't come through if you only look at our published average balances, which barely moved.
Essentially, what happened is this.
We started the quarter with a lot of excess cash because of government stimulus programs that took place in the first quarter.
In addition, PPP loans were forgiven over the course of the quarter, generating even more cash.
We invested some of that excess cash into securities early in the quarter and into strong loan growth toward the end of the quarter.
To be more precise, PPP and excess cash had two distinct effects on the margin.
First, the first quarter NIM had the benefit -- excuse me, the first quarter NIM had the benefit of $7.9 million of PPP income, while second quarter PPP income was only $5.5 million.
Second, we put excess cash to work by purchasing approximately $300 million of securities in the second quarter.
That's better than leaving it sit in cash.
Those investments will generate about $3.9 million of net interest income annually or about $0.03 per share, but they still yield us than what we were earning on the PPP loans, and it's still a layer of thin margin assets on top of the balance sheet that drags down the NIM.
Because of the noise from PPP and excess cash, we have been publishing a core NIM that adjusts for both of those things.
Our previous guidance was for our core NIM to fall between 3.20% and 3.30%, and our core NIM for the second quarter came in at 3.20%, which was within that range, albeit at the bottom of that range.
The reason for that is simple math.
The more excess cash we invest in securities, the less cash there is to adjust for in the core calculation.
The good news here is that our loan growth in the second quarter was very strong, especially toward the end of the quarter.
That should help the margin going forward.
We expect to maintain that trajectory for the remainder of the year, which would replace PPP runoff and further soak up excess cash to the benefit of the margin.
As a result, we are reiterating our core NIM guidance of 3.25% plus or minus five basis points.
Let me switch gears now to asset quality and offer a couple of thoughts that may be helpful to you.
First, we realized that deferrals were the number one topic a year ago, but our deferrals have all but disappeared from a peak of over $1 billion during the pandemic to $138 million last quarter to only $59.5 million this quarter or just 88 basis points of total loans.
Second, nonperforming loans are just 0.82% of total loans ex PPP, and the reserve coverage of nonperforming loans is 182.9%.
These are levels that we believe compare very favorably to peers.
Third, we just completed our regular semiannual loan review process in which we review every commercial credit in excess of $350,000.
This involved a review of about 1,000 relationships totaling $2.4 billion out of a $3.9 billion commercial loan portfolio.
At the conclusion of that exercise, there were 0 downgrades to special mention or substandard in the portfolio.
The thoroughness of that exercise gives us confidence as we took noted declines in both special mention and classified loans this quarter.
Classified loans, for example, dropped from $72.3 million to $56.3 million, a level very close to the pre-pandemic level of $52.5 million at the end of 2019.
Fourth, delinquencies, which are sometimes seen as an early warning sign of trouble ahead, not only went down from last quarter, but they are at an all-time low for our bank at just 11 basis points of total loans ex PPP.
Fifth and finally, our reserves remain at 1.50% of total loans ex PPP protecting our capital and our earnings stream going forward.
As for fee income, even with mortgage income slowing down a bit in the second half, we anticipate being able to sustain the pace of $26 million to $27 million per quarter in noninterest income for the remainder of 2021 due to favorable trends we are seeing in SBA, swap and trust income.
NIE came in at $51.5 million in the second quarter, down slightly from $51.9 million last quarter.
Our previous NIE guidance was $52 million to $53 million per quarter, so we've been comfortably below that.
We do, however, expect some expense associated with returning to a more normal work and travel environment, elevated hospitalization expense that we have been seeing, new hires in revenue-producing and credit positions and the new recently announced equipment finance effort, bringing our NIE guidance to $53 million to $54 million per quarter for the remainder of the year.
Finally, we repurchased 72,724 shares in the second quarter at an average price of $13.95.
And with that, we'll take any questions you may have.
| first commonwealth declares quarterly dividend.
qtrly diluted earnings per share $0.31.
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We appreciate you're joining us today for Gartner's first quarter 2021 earnings call, and hope you are well.
With me on the call today are Gene Hall, Chief Executive Officer; and Craig Safian, Chief Financial Officer.
All growth rates in Gene's comments are FX-neutral unless stated otherwise.
Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website.
Finally, all contract values and associated growth rates we discuss are based on 2021 foreign exchange rates unless stated otherwise.
I encourage all of you to review the risk factors listed in these documents.
Gartner performance accelerated in the first quarter of 2021.
We delivered strong results across contract value, revenue, EBITDA and free cash flow.
Total revenues were up 6%, with each of our business segments, research, conferences, and consulting, exceeding our expectations.
Research is our largest and most profitable segment.
Our Research segment serves executives and their teams across all major enterprise functions in every industry around the world.
Research has a vast market opportunity across all sectors, sizes and geographies.
Global Technology Sales, or GTS, source leaders and their teams within IT.
For Q1, GTS contract value grew 5%.
First quarter new business was up 21% as a result of new logos and upsell with existing clients.
Client engagement continue to be strong, with content and analyst interaction volumes up to 26% compared to Q 2020.
We saw strong performances across several regions and industries, including tech and midsized enterprises.
We expect GTS contract value growth to continue to accelerate in 2021 and return to double-digit growth in the future.
Global Business Sales, or GBS, serves leaders and their teams beyond IT.
This includes HR, supply chain, finance, marketing, sales, legal and more.
GBS achieved contract value growth of 12%, its first quarter of double-digit growth.
New business growth was a very strong 87% in the quarter.
All practices, with the exception of marketing, ended Q1 with double-digit contract value growth rates, and all practices delivered positive quarterly NCVI.
Across our entire research business, we practiced relentless execution of proven practices, and we're seeing the results of our efforts.
Our Research business is well positioned to return to sustained double-digit growth over the medium term.
Turning to Conferences, as many of you know, during 2020, our Conferences business pivoted from in-person destination conferences to virtual.
Our value proposition for virtual conferences remains the same as for in-person conferences.
We deliver extraordinarily valuable insights to an engaged and qualified audience.
While Q1 is a small quarter for conferences, the business exceeded our expectations.
Beyond virtual conferences, we continue to prepare to return to in-person conferences in the second half of 2021.
Gartner Consulting is an extension of Gartner Research, and helps clients execute their most strategic initiatives through deeper extended project-based work.
Our Consulting segment also exceeded our expectations, with bookings up 26% during Q1.
Our Consulting business will continue to serve as an important complement to our IT Research business.
One of our objectives is to generate strong cash flow.
Free cash flow for the quarter was $145 million, up significantly versus the prior year.
In addition, we used that cash flow plus cash balances to purchase more than $600 million in stock through April of this year.
With these repurchases, our Board increased our share repurchase authorization by another $500 million.
We recently launched our 2020 Corporate Responsibility Report.
The report details the progress we made in accelerating positive social change and contributing to a more sustainable world.
We want our associates, communities and clients to continue to thrive today and in the future.
The report can be found on gartner.com, and I encourage you to take a look.
Summarizing, Q1 was a strong quarter with all three business segments exceeding our expectations.
Looking ahead, we are well positioned for sustained success.
We have a vast addressable market which will allow us to achieve double-digit contract value and revenue growth over the next five years and beyond.
We expect to deliver modest EBITDA margin expansion going forward from a normalized 2021.
We generate significant free cash flow in excess of net income, which we'll continue to deploy through share repurchases and strategic tuck-in acquisitions.
And with that, I'll hand the call over to Craig.
I hope everyone remains safe and well.
First quarter results were outstanding with very good momentum across the business.
Revenue was well above our expectations.
Despite the lower-than-planned expenses, we are well positioned to take advantage of the strong demand environment.
We will continue to restore spending to support and drive long-term sustained double-digit growth.
With stronger-than-expected results in contract value, nonsubscription research and consulting, we are increasing our revenue growth and normalized margin outlook, which results in a meaningful increase to our 2021 guidance.
The improved outlook reflects the increased visibility we have following the stronger-than-expected first quarter.
First quarter revenue was $1.1 billion, up 8% year-over-year as reported and 6% FX-neutral.
In addition, total contribution margin was 70%, up more than 320 basis points versus the prior year.
EBITDA was $320 million, up 50% year-over-year and up 44% FX-neutral.
Adjusted earnings per share was $2, and free cash flow in the quarter was $145 million.
Research revenue in the first quarter grew 8% year-over-year as reported and 6% on an FX-neutral basis, and we saw strong retention and new business throughout the quarter.
First quarter research contribution margin was 74%, up about 200 basis points versus 2020.
Higher contribution margins reflect both improved operational effectiveness and the avoidance of travel expenses.
Some of the margin improvement compared to historical levels is temporary and will reverse as the world reopens, and we increase spending to support growth.
We are seeing a benefit from increased scale and a mix shift to higher-margin products, including from the discontinuation of certain lower-margin marketing products.
Total contract value grew 6% FX-neutral to $3.7 billion at March 31.
Quarterly net contract value increase, or NCVI, was $59 million, significantly better than the pandemic affected first quarter last year.
Quarterly NCVI is a helpful way to measure contract value performance in the quarter, even though there is notable seasonality in this metric.
Global Technology Sales contract value at the end of the first quarter was $3 billion, up 5% versus the prior year.
GTS CV increased $34 million from the fourth quarter.
The selling environment continued to improve in the first quarter but while retention isn't yet fully back to normal.
Moving forward, we expect win backs and a return to more expansion with existing clients to contribute to growth in 2021, consistent with our experience coming out of the last downturn.
By industry, CV growth was led by technology, healthcare and services, while retention for GTS was 98% for the quarter, down about 560 basis points year-over-year.
Sequentially, a majority of our industry groups saw retention improve from the fourth quarter.
GTS new business was up 21% versus last year with strength in new logos and an improvement in upsell with existing clients.
Our regular full set of metrics can be found in our earnings supplement.
Global Business Sales contract value was $731 million at the end of the first quarter, up 12% year-over-year.
GBS CV increased $25 million from the fourth quarter.
This was the strongest first quarter performance we've seen from GBS.
CV growth was led by the healthcare and technology industries.
All practices recorded double-digit CV growth with the exception of marketing, which was impacted by discontinued products.
However, our marketing practice saw improving retention rates and a return to year-over-year new business growth in the quarter.
All of our practices, including marketing, showed sequential increases in CV from the fourth quarter.
While retention for GBS was 104% for the quarter, up more than 330 basis points year-over-year, GBS new business was up 87% over last year, led by very strong growth across the full portfolio.
As with GTS, our regular full set of GBS metrics can be found in our earnings supplement.
Conferences revenue for the quarter was $25 million.
We had about $10 million of onetime revenue in the quarter.
This reflected contract entitlements, which we extended beyond the end of 2020 as a result of the pandemic.
Contribution margin in the quarter was 56%.
We held five virtual conferences in the quarter.
We also held a number of virtual Avanta meetings.
First quarter consulting revenues increased by 4% year-over-year to $100 million.
On an FX-neutral basis, revenues were flat.
Consulting contribution margin was 39% in the first quarter, up 860 basis points versus the prior year quarter.
Labor-based revenues were $84 million, up 4% versus Q1 of last year and down 1% on an FX-neutral basis.
Labor-based billable headcount of 744 was down 8% due to headcount actions taken in Q2 and Q3 of last year.
Utilization was 68%, up about 550 basis points year-over-year.
Backlog at March 31 was $116 million, up 3% year-over-year on an FX-neutral basis after a strong bookings quarter.
Our backlog provides us with about four months of forward revenue coverage.
Our Contract Optimization business was up 6% on a reported basis versus the prior year quarter and 3% FX-neutral.
As we have detailed in the past, this part of the consulting segment is highly variable.
Consolidated cost of services decreased 2% year-over-year and 4% FX-neutral in the first quarter.
Cost of services declined due to lower travel and entertainment costs during the quarter, as well as the continuation of various cost avoidance initiatives.
SG&A decreased 2% year-over-year and 4% FX-neutral in the first quarter as well.
SG&A declined due to lower facilities, travel, entertainment, and conference-related expenses, as well as the continuation of various cost avoidance initiatives.
As CV rebounds this year, our traditional sales productivity metrics will also improve.
For 2021, we have ample sales capacity to drive increasing CV growth, a more tenured-than-usual sales force, several consecutive quarters of strong client engagement which should drive improving retention, and the insights to help our clients address their most critical priorities.
Going forward, in addition to the initiatives to improve sales force productivity and cost effectiveness we've been discussing the past few years, this year, we are investing to upgrade many of our sales technology tools.
We will be ramping up our sales force hiring later in the year to ensure we have the team in place to drive strong CV growth next year.
We still anticipate high single-digit growth in both GTS and GBS headcount by the end of 2021.
EBITDA for the first quarter was $320 million, up 50% year-over-year on a reported basis and up 44% FX-neutral.
First quarter EBITDA reflected revenue above the high end and costs toward the low end of our expectations for the first quarter.
Depreciation in the quarter was up about $3 million versus 2020, including real estate and software, which went into service since the first quarter of last year.
Net interest expense, excluding deferred financing costs in the quarter, was $25 million, flat versus the first quarter of 2020.
The Q1 adjusted tax rate, which we used for the calculation of adjusted net income, was 23.5% for the quarter.
The tax rate for the items used to adjust net income was 22.4% in the quarter.
Adjusted earnings per share in Q1 was $2.
Recall that about $6 million of equity compensation expense, which we normally would have incurred in the fourth quarter of 2020, shifted into the first quarter of 2021.
The weighted average fully diluted share count for the first quarter was 89.1 million shares.
The ending fully diluted share count at March 31st was 87.7 million shares.
Operating cash flow for the quarter was $157 million compared to $56 million last year.
The increase in operating cash flow was primarily driven by EBITDA growth, improved collections and cost avoidance initiatives.
capex for the quarter was $13 million, down 49% year-over-year.
Lower capex is largely a function of lower real estate investments.
Free cash flow for the quarter was $145 million, which was up about 360% versus the prior year.
Free cash flow growth continues to be an important part of our business model, with modest capital expenditure needs and upfront client payments.
Free cash flow as a percent of revenue or free cash flow margin was 22% on a rolling 4-quarter basis, continuing the improvement we've been making over the past few years.
Free cash flow is well in excess of both GAAP and adjusted net income.
At the end of the first quarter, we had $446 million of cash.
Our March 31st debt balance was $2 billion.
At the end of the first quarter, we had about $1 billion of revolver capacity.
Our reported gross debt to trailing 12-month EBITDA was about 2.2 times.
We remain very comfortable with our current gross debt level and the corresponding lower leverage multiple.
The multiple has reduced predominantly from increased EBITDA.
Our expected free cash flow generation and excess cash remaining on the balance sheet provide ample liquidity and cash to deliver on our capital allocation strategy of share repurchases and strategic tuck-in M&A.
During the first quarter, we repurchased $398 million in stock at an average price of about $180 per share.
In the month of April, we repurchased more than $200 million of our stock.
At the end of April, the Board increased our share repurchase authorization for the second time this year, adding another $500 million.
As of April 30, we have around $790 million available for open market repurchases.
We expect the Board will continue to refresh the repurchased authorization as needed going forward.
As we continue to repurchase shares, we expect our capital base to shrink going forward.
This is accretive to earnings per share and combined with growing profits, also delivers increasing returns on invested capital over time as well.
We are updating our full year guidance to reflect Q1 performance and an improved and increased outlook for the remainder of the year.
For Research, the strong start to the year in CV performance and improvements to nonsubscription revenue are contributing to higher-than-previously expected research revenue.
For Conferences, our guidance is still based on being virtual for the full year.
Operationally, we are planning to relaunch in-person Avanta meetings in the third quarter and in-person destination conferences starting in September.
Our guidance includes fixed costs, primarily people and marketing related to both a full year of virtual and a partial year of in-person conferences.
We've excluded the variable costs, primarily venue-related associated with in-person conferences from our guidance.
If we are able to run in-person conferences, we expect incremental upside to both our revenue and profitability for 2021.
For Consulting revenues, demand started the year better than we expected and the backlog improved during the first quarter.
For expenses, we have reinstated benefits, which were either canceled or deferred in 2020.
This includes our annual merit increase, which took effect April 1.
We also plan to increase quota-bearing head count in the high single digits for both GTS and GBS by the end of 2021.
Additionally, we continue to invest in several other programs.
The impact of most of these expense restorations or investments impact our P&L starting in the second quarter.
As you know, travel expenses were close to 0 from April 2020 through March 2021.
Our current plans continue to assume a modest ramp-up in travel-related expenses over the course of 2021.
Most of this ramp is built into the second half of the year.
If travel restrictions remain in place for longer than we've assumed, we'd see expense savings.
For our revenue guidance, we now expect Research revenue of at least $3.935 billion, which is growth of at least 9.2%.
We expect Conferences revenue of at least $170 million which is growth of at least 42%.
We now expect consulting revenue of at least $400 million, which is growth of at least 6.4%.
The result is an outlook for consolidated revenue of at least $4.5 billion, which is growth of 9.9%.
Based on current foreign exchange rates and business mix, the consolidated growth includes an FX benefit of about 200 basis points.
The year-over-year FX benefit is more pronounced in the first half of the year.
With the ongoing business momentum we are seeing, we are planning to restore growth spending as we move through the year.
We now expect full year adjusted EBITDA of at least $1 billion, which is an increase of about 22.3% versus 2020 and reported margins of at least 22%.
This is based on conferences running virtual only.
The 18% to 19% expected margins in the back half of the year should provide a reasonable run rate for thinking about the margins going forward as we will have more fully restored costs and resumed growth hiring.
We expect our full year 2021 adjusted net interest expense to be $102 million.
We expect an adjusted tax rate of around 22% for 2021.
We now expect 2021 adjusted earnings per share of at least $6.25.
For 2021, we now expect free cash flow of at least $850 million.
This is before any insurance proceeds related to 2020 conference cancellations.
All the details of our full year guidance are included on our Investor Relations site.
Finally, we expect to deliver at least $270 million of EBITDA in Q2 of 2021.
We expect the second quarter tax rate in the high 20s.
Looking out over the medium term, our financial model and expectations are unchanged.
With 12% to 16% research CV growth, we will deliver double-digit revenue growth.
With gross margin expansion, sales cost growing in line with CV growth over time and G&A leverage, we can modestly expand margins from a normalized 2021 level of around 18% to 19%.
We can grow free cash flow at least as fast as EBITDA because of our modest capex needs and the benefits of our clients paying us upfront.
We will repurchase shares over time, which will lower the share count as well.
We had a strong start to the year with momentum across the business.
We have meaningfully updated our outlook for 2021 to reflect the stronger demand environment and our enhanced visibility.
We are restoring certain expenses and investing to ensure we are well positioned to rebound as the economy recovers.
We repurchased more than $600 million worth of stock this year through the end of April and remain committed to returning excess capital to our shareholders.
| q1 revenue rose 8.4 percent to $1.1 billion.
board of directors increased share repurchase authorization by $500 million in april 2021.
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Consistent with those objectives, our communities under the leadership of our field staffs have continued to operate and serve our residents while adhering to the CDC's guidelines and complying with local, municipal and state guidelines.
Our corporate team members have also adapted well to the new work environment and have continued to support our field staffs and to advance all of our strategic business objectives.
I truly believe that we have collectively done some of the best work in our Company's 27-year history during what has certainly been its most challenging period.
The next generation of ACC team members appear to be learning a lot about our business for mom and dad each day.
As you know, at the outset of this pandemic, consistent with our Company values and the previously mentioned eight guiding objectives, we made a pledge that no resident would go without a home because of an inability to pay rent on a timely basis.
We also committed to be compassionate to the financial hardships that our residents and their parents may be experiencing due to COVID and the corresponding government shutdowns.
And we committed to be the best partner possible to our long-term ACE university partners.
Staying true to our pledge and these commitments did indeed cause short-term financial impacts that are reflected in the quarter.
At our off-campus apartment communities and those on-campus apartment communities that American Campus leases in the open market, on a monthly average basis for April, May and June, 93.7% of our residents made their rent payments.
For those that were not able to meet their financial obligations due to hardship, through our resident hardship program we provided nearly $9 million of direct financial relief to more than 6,500 of our residents and their parents.
We also provided an additional $15 million of financial relief to students and parents at our ACE on-campus communities where leasing administration, rent collections and residence life are administered by our university partners.
In addition, our waiving of fees associated with the payment and collection of rent resulted in more than $2 million of budgeted revenues not being collected during the quarter.
As the team will discuss, this $24 million in financial relief and the waiver of fee income makes up the large majority of our diminished revenue for the quarter.
We were able to offset a portion of this through expense reductions that did not diminish our ability to deliver quality service to our residents.
With the majority of our current in-place leases ending in the weeks ahead and a new academic year about to begin at universities across the nation, unlike multifamily residents, the financial position and buying power of the student renter has the potential to improve somewhat.
As many of you will recall from your own college years or from being parents of college students, each year students are eligible to apply for needs-based financial aid in the form of grants, scholarships and student loans.
In the spring and summer of 2019, when those financial aid assessments were being completed for the current academic year, the US economy was at or near all time highs, with unemployment for nearly every demographic group being at all-time lows.
Incomes from the favorable economic conditions were likely reflected in the students' applications for financial aid based on their and their parents' financial position at that time.
As such, when COVID hit in March of 2020, in the middle of this academic year, many of those students and parents saw their income significantly diminish without the benefit of financial aid support.
By contrast, as students have applied for financial aid in the spring and summer of 2020 for the upcoming academic year, those students and parents experiencing financial hardship due to the pandemic are now likely to qualify for more financial aid than they received in the prior year.
We believe this needs-based increase in financial aid likely occurs in every US recession and is perhaps one of the reasons the student housing industry has been so resilient over the years during times of macroeconomic stress.
As we look forward to the next academic year, while we do not believe there will be a full return to normalcy in the fall of 2020, we are cautiously optimistic at this time, given the following four variables.
One, universities' focus on policies and procedures to promote a safe environment in the delivery of their academic curriculum, facilitating a return to campus with some component of in-person instruction.
As reported in the College -- in the Chronicle -- excuse me, as it reported in the Chronicle of Higher Education, at this time, 63 of our 68 universities served are conducting some component of in-person classes.
And it's worth noting, we also continue to have leasing activity of property serving the five universities that have announced predominantly online curriculum delivery, with our four same store properties at these schools being 90% leased and with potential no shows and request for reletting currently representing only 5% potential diminishment in occupancy.
Two, universities now having available data on how COVID impacts the 18 to 22-year-old student demographic and having an improved understanding of how modern apartment style student housing and in-suite bath residence halls facilitate a student's ability to sanitize their own living environment and to isolate in households of two to four residents in times of outbreak.
Three, student sentiment with regard to a desire to be in the college environment with their peers versus at home with mom and dad even if instruction is being delivered predominantly online.
And four, the continued incremental improvement we see in our overall leasing data, coupled with well above normal velocity compared to the same period prior year with regard to traffic, applications, leases and renewals for the last three, 10 and 20 days at our open market properties as of July 17.
As you saw in last night's release, with a range of five to 11 weeks left before the commencement of classes, we are now 90% pre-leased for the upcoming academic year, only 340 basis points behind the prior year.
While the variance to prior year increased from the 230 basis points in our May 31 leasing update, it is worth noting that the variance to prior year at our open market leasing properties have decreased since that time.
And when you review page S8 in our supplemental, the three, 10 and 20-day velocity trends in traffic, applications, leases and renewals would suggest that variance to the prior year should continue to decrease for that core category of properties.
I'd now like to further break down our cautious optimism in terms of the ongoing risk and opportunities that may negatively or positively impact our final leasing numbers.
First focusing on risk.
There are three normal and ordinary risk categories that we routinely manage in each and every annual lease-up.
Those components are: one, renewal skips; two, students who have asked us to attempt to relet their accommodations so that they may be released from their financial responsibility; and three, no shows.
In all three of these risk categories, each year it is our goal to relet prior to the beginning of classes any accommodations that become available due to any of these three reasons.
A renewal skip is a current period leaseholder that has also signed a renewal lease for the upcoming academic year, but has vacated their apartment and quit paying current rent, thus having skipped out on their current lease and the future lease.
Given the definitive actions that they have taken and the certainty that they are not returning for the next academic year, these students are actively removed from our pre-leasing statistics and are not counted as leases in our pre-leasing reports.
Thus far, throughout this lease-up, we have had 178 renewal skips, which is consistent with our historical levels.
With regard to potential no shows and relet request, we commenced our no show management and reletting process in late May, early June versus our normal timing in July in an attempt to ferret out, earlier than usual, the number of students who may not be planning to show up in the fall as well as to proactively identify students who wish to have us help them release their accommodations.
These potential no shows and relet leases are included in our pre-leasing numbers as they have always been at this time in the lease-up.
Our normal and ordinary annual process is to diligently attempt to release accommodations subject to both no show and relet request until the very end of the lease-up process.
At the very end of the annual lease-up process, we then remove from our final leasing statistics any actual no shows and unsuccessful relets that also never took possession of their accommodations and essentially became a no show.
As we have commented to the market over the years, we typically only lose a total of 35 basis points to 60 basis points of final occupancy, with that net loss always having been reflected in the final leasing statistics we report each year.
To be clear, our final fall lease-up occupancy average of 97.5% over the years has always been net of the impacts of the process as we just discussed.
We've also often commented over the years that we believe one of the reasons our fall occupancies typically exceed the industry average by 200 basis points is our diligent administration of this process versus our peers.
As part of this year's efforts to expedite this process, we have undertaken an exhaustive communication process to facilitate engagement with our residents, giving them the opportunity to let us know if there is a possibility that they are not coming.
We do not proactively ask directly, are you going to take possession of the unit or are you planning to no show.
But rather, we undertake communication and discussions related to the steps and actions required with regard to roommate matching, move-in and other coordinating informational items.
This process includes a series of email communications to each resident and their guarantor as well as an attempt to call and actually speak to each resident guarantor.
At our properties leased in the open market, we currently have a total of 72,009 leases for fall, with 28,057 being returning renewal residents that have already taken -- already have possession of their units and 43,952 being new incoming leases, with this latter category representing a greater no show risk.
In addition to our standard email protocols, which again were implemented earlier than usual this year, we, as of this date, have made a total of 64,029 phone calls and successfully have had direct in-person dialog with 68% of our new incoming leases and 20% of our returning renewals.
At this time, our numbers do reflect an increase over the prior year's potential no show and requested relet activity.
While we do know some portion of this increase is due to COVID, we do not yet know to what degree the increase over the same day prior year is directly due to our efforts to expedite the process.
As of yesterday, July 20, we have identified 689 potential no shows as compared to 135 in the prior year.
With regard to relet request, we currently have 1,563 for the current year as opposed to 956 in the prior year.
The combined current year total potential no show relet at this time represents approximately 230 basis points of potential lost occupancy versus 110 basis points in the prior year.
In addition, historically, the no show -- the number of no shows typically increase in the first week of August in concert with the first rent installment being due.
As an example, last year, the 135 potential no shows as of July 20 hit a high of 446 on August 5 of last year.
Through our normal processes, we successfully managed the final impact to only 38 basis points of diminishment due to actual no shows and successful reletting.
We will closely monitor rent payments and increases in potential no shows during the first week of August to determine if historical or above normal increases occur or if our efforts to expedite these processes did in fact accelerate identification of potential no shows and relets earlier than usual.
Well, as of July 20, the combined no show and relet net variance to last year's is 1,161, representing 120 basis points of potential lost occupancy.
The ability to relet both no show and relet request in the COVID environment will likely be more challenging.
This year, with fewer properties being leased and in many cases -- I'm sorry, this year, with fewer properties being fully leased and in many cases not having a wait list to facilitate this process, we will have to rely mostly on increased traffic, applications and leasing velocity to the prior year that we previously discussed to backfill these potential no shows and relet requests.
With regard to opportunities that may further accelerate our leasing velocity beyond historical levels in the late stages of our lease-up, I'd like to discuss universities' fall housing de-densification activities due to COVID.
As we have discussed earlier in the summer, of the approximately 470,000 on-campus beds in the 68 owned markets we serve, over 180,000 of those beds are largely in older traditional residence halls with community bathrooms where as many as 20 to 40 students share common sinks, toilets and showers in small confined spaces, a less than ideal product with regard to consumer preference and the ability to control sanitization to minimize the spread of viruses.
With many universities looking to de-densify this product type by converting double bedrooms to singles, thus cutting in half the number of students sharing these common restroom and bathing facilities, the potential existed for on-campus capacity to be reduced by as much as 90,000 beds.
Based upon our tracking of these de-densification activities by the universities we serve, at this time, 48 of the 68 universities served are de-densifying their on-campus housing, resulting in a reduction of 45,800 on-campus beds.
In addition, a total of 50 of the 68 universities are taking an additional 9,735 on-campus beds offline to use as quarantine housing should a second wave of coronavirus occur, resulting in an actual total reduction of more than 55,500 beds on campus this fall.
As universities are in the final stages of administering these plans and given the fact that to date we have not yet seen a positive variance in velocity in the 48 markets where de-densification is occurring as compared to the 20 where it is not, we are hopeful that we have yet to see the additional off-campus demand that yet may occur.
With regard to on-campus densification impacting our own portfolio via compliance with any mandates covering on-campus university housing, we're pleased to report that we have only 1,061 beds impacted at this time, representing only 110 basis points of capacity lost to our portfolio's designed beds.
I'd also like to briefly touch on the average rental rate increase for the upcoming academic year.
At this time, the 90.1% of leases in place are at an average rent of $807 per bed for a 1.6% increase over the prior year in place average rent.
Whether or not that rate growth increases, decreases or stays largely intact depends upon the rent levels associated with the mix of remaining vacant beds leased, the rent levels associated with leases ultimately not reflected on our final leasing statistics due to final no shows and relapse.
As expected, this quarter the operations team was focused on our response to and preparations for operating the portfolio under eight core objectives as outlined by Bill last quarter addressing COVID-19.
Page S5 of the supplemental highlights our financial performance, which was impacted on the revenue side by rent relief to our residents made either directly or through our university partnerships, followed by wait fees, revenues foregone in our summer camp and conference business and increased reserves for bad debt for our residents.
This resulted in property same-store revenues decreasing by 14.2% which we were able to partially offset with savings and operating expenses of 5.7% for a combined NOI decrease of 20.9%.
In mid-March, since the virus was officially designated a pandemic, the American Campus team has been transitioning our operational systems to accommodate the new norms amid the coronavirus crisis.
Understanding the different property types in our portfolio was essential to creating mitigation strategies for each properties based on how students circulate through the communities.
Over 60% of our portfolio is garden style apartment or townhome units which typically feature exterior unit entries and by nature have less interior circulation and common area interaction.
The balance of our communities consist of 30% mid-rise products and 9% high-rise buildings that rely on the use of common elevator banks and single point entries which require additional mitigation.
As part of our COVID operational plan, we are collaborating with RB, the maker of Lysol, and implementing a comprehensive Be Safe, Be Smart, Do Your Part program.
Our approach to operating in a pandemic environment can be broken down to four key components: material specifications, operational policies, staff and student education and the promotion of resident accountability and responsibility.
In addition to following CDC and EPA guidelines, ACC's collaboration with RB-Lysol will greatly enhance areas of the operational plan.
The Be Safe, Be Smart, Do Your Part program began with a touch point analysis of the public spaces in each of our communities.
Simply put, our operations team evaluated every public area from the building entry throughout the community and identified the high-touch surface areas, in areas where close interaction would occur.
This essential analysis, which highlighted single-point entries, door handles, reception desks, elevators, public bathroom fixtures, among others, gave us the information needed to begin implementation of all aspects of the program.
Antimicrobial surface overlays, which have a chemical response that continuously self-cleans contaminants off the surface were applied to door handles, touch-screens and elevator buttons.
To further minimize touch points, ACC has also incorporated door foot pools at some public restrooms, touch-less trash and recycling receptacles, touch-less paper towel dispensers and touch-less soap dispensers.
Hand sanitization stations were placed at entries, amenities and elevator lobbies while sanitization white stations were strategically placed promoting student involvement in the disinfecting of high-touch surface areas.
The annual operation expense on these items is approximately $2.5 million to $3 million.
Signage has been installed to highlight policies that will promote physical distancing, maximum recommended occupancies and best practices.
We are also providing our residents at every community with updated rules and regulations addressing COVID-19 resident responsibilities, a student code of conduct that addresses the use of amenity spaces and education for residents to perform a daily wellness self-checklist to assess their health before leaving their student unit.
ACC has also comprehensively overhauled our cleaning policies and procedures.
We are proud to have co-written these cleaning policies and procedures with RB-Lysol as the US Environmental Protection Agency recently approved Lysol disinfectant spray as the first product to test effective against the virus that causes COVID-19 when used on hard nonporous surfaces.
Our revised cleaning regimen, including the frequency of deep clean and high touch-point surface areas has customized products and procedures for each type of functional space in our student housing communities.
As we turn in make ready units, we will disinfect with Lysol products and prepare each student unit and bedroom according to the co-written Lysol protocols, and we will place a Lysol clean and confident room seal on the unit and bedroom doors, which will not be broken until the resident renters their unit and bedroom.
Our operational staff have new policies for safe engagement with residents as well as each other, and have been issued masks, gloves and other equipment along with guidelines for their use.
We will also reach out and educate our residents through a healthy living email campaign, virtual brochures and virtual resident life programming.
Our residence life programming initiatives will support the health and wellness and academic and personal success of our residents.
While education is key to understanding the current environment, perhaps the most critical part of the Be Safe, Be Smart, Do Your Part program is promoting self-accountability and responsibility among our residents.
As such, the most important part of collectively mitigating the spread of the virus is the individual actions of our residents.
For this unprecedented fall semester, we have physical distancing, sanitization knowledge and personal responsibility practices will become the new behavioral norms for our student residents.
Already, we are delighted to see our residents embrace the new personal responsibility policies at our communities.
Beginning with our 2020 owned development deliveries, I'm pleased to report that we have received all necessary permits for occupancy for all projects expected to be completed for this August, including the second phase of our Disney College Program housing and projects at San Francisco State and USC Health Sciences.
While those developments are targeted to open on time and on budget despite the potential disruption from COVID-19, we are experiencing impacts to targeted occupancy for fall of 2020.
With regards to the Disney project, Flamingo Crossings, while Walt Disney World has reopened to limited capacity, based on discussions with Disney, we do not currently anticipate occupancy of the project in 2020 based on their current reopening schedule and labor onboarding.
While the situation remains fluid, we will have 1,600 beds available in August, increasing to 2,600 beds in January 2021 ready to occupy DCP participants once the program recommences.
Through the terms of the ground lease, our project has a first fill provision for all DCP participants in the program.
To the extent the interim program continues to be suspended for a prolonged period of time, we have the right in the ground lease to open the project to all of Walt Disney World's Orlando based employees along with the additional backup provisions where we have the right to convert the project to a hotel and which Disney has the right to offer and manage as part of their hospitality portfolio.
Each of these alternate uses has pro forma returns equal to or greater than the development's intended primary use.
With regards to San Francisco State University, the university officials have mandated to significantly reduce the amount of on-campus housing available for fall 2020 as part of de-densification efforts.
Our project is operating under a marketing and license agreement, with San Francisco State performing the leasing administration duties for this academic year.
After discussions with the University, we anticipate that the project will open at 60% capacity and a single occupancy configuration for this fall.
There remains the potential to return to fully designed bed capacity for spring and summer 2021, and we will continue to monitor the situation and work closely with the University.
With regards to USC Health Sciences phase two, we are currently 72% pre-leased and are working through continued leasing activity and the no show process for fall.
We will provide a comprehensive update on all fall deliveries on the Q3 call.
Moving to our on-campus P3 business.
We have a strong pipeline of on-campus development of 10 projects in various levels of pre-development.
First, we anticipate closing and commencement of construction on our third-party project at Georgetown University in Q3 of this year as originally planned.
However, due to the disruptions caused by COVID-19, our third-party projects at Concordia, University of California, Berkeley, Upper Hearst and University of California, Irvine, are anticipated to be delayed until next year.
We currently expect to close and commence construction on all three projects in 2021, with Concordia delivering -- with Concordia targeting delivery in fall of 2022 and UC Berkeley and UC Irvine targeting delivery in fall of 2023.
And we continue to make progress in the early stages of pre-development on our previously announced awards at MIT, Virginia Commonwealth University, Princeton, Northeastern, UC Berkeley and West Virginia University.
The final structure, scope, feasibility, fees and timing for all projects in pre-development have not yet been finalized.
Overall, while we have seen some procurement and housing initiatives temporarily delayed and suspended through COVID-19, we continue to pursue numerous active procurements and see a vibrant future pipeline of on-campus development opportunities.
As Bill mentioned in his remarks, universities across the country have had to de-densify on-campus housing, with beds impacted consisting primarily of older traditional dorms with community baths.
Consumer preferences also weighted heavily to more modern apartment and suite style accommodations that more easily allow sanitization and, if needed, isolation to occur within the unit.
In addition, due to de-densification, other reduced revenue streams and related financial impacts, universities will utilized off-balance sheet financing structures in order to update their housing stock, including both project based financing as well as equity based models like our ACE program.
We expect that the combination of these facts will further accelerate the need for the modernization of outdated on-campus housing, utilizing the P3 financing method, and believe ACC is well positioned as the established best-in-class partner to capitalize on this expanding opportunity.
In addition to what we believe will be an expanding opportunity on-campus, ACC is also positioning itself to execute on opportunistic investments that may arise from the COVID-19 crisis and corresponding economic environment.
Given that our recent cost of public equity continues to be at disconnect to private market valuations, it is prohibitive for us to execute on the many investments in the current environment.
As such, we are expanding our joint venture equity strategy in order to pursue external growth.
We have engaged [Indecipherable] financial advisor and are currently in the market to identify equity sources for joint venture or fund in which ACC would invest minimal equity or contribute existing assets as minority GP.
In addition to our existing partnership with Allianz, the identification of external equity partners will allow ACC to pursue external growth, off-balance sheet, while also offering further access to liquidity via dispositions if the current economic crisis continues.
We plan to utilize this off-balance-sheet structure to execute on our proven core competency of identifying and executing on investment opportunities that drive outsized returns for both ACC and our strategic capital partners.
ACC will benefit in the form of earnings per share and FFO growth to the generation of fees and potential promotes upon outperformance while requiring minimal equity investment to preserve our balance sheet for more accretive investments.
We will keep the market up to date as we make progress.
Finally, looking forward to the fall 2021 academic year, we continue to see favorable reductions in new supply across our owned markets.
Within ACC's 68 markets, we are tracking 17,600 beds currently under construction for 2021, with a potential additional 1,200 beds planned, but not yet under construction, reflecting a decline of 14% to 20% in new supply off the current year's decline of 20%.
Even if all planned beds were delivered for fall of 2021, this is the lowest number of beds delivered in our markets since 2011.
We will update the market with respect to these potential deliveries on our third quarter call.
As we reported last night, total FFOM for the second quarter of 2020 was $50.9 million or $0.37 per fully diluted share.
As has been discussed, Q2 was a quarter significantly impacted by the effects of COVID-19 and the associated governmental shelter in place orders put into effect across the country.
While we cannot completely isolate every item related to the pandemic, we believe approximately $23 million to $24 million in FFOM was lost due to situations surrounding the pandemic this quarter.
Overall, owned property revenue was $32.4 million negatively impacted by COVID related rent relief, lost summer camp revenue, increased bad debt and waived fees and other items.
Somewhat offsetting the lost revenue, owned property operating expenses were $8 million lower than originally budgeted as we were able to reduce spend in each area except for the uncontrollables of insurance and property taxes.
As a result of the lower than originally budgeted property NOI, ground lease expense was approximately $500,000 less due to a reduction in outperformance rent being paid to our university ground lessor partners.
And joint venture partners' noncontrolling interest in earnings was approximately $1.2 million lower.
Additionally, third-party management fee income was approximately $1 million lower and FFOM contribution from our on-campus participating properties was also almost $800,000 lower due to universities refunding a portion of spring rents at properties in both of these business segments.
Lastly, we were able to create approximately $800,000 in G&A and third-party overhead expense savings relative to our original plan for the quarter.
Due to the continued uncertainty created by the pandemic and the ultimate effect of any actions taken by universities with regard to curriculum delivery for the 2021 academic year, we are not issuing new 2020 earnings guidance at this time.
We do however want to make you aware of some additional impacts of the pandemic that you should expect as we close out the current academic year in the first couple of months of the coming quarter.
July will represent the last month of the current in-place leases at a substantial majority of our properties, and we expect delinquencies will not materially differ from recent months.
We also have some additional anticipated refunds in our on-campus ACE portfolio for the remainder of the summer term, expected to be in the range of approximately $1.5 million to $2.5 million, which should still keep us within the originally communicated range of expected refunds.
And finally, with regards to other income, we continue to expect a little to no summer camp business, and we are continuing to waive late fees and convenience fees through the remainder of the current academic year, which, combined, is expected to result in the loss of $5 million to $6 million in other income in the third quarter.
As William discussed, we now believe it is likely that the three third-party development projects at the University of California, Irvine, Berkley and Concordia University originally scheduled to commence in 2020 will be delayed until 2021.
These projects were expected to contribute a combined $4 million in development fee income in 2020.
While there will be some continued financial impacts of the pandemic into the immediate future, the consumer sentiment and university policies Bill discussed give us confidence that longer-term, our operating results will return to normalized levels.
In the meantime, we have a strong and healthy balance sheet and substantial liquidity to allow us to absorb the disruption.
We further improved the Company's balance sheet liquidity in June with a well-received 10 year $400 million bond offering, using the proceeds to reduce the outstanding balance on the Company's $1 billion revolving credit facility.
As of June 30, we had over $800 million of availability on our revolver, with no remaining debt maturities in 2020 and a manageable $167 million in secured mortgage debt maturing in 2021.
As detailed on page S15 of our earning supplemental, including all projects currently under development for delivery through 2023, we have only $279 million in remaining development capital needs.
As of June 30, the Company's debt to total asset value was 40.9% and net debt to EBITDA was 7.6 times.
Although our leverage ratios are temporarily elevated at this time relative to the targets we have historically communicated due to the short-term COVID related disruption discussed, we feel confident about the capital plan we continue to lay out on page S15, which will bring the Company's debt to total assets back into the mid-30% range and debt to EBITDA back to the high-5 times to low-6 times range.
| q2 adjusted ffo per share $0.37.
q2 same store net operating income decreased by 20.9 percent versus q2 2019.
anticipates about $1.5 to $2.5 million in rent refunds in q3 of 2020.
no remaining debt maturities in 2020.
|
Factors that could cause such material differences are outlined on Slide 25 and are more fully described in our SEC filings.
We appreciate you joining us and your interest in Atmos Energy.
Yesterday, we reported fiscal '22 first quarter net income of $249 million, a $1.86 per diluted share.
Our first quarter performance was in line with our expectations, reflecting the ongoing execution of our operating, financial and regulatory strategies.
Consolidated operating income decreased to $276 million in the first quarter, primarily due to a $39 million decrease in revenues associated with the refund of excess deferred tax liabilities.
As a reminder, beginning in the second quarter of fiscal '21 and through the end of last fiscal year, we reached an agreement with regulators in various states to begin refunding excess deferred tax liabilities.
Generally, over a three to five-year period, these refunds reduce revenues throughout the fiscal year when those revenues are billed.
The corresponding reduction in our interim annual effective income tax rate is recognized at the beginning of the fiscal year.
Therefore, period-over-period changes in revenues and income tax expense may not be offset with interim periods that will substantially offset by the end of the fiscal year.
Excluding the impact of these excess deferred tax liability refunds, operating income increased $16 million over the prior-year quarter.
Slide 5 summarizes the key performance drivers for each year operating segments.
Rate increases in both of our operating segments, driven by increased safety reliability capital spending totaled $47 million.
Continued robust customer growth and our distribution segment increase operating income by $4 million.
In the 12 months ended December 31st, we added 55,000 new customers, which represents a 1.7% increase.
These increases are partially offset by a $20 million increase in consolidated O&M expense.
As a reminder, in the prior-year quarter, we deferred non-compliant spending to fight in the fiscal year.
As we evaluated our customer load during that time period.
Therefore, the period-over-period variance partially reflects this time indifference.
The first quarter increase is primarily driven by increased pipeline maintenance activities.
Consolidated capital spending increased to $684 million, a $227 million period-over-period increase reflecting an increased system of modernization spending in our distribution segment.
Spending to close out Phase 1 of APT's Line X and Line X2 projects and project timing.
We remain on track to spend $2.4 billion to $2.5 billion of capital expenditures this fiscal year with more than 80% of the spending focused on modernizing the distribution and transmission network, which also reduces methane emissions.
We're also on track with our regulatory filings.
To date, we have implemented $73 million in annualized regulatory outcomes excluding refunds of excess deferred tax liabilities.
And currently, we have about $36 million in progress.
Slides 17 through 24 summarize these outcomes.
And Slide 16 outlines our planned filings for the remainder of this fiscal year.
To date, we have completed over $1 billion of long-term financing.
Following the completion of the $600 million 30-year senior note issuance in October, we executed four sales rates under our ATM program for approximately 2.7 million shares for $260 million, and we settled forward agreements on 2.7 million shares or approximately $262 million.
As of December 31st, we were probably $295 million in net proceeds available under existing forward sale agreements.
As a result of this activity, we've now priced a substantial portion of fiscal '22 equity needs and anticipate satisfying remaining equity needs through our ATM program.
As a result of this financing activity, direct recapitalization excluding the $2.2 billion of winter storm financing, was 59% as of December 31st.
Additionally, we finished the quarter with approximately $3.1 billion of liquidity.
In January, we completed the issuance of $200 million of long-term debt through [Inaudible] our existing 10-year 2.625% notes due September 2029.
The net proceeds were used to pay off or $200 million term loan that was scheduled to mature in April.
Following this offering, excluding the interim winter storm financing, a weighted average cost of debt decreased to 3.81% and our weighted average maturity increased 19.23 years, which further strengthens our financial profile.
Additional details for financing activities or equity forward arrangements, as well as our financial profile, can be found on Slides 7 through 10.
And we continue to make progress on securitization.
Yesterday, the Texas Railroad Commission unanimously issued a financing order authorizing the Texas Public Financing Authority to issue custom rate relief bonds to securitize costs associated with winter storm Uri over a period not to exceed 30 years.
We currently anticipate the securitization transaction will be completed by the end of our fiscal year.
Upon receipt of the securitization funds, we will repay the $2.2 billion of winter storm financing we issued last March.
And in Kansas, we started our securitization proceedings at the Kansas Corporation Commission in late January.
Based on the current procedural schedule, we are anticipating a financing order by the end of our fiscal third quarter.
Our first quarter performance was a solid start in the fiscal year, the execution of our operational, financial, regulatory plans is on track, which positions us well to achieve our fiscal '22 earnings per share guidance of $5.40 to $5.60.
Details around our guidance can be found in Slides 12 and 13.
It is through your dedication, your focus, and the effort that we safely provide natural gas sales to 3.2 million customers in 1,400 communities across our eight states.
And as you just heard, we're off to a great start.
The results, Chris summarized, reflect the commitment of all 4,700 Atmos Energy employees as we work together to continue modernizing our natural gas distribution, transmission, and storage systems on our journey to be the safest provider of natural gas services.
During the first quarter, we achieved several project milestones to further enhance the safety, reliability, versatility, and supply diversification of our system.
For example, at APT, we placed into service Phase 1 of a 2-phase pipeline integrity project that will replace 125 miles of Line X. As a reminder, Line X runs from Waha to Dallas and is key to providing reliable service to the local distribution companies behind the APT system.
Phase 1 replaced 63 miles of 36-inch pipeline.
Phase 2 includes an additional 62 miles of 36-inch pipeline and is anticipated to be completed late this calendar year.
Additionally, we completed the first of a 3-phase project to replace our existing Line S2.
This 91-mile 36-inch project will provide additional supply from the Haynesville and Conn Valley shale plays to the east side of the growing Dallas-Fort Worth Metroplex.
Phase 1 replaces 21 miles of this line and Phase 2 will replace an additional 18 miles and is expected to be completed late this calendar year.
Phase 3, which will replace the remaining 52 miles is expected to be in service in 2023.
During the completion of Phase 1 for Line X and Phase 1 for Line S2 our teams used recompression practices to avoid venting or flaring over 70,000 metric tons of carbon dioxide equivalent.
This is an excellent example of how Atmos Energy's environmental strategy is being integrated into our daily operations.
APT's third salt-dome cavern project at Bethel is now approximately 80% complete and remains on track to be placed in service late this calendar year.
As a reminder, this project is anticipated to provide an additional five to six Bcf of Cavern storage capacity.
As I mentioned during our November call, we have started work on a 22-mile 36-inch line that will connect the southern end of the APT system with a 42-inch Kinder Morgan Permian Highway line that runs from Waha to Katy.
This new line will support the forecasted growth and increased supply diversity to the north of Austin in both Williston and Travis County in Texas.
This line is expected to be in service in late December of this year.
In addition to those system modernization projects, we continue to make progress in advancing our comprehensive environmental strategy that is focused on reducing Scope 1, 2, and 3 emissions and reducing our environmental impact from our operations in the following five key areas, operations, fleet, facility, gas supply, and customers.
At APT storage fields, we are making progress with the installation of the remaining gas cloud imaging cameras for continuous methane monitoring and anticipate completion by the end of this fiscal year.
Our RNG strategy focuses on identifying opportunities to transport RNG for our customers.
We currently transport approximately eight Bcf a year and anticipate another four projects to come online within the next 12 to 18 months.
Those four projects are expected to provide an additional Bcf a year of RNG capacity.
Furthermore, we are evaluating approximately 20 opportunities that could further expand our RNG transportation.
Two, zero net energy homes are underway in Texas, one in Taylor and the other in Dallas.
The home in Taylor is being developed through our partnership with the Williamson County Habitat for humanity, and we estimate the home to be completed in late March.
And in Dallas, we are working with the Dallas habitat humanity and estimate construction of this zero net energy home to begin mid-March.
These homes use high-efficiency natural gas appliances doubled with rooftop solar panels and insulation to minimize the home's carbon footprint.
The zero net energy homes demonstrate the value and the vital role natural gas plays in helping customers reduce their carbon footprint in an affordable manner.
Providing these families with a natural gas home that is environmentally friendly and cost-efficient is just one-way Atmos Energy fuels safe and thriving communities.
And finally, over the next five years, we will invest $13 billion to $14 billion in capital support, the replacement of 5,000 to 6,000 miles of our distribution transmission pipe, or about 6% to 8% of our total system.
We will also replace 100 to 150 steel service lines, which is expected to reduce our inventory by approximately 20%.
This level of replacement work is expected to reduce methane emissions from our system by 15% to 20% over the next five years.
Our first quarter activities and initiatives reflect the continued successful execution of our strategy to modernize our natural gas distribution, transmission, and storage systems as we continue our journey to be the safest provider of natural gas services.
These efforts, along with the strength of our balance sheet, our strong liquidity, have atmos energy well-positioned to continue serving the vital role we play in every community that is delivering safe, reliable, efficient, and abundant natural gas to homes, businesses, and industries to fuel our energy needs now and in the future.
| compname reports q1 earnings per share of $1.86.
q1 earnings per share $1.86.
|
See Slide 2 for more information on the calculation of these pro forma metrics.
For pro forma comparisons, current and prior periods include the results of recent acquisitions and the PA Consulting investment.
We are also providing pro forma net revenue comparisons adjusted to exclude the impact of the extra week in Q4 fiscal 2020.
Turning to the agenda on Slide 3.
Steve will begin by updating the progress we are making against our strategy and the future ESG at Jacobs.
Bob will then review our performance by line of business.
And Kevin will provide a more in-depth discussion of our financial results, followed by an update on our Focus 2023 and M&A initiatives as well as a review of our balance sheet and cash flow.
With that, I'll now pass it over to Steve Demetriou, Chair and CEO.
Turning to Slide 4.
Before I review our results, I'd like to share that we're in the final stages of completing our new strategy.
We will be hosting an investor event, the week of March 7 for a deep dive of the next phase of our Jacobs transformation.
Three key initiatives have emerged.
First, we're putting in place a purpose-driven roadmap, rooted in our values and strong culture to maximize our next stage of growth.
Secondly, we identified and have aligned investment resources to capture three multi-decade growth opportunities; global infrastructure modernization, climate response and the digitization of industry.
And third, we're taking a transformational approach to executing against these opportunities as we are unlocking the innovation engine at Jacobs, expanding our technology ecosystem, while accelerating our trajectory of profitable growth and durable cash flow generation.
We look forward to eliminating this strategy at our upcoming investor event.
Now turning to our financial results.
I'm pleased with our strong fourth quarter and fiscal year performance with net revenue increasing 7% year-over-year.
Adjusted EBITDA grew 12% during the quarter and 18% for the full year.
Backlog ended the fourth quarter up 12% year-over-year and up 7% on a pro forma basis.
PA Consulting continued to post exceptional performance with 41% revenue growth.
More importantly, PA delivered this growth while maintaining adjusted operating profit margins of 24%.
For the full year, PA revenues surpassed $1 billion, far exceeding our deal investment model.
As we look at overall Jacobs growth going forward, we now have certainty surrounding the unprecedented U.S. Infrastructure funding with the passage of the $1.2 trillion Infrastructure and Jobs Act last week.
And more broadly, global infrastructure modernization and national security needs are accelerating as our government and commercial clients address the challenges of climate change, advancement of the digitization strategies and increasing cyber threats.
On top of that, our advanced facilities business is expected to show significant growth, driven by the need for additional semiconductor manufacturing capacity and post-pandemic life Sciences priorities.
Given these strong growth dynamics, we're introducing fiscal 2022 guidance for double-digit adjusted EBITDA growth.
Looking beyond 2022, we expect our strong organic growth to result in approximately $10 per share of adjusted earnings per share in fiscal year 2025.
Turning to Slide 5.
As we reflect on climate change, it is globally accepted that humanity is at a critical juncture in our efforts to limit global warming.
Jacobs and PA participated at the recent UN Climate Change Conference of the Parties COP26 in Glasgow to demonstrate our commitment to reinvent tomorrow with immediate and sustained action in the transition to a net zero economy.
We stood alongside other business financial and government leaders as well as activists and students to make sure our voice was heard.
We engaged in activities to accelerate solutions to ensure the world stays on track to meet the critical 1.5 degree celsius trajectory, while preparing to adapt to the changes already locked in from climate change.
As we move to Slide 6, given the nature of our business, it's clear that Jacobs' greatest opportunity to positively address climate change comes from a sustainable and resilient solutions that we co-create and deliver in partnership with our clients.
To spearhead this effort, we have established a new office of global climate response in ESG to ensure that sustainability is woven into all of our solutions across markets and geographies.
We are accelerating our established partnerships with the public and private sector to advance net zero carbon outcomes, climate resilience, natural and social capital as well as ESG business transformation in alignment with the United Nations Sustainable Development Goals.
Annually, we generate approximately $5 billion of ESG-related revenue and expect to grow significantly over the next several years driven by strong capability and energy transition, decarbonization, climate adaptation and natural resource stewardship.
Our culture is a competitive differentiator.
Our people have the knowledge, curiosity and the trust of our clients to achieve our purpose to create a more connected sustainable world.
Moving on to Slide 7 to review Critical Mission Solutions.
During the fourth quarter, our CMS business continued its strong performance.
Total CMS backlog increased 16% year-over-year, 7% on a pro forma basis to $10.6 billion driven by a strategic new wins in cyber and intel and nuclear and remediation.
Our CMS strategy is focused on creating recurring revenue growth and margin expansion by offering technology-enabled solutions aligned to critical national priorities.
Three market trends that we see offering continued strong growth include, cyber, commercial space and 5G technology for national security.
Beginning with cyber and intelligence, we are seeing several major emerging threats to national security.
First, cyber attacks on mission critical infrastructure, which are even more stealth and as disruptive as a traditional attack.
Second, the speed and complexity of near-peer threats, which requires real-time coordination between space and other domains as a severity of nation state sponsored attacks continues to increase.
And third, the adoption of a data-intensive AI-based applications are dramatically increasing the need for real-time data security and integrity.
The funding for addressing these threats are partially reflected in the unclassified federal government spending on cyber in FY '22, which is expected to be over $20 billion, up 10% from prior year.
Additionally, we expect to spending within classified budgets to be up higher.
During the quarter, we are awarded a $300 million, seven year contract with the National Geospatial-Intelligence Agency to modernize the NGA's ability to rapidly gain and share insights from cross domain inventory, including top secret data classification.
And within the classified budget, we were awarded $170 million five year new contract to develop highly secure and hardened software application that are leveraging the latest advances in AI and machine learning.
We recently closed the BlackLynx acquisition, which provides software-enabled solutions for automating the collection of data at the edge and quickly gaining insights into extremely large volumes of structured and unstructured data.
Our strong presence across the DoD and intelligence community as well as our digital enablement center will provide the escape velocity for BlackLynx to commercialize and scale their solutions resulting in highly profitable recurring revenue.
We also recently announced a strategic investment and distribution agreement with HawkEye 360, which will enhance our digital intelligence suite of technologies with their RF, spectrum analytics and collection automation offering.
Moving on to space.
With a significant amount of capital being infused into the commercial space companies, the affordability of space tourism is becoming a reality as well as other emerging opportunities such as acceleration of satellite-based technologies and the need to understand the impact of space debris.
Today we support commercial space companies with manufacturing process optimization, system and subsystem prototype work and test facility studies and projects.
As commercial space matures, we are positioning our solutions for these emerging opportunities.
During the quarter, we were notified of a significant increase to the ceiling of our contract in Marshall Space Flight Center that also supports Artemis and SLS.
The U.S. Space Force selected Jacobs for a five year contract to provide software and system support for its Patriot Excalibur system, which coordinates to scheduling, training and status of U.S. Space Force aircraft.
Finally, our telecom business had a strong quarter.
And we see the rollout of 5G investment from clients like AT&T, Verizon, DIRECTV, T-Mobile and Dish Network accelerating in 2022 and beyond.
In addition, the new Bipartisan Infrastructure Bill includes $2.5 billion for 5G rollout at U.S. military bases, and the DoD is investing heavily in 5G technology in support of national priorities.
In summary, we continue to see strong demand for our solutions in 2022.
The CMS sales pipeline remains robust with the next 18 month qualified new business opportunities remaining above $30 billion, which includes $10 billion in source selection with an increasing margin profile.
Now on to Slide 8, I'll discuss our People & Places Solutions business.
We finished the year with strong financial performance with the year-over-year backlog growth of 7% and annual net revenue growth.
I'll discuss our results across the major themes of climate response, pandemic solutions, infrastructure modernization and digitization.
Starting with climate response.
As the top-ranked global environmental consulting firm, Jacobs is leading the efforts to mitigate the impacts of climate emergency, advanced transition to a clean energy net zero economy and rapidly respond to natural disasters.
This quarter, Jacobs is awarded a multi-year contract by the U.S. Army's Engineer Research and Development Center to integrate nature-based solutions that grow climate resilience across defense department facilities.
Jacobs has recently been selected to reimagine New York's Rikers Island, taking the site through a full community revitalization with an equitable resilient multi-use approach incorporating our innovative social value analysis.
As the first phase in a 20-year program across the entire city, Jacobs' plan will consolidate four aging wastewater facilities into a state of the art 1 billion gallon per day water resource recovery facility that includes the renewable energy hub.
In the transportation market, our specialists have pioneered advanced charging technology that enables clients to transition to decarbonized operation, a key focus of economic stimulus packages.
Our transit team continues to win contracts that support clients with assets, operational and technology shifts toward green fleets.
For example, we recently won and commenced a hydrogen rail facility study with Caltrans.
And our long-term work with Brisbane Metro continues to showcase cutting-edge green transit solution.
With exponential growth forecasted in the electric vehicle market, Jacobs has become the go-to-firm to support leading EV battery and vehicle manufacturing companies globally.
We've doubled our EV book of business in the past year and are forecasting continued growth.
We also announced a strategic partnership and investment in Microgrid Labs, a provider of commercial fleet electrification and infrastructure solutions, including their proprietary SaaS platform.
The green economy transition is driving increased investments in hydrogen and renewables.
And our team is delivering diverse solutions for a range of clients from our participation in the Bacton Energy Hub Consortium in the U.K. to energy transmission plans for a potential offshore wind development in the U.S. and additional contracts with Iberdrola's Renewables Avonlie Solar Farm and the Swanbank waste to energy facility in Australia.
Moving on to the theme of pandemic response.
With ongoing impact to the supply chain, health systems and semiconductor chip shortage, Jacobs is gaining momentum with multi-year backlog across sectors with new wins in biopharma such as the next phase of a new $2 billion biotechnology facility.
Jacobs has successfully won several health opportunities in the U.S., Europe and Australia as they rethink pandemic response operations.
The most significant aspect of the global supply chain disruption involves semiconductor shortages.
As the world's leading technical services provider to the semiconductor industry, we are poised for significant growth in the electronic sector this year and expect our electronics business to further accelerate over the next several years.
In fact, Jacobs is engineering several major investments for large chip manufacturers.
Projects like Intel's New Arizona Fab, which Jacobs is designing, are scheduled to be fully operational in 2024.
The new fab will manufacture Intel's most advanced process technology and represents the largest private investment in Arizona's history.
Interconnected with climate response, pandemic solutions, infrastructure modernization and digital transformation are leading to long-term transformative growth with significant wins across all markets.
Globally, we are continuing to win pioneering transportation projects across all sectors and modes.
In highways, we were recently selected for transport for New South Wales along with consortium partners to undertake the $1.2 billion Warringah Freeway upgrade project to accommodate a third road crossing Sydney Harbour.
In Ports and Maritime, we won the sustainable ports design and program management for King Abdul Aziz Port in Dammam, Saudi Arabia.
And in air transportation, we were selected as the integrated program manager for the Solidarity Transport Hub in Poland, a greenfield airport in multimodal, including a high-speed rail network with an initial planned capacity of 45 million passengers.
The program is of national significance.
It will become the benchmark for zero carbon delivery and be a sustainable transportation platform for Eastern Europe's future travel demand.
Our long-standing relationships and existing framework agreements supported major wins with U.S. State Department of Transportation and Transport for London, emphasizing our market leading position for solving our clients' most complex transportation challenges.
In summary, we see continued investment across the P&PS client sectors.
We are already experiencing exciting global wins in the first quarter of our new fiscal year, indicating that we are well positioned to develop and deliver unmatched value and capability to our clients as investment momentum builds from the U.S. Infrastructure Act and other economic stimulus.
Turning to PA Consulting on Slide 9.
As Steve mentioned, PA continues to exceed expectations, supported by an extension of consultative service to U.K.'s National Health Service, PA's efforts have extended into longer term vaccine deployment, testing trace and future pandemic preparedness planning.
Additionally, PA growth is being accentuated by recent digital solution wins for confidential U.S. biopharmaceutical clients in the areas of cell and gene therapy and next generation patient care model.
We continue to progress our synergy growth and long-term collaboration.
The Jacobs' PA team were recently awarded a biotechnology manufacturing plant expansion to provide an end-to-end lifecycle solution incorporating critical digitize clinical trial information into the process design and facility layout.
Additionally, we continue to receive Joint Strategic Consultancy award in the transportation sector globally.
I look forward to our continued success with collaborative and integrated offerings to our customers.
At COP26, PA displayed its deep ESG expertise and successfully unveiled its innovative EV battery charging technology, ChargePoint.
Further, PA gained -- PA received industry recognition for their jointly developed COVID-19 awareness and situational intelligence tool with Unilever.
The business exceeded current expectation -- current expansion targets for the year and is well positioned for continued out-year growth.
Turning to Slide 10 for a financial overview of fourth quarter results followed by our fiscal year review.
As we have previously communicated, our fiscal fourth quarter 2020 had 14 weeks compared to our normal 13-week quarters, which impacted our quarter year-over-year growth rate by 7% and our full year growth rate by 2%.
Fourth quarter gross revenue increased 2% year-over-year and net revenue was up 7%.
Including the pro forma impact from all acquisitions and adjusting for the year ago extra week, net revenue was up 6% for the quarter.
Adjusted gross margin in the quarter as a percentage of net revenue was 27.2%, up 370 basis points year-over-year.
Consistent with last year, the year-over-year increase in gross margin was driven by a favorable revenue mix in both People & Places, CMS as well as the benefit from PA Consulting, which has a strong accretive gross margin profile of nearly 50%.
We will continue to focus on increasing gross margins as we bring to market higher value solutions for our clients.
Adjusted G&A as a percentage of net revenue was up year-over-year to 17%.
Within G&A, during the quarter, we incurred an approximate $20 million or $0.12 per share charge to a legal settlement cost, which burdened both GAAP and our adjusted results.
This charge was related to a CH2M legacy matter, surrounding a previously completed product advisory arrangement.
GAAP operating profit was $252 million and was mainly impacted by $46 million of amortization from acquired intangibles.
Adjusted operating profit was $303 million, up 17%.
Our adjusted operating profit to net revenue was 10%, up 85 basis points year-over-year on a reported basis.
GAAP earnings per share from continuing operations rounded to $0.34 per share and included $0.45 primarily related to the U.K. statutory tax rate changes and other tax-related items, $0.40 related to the final mark-to-market of the Worley stock and related FX impact, $0.23 of net impact related to amortization of acquired intangibles, $0.10 of transaction and other related costs and $0.06 from Focus 2023 and other restructuring costs.
Excluding these items, fourth quarter adjusted earnings per share was $1.58, including the $0.12 burden from the previously discussed legal matter.
During the quarter, PA's continued strong performance contributed $0.23 of accretion net of incremental interest.
Q4 adjusted EBITDA was $310 million and was up 12% year-over-year, representing 10% of net revenue.
Finally, turning to our bookings.
During the quarter, our revenue book-to-bill ratio was 1.3 times for Q4, positioning us well for the developing growth momentum we expect over the course of fiscal year '22.
Now turning to a recap of our full year fiscal year 2021 on Slide 11.
Gross revenue increased 4% and net revenue was up 7%.
Including the pro forma impact of all acquisitions and adjusting for the extra week in the year ago period, net revenue was up 3% for the full year.
We continue to enhance our portfolio to higher value solutions, which is evident as gross margin as a percentage of net revenue was 26% for the year, up 235 basis points year-over-year.
We expect mid-single-digit reported revenue growth in the first quarter of fiscal 2022 with an acceleration in the second half of our fiscal year driven by U.S. infrastructure spending and the ramp up of new awards in our CMS business.
GAAP operating profit was $688 million and was mainly impacted by the $261 million of purchase price consideration for the PA Consulting investment and a $150 million of amortization of acquired intangibles.
Adjusted operating profit was $1.188 billion, up 23% and represented 10% of net revenue.
Adjusted EBITDA of $1.244 billion was up 18% year-over-year to 10.6% of net revenue and just above the midpoint of our increased fiscal 2021 outlook.
GAAP earnings per share was $3.12 and was impacted by $1.96 from the PA Consulting purchase price consideration and valuation allocation, $0.77 of amortization of acquired intangibles, $0.57 related to the U.K. statutory rate change and other U.K. related tax items, $0.35 of net charges related to Focus 2023, deal costs and restructuring and all of this being partially offset by a net positive $0.48 from the final sale of Worley and C3.
Excluding all of these items, adjusted earnings per share was $6.29, also above the midpoint of our previously increased outlook.
Of the $6.29, PA Consulting contributed $0.48 to that figure.
Before turning to LOB performance, I would like to highlight that we are currently working on a further optimization of our real estate footprint.
As a result, while we are still reviewing key components of the plan, we expect the potential non-cash impairment charge ranging from $60 million to $70 million in the first half of fiscal '22.
Our new footprint will facilitate virtual work options that leverage new technology and more collaborative workspaces in our offices.
Starting with CMS, Q4 2021 revenue was down 5% year-over-year, but when adjusting for the extra week in Q4 2020 was relatively flat on a pro forma basis.
Let me remind you of the transitional dynamic impacting CMS revenue growth related to the transitioning off of two lower margin contracts.
This represented $175 million year-over-year revenue impact during the quarter.
When excluding the contract roll-off and adjusting for the extra week a year ago, pro forma CMS revenue was up double-digits year-over-year.
In 2022 Q1, we expect to -- we continue to expect an approximate $210 million year-over-year impact from these two contract roll-offs, and this will phase out in Q2.
As a result, we expected report -- we expect reported revenue in the first quarter 2022 to be down slightly on a year-over-year basis with underlying growth being much stronger.
We expect the CMS growth trajectory to improve over the year, resulting in a reported mid-to-high single-digit full year 2022 growth rate.
Q4 CMS operating profit was $115 million, up 7%.
Operating profit margin was strong, up 100 basis points year-over-year to 9.1%.
For the full year, CMS operating profit was $447 million, up 20% with 8.8% operating profit margin.
The improvement for the quarter and the year in operating margin was driven by our strategy to focus on higher margin opportunities across the business.
We expect operating profit margin to remain in the mid-8% range through fiscal 2022.
Moving to People & Places.
Q4 net revenue was flat year-over-year.
When factoring in the impact from the extra week, P&PS grew net revenue approximately 8% year-over-year for Q4 and was up 2% for the fiscal year 2021.
In Q4, total P&PS operating profit was down year-over-year driven by the $20 million legal settlement cost I described earlier.
Adding back down legal settlement costs, operating profit growth would have been up 8% in Q4.
For the fiscal year, operating profit was up 5% or 8% excluding the legal settlement.
In terms of PA's performance, PA contributed $273 million in revenue and $66 million in operating profit for the quarter.
Q4 revenue grew 41% and 32% year-over-year in sterling.
Q4 adjusted operating profit margin was 24% in line with our expectations.
On a full year basis, PA Consulting grew revenue 33%, 24% in sterling with adjusted operating profit margin up 23%.
Our non-allocated corporate costs were $55 million for the quarter and $190 million for the full year.
These costs were up year-over-year and in line with our expectation.
This -- the increase, excuse me, was driven primarily by the expected increases in medical costs and IT investments related to our new ways of working.
In fiscal 2022, we expect non-allocated corporate costs to be in the range of $200 million to $250 million given continued increases in medical costs and other investments.
These corporate costs as well as Focus 2023, CMS, P&PS investments will precede our expected acceleration in revenue growth and profit later in 2022.
In summary, these increased investments ahead of our growth will likely result in our Q1 profitability and earnings per share being relatively flat versus our Q4 results with Q2 then showing improvement and further acceleration occurring in the second half of the year.
Turning to Slide 13 to discuss our cash flow and balance sheet.
During the fourth quarter, we generated $176 million in reported free cash flow as DSO again showed strong improvement.
The quarter's cash flow included $22 million of cash related to restructuring, and other items was $16 million related to a real estate lease termination as we take advantage of virtual working.
For the year, free cash flow was $633 million, which was mainly impacted by the $261 million of PA purchase price consideration treated as post-closing compensation that we discussed last quarter.
Regardless, our reported free cash flow represented 133% conversion against our reported net income.
For the full year 2022, we will again target an adjusted free cash flow conversion of at or above one-times.
As a result of our strong cash flow, we ended the quarter with cash of $1 billion and a gross debt of $2.9 billion, resulting in $1.9 billion of net debt.
Our pro forma net debt to adjusted expected 2022 EBITDA is approximately 1.3 times, a clear indication of the strength of our balance sheet.
During the quarter, we monetized our Worley stock for $370 million and executed a $250 million accelerated share repurchase program.
We will continue to monitor for any material dislocation in our share price given the strong long-term secular growth opportunities for our company.
And finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased 11% earlier this year to $0.21 per share.
We are introducing our fiscal 2022 outlook for adjusted EBITDA to be in a range of $1.37 billion to $1.45 billion, which at the midpoint represents double-digit growth.
Our adjusted earnings per share outlook for fiscal 2022 is in the range of $6.85 to $7.45.
We expect a multi-year benefit from the U.S. Infrastructure Investment and Jobs Act to support our growth in the second half of fiscal 2022.
As we look beyond this year, we see substantial opportunities for sustained organic growth driven by infrastructure monetization, climate response and digital transformation.
We anticipate approximately $10 of adjusted earnings per share through fiscal 2025.
At our in-person investor event in March, we'll further expand on our long-term strategy and financial model.
| q4 revenue rose 1.9 percent to $3.6 billion.
jacobs engineering - expect double-digit adjusted ebitda and adjusted earnings per share growth in fiscal year 2022 and beyond.
qtrly earnings per share from continuing operations was $0.34.
expects fiscal 2022 adjusted ebitda of $1,370 million to $1,450 million and adjusted earnings per share of $6.85 to $7.45.
|
As you all know, the COVID situation around the world continues to be very fluid depending on the specific countries, levels of vaccination and other government actions.
The US is clearly ahead of the curve, and the consumer is behaving strongly exhibiting signs of a response to pent-up demand, being much more comfortable going out and shopping in stores, and very willing to spend in apparel and accessories.
We have been observing these trends since mid-March when the stimulus checks were made available.
Canada is still under various restrictions at present.
And in Europe, most countries were in multiple degrees of lockdowns until recently, and we experienced significant store closures during the quarter as a result.
The great news here is that most countries have now reopened and so are our stores.
We are thrilled with this development as our business is very large there.
And while our Asia businesses were less impacted by lockdowns, the consumer seems less motivated to resume shopping in our stores at levels comparable to the pre-pandemic era.
Let me get now into our results for the first quarter.
We believe that the most relevant comparison to understand our relative performance this year is against our results for the pre-pandemic period, which is our fiscal year 2020.
We are extremely pleased with our fiscal 2022 first quarter performance, which exceeded our expectations for revenues and profitability across all channels.
During the period, our revenues reached $520 million doubling last year's results and were only 3% below revenues in the LLY period.
During the quarter, we delivered a 5% adjusted operating margin, which is remarkable.
The operating margin expansion was over 94[Phonetic] points versus LLY and was fueled by improvement in gross margin of almost 700 basis points and a lower SG&A rate of over 200 basis points.
Adjusted operating profit was $26 million in Q1, which compares to an adjusted operating loss of $109 million last year as we faced the most challenging time of the pandemic.
This also compares to an adjusted operating loss of $22 million in the LLY first quarter period, a $48 million improvement.
In addition to the improvements in the macro environment that I mentioned, this performance, both top and bottom line is a direct result of the transformational work that we have done at Guess?
over the last 15 months.
This transformation touched every area of our business.
Including initiatives to elevate our brands and our product, the acceleration of our e-commerce business, the optimization of our global footprint and brand portfolio, the reorganization of our team globally and the execution of significant cost reductions throughout our operations.
This company has been relevant and thriving for 40 years because of its strong business sense, an incredible foresight into the future of not only consumer preferences but also dynamic business models.
The leadership and commitment to action of our Co-Founder and Chief Creative Officer, Paul Marciano, has inspired yet another transformation for our company.
To execute this transformation, it required great teamwork and an enormous effort from our associates all over the world.
I want to express how proud we are of what our entire team has accomplished under very challenging circumstances.
I believe these results showcase four key implications for our go-forward business.
First, after closing 140 retail locations and renegotiating over 340 store leases in the past 15 months, the company is operating with a new occupancy model.
Many unprofitable locations have closed forever.
Lease costs for most of the renegotiated leases are meaningfully lower and in many cases rents are now variable based on sales.
This model is contributing to a lower occupancy cost structure across markets and is bringing profitability to the North America retail business that the company has not seen in years.
Second, we have a healthier retail business with more full price selling and less promotional activity, which is delivering higher product margins.
We are pricing our product based on perceived value, which in many cases is higher than the historical price for comparable products, and we are selling more of it at full price.
These are structural changes to our retail business model, which will enable strong flow-through to profitability as we grow our sales.
The third key implication relates to our e-commerce business.
Our e-commerce business in North America and Europe grew 61% in Q1 and delivered a very high level of profitability.
This is a key growth vehicle for our future.
Fourth and last, the work that we have done to streamline our cost structure has resulted in a more efficient operating model and a lower SG&A load to support our business.
So we now have the flexibility to strategically reinvest some of the savings in growth driving initiatives like marketing and further development of omnichannel capabilities.
Most of the transformational changes that we executed are permanent and will contribute to further operating margin expansion for our company.
For the current fiscal year 2022, we now have a clear line of sight to a 300 basis point expansion of our operating margin compared to the LLY fiscal year 2020 period, which we closed with a 5.6% adjusted operating margin.
Longer term, we expect this to result in the acceleration of at least one year to reach our 10% operating margin goal by fiscal year 2024 versus our original estimate of fiscal year 2025.
As you can imagine, I'm very excited about this.
Now let me tell you about some of the trends that we saw in the business in the first quarter.
In the US, customer traffic levels are still negative versus LLY, but have increased substantially, fueling our sales improvement, most likely a result of pent-up demand, stimulus checks and vaccine rollouts.
We continue to see record levels of conversion and better full price sell-throughs.
It is clear that along with the macro factors impacting our sales, the customer is responding well to our offerings.
So we see customers getting back out into our stores.
And we are also seeing category performance trends that indicate that they are getting out of the house for multiple occasions.
While our Athleisure and essential lines continue to perform well, we have seen a material uptick in our sales in dressier products, including denim, dresses, high heels and our Marciano collection.
In Europe, we are still dealing with significant government-mandated capacity constraints, which have resulted in a more muted traffic recovery at this point.
However, conversion in that region has increased materially driving the sales comp improvement.
We continue to see stronger performance in categories like Athleisure and handbags versus the dressier products in the US, where the vaccine rollout is much more advanced.
In Asia, traffic is still under pressure as the consumer remains sensitive to the COVID situation, especially in Japan, where we are still seeing government-mandated lockdowns.
The product categories that have performed better in this environment include dresses, outerwear and denim.
Our wholesale and global licensing businesses are performing very well, indicating that our product is resonating with our wholesale customers, and our brand is gaining market share.
In Europe, the Fall/Winter season that we recently closed have orders up single digits to last year with fewer accounts but higher average orders, and our licensing business grew over 14% in Q1 versus LLY.
Feedback from our licensees on our brand has been super encouraging.
We've spoke in depth about our strategic business plan in March, including our six strategic objectives.
They are organizational culture, brand relevancy, product excellence, customer centricity, global footprint optimization and functional capabilities.
Today, I will touch on a few initiatives related to these objectives.
Let me start with an update on the important topic of ESG.
will publish its fourth sustainability report, which is prepared in accordance with GRI and SASB standards and is undergoing reasonable assurance procedures by KPMG.
As you know, having our sustainability data assured and verified constitutes a leading practice in the industry.
Regarding brand relevancy, as you know, we are currently focused on elevating our brand.
Paul has been driving this game-changing initiative, including the development of our one global line, the elevation of the starting of our assortment and the quality of our products and how the brand is represented across all touch points globally.
There is no one in the world that knows the Guess?
brand better than Paul Marciano.
Under his leadership, the product teams have worked really hard to improve the materials that we use, maintain our focus on sustainability and increase perceived value for each item in our collections, and the results are amazing.
I have said this before, we now have the best product I have seen in all my years at Guess?
Next, Paul and the creative teams are working on elevating the customer experience through our websites and in our stores, and we will be remodeling key stores where appropriate to elevate our image and maximize sales.
Regarding our customer centricity initiative, our team is laser-focused on the full implementation of the Salesforce Customer 360 suite that we have mentioned in the past.
We have just completed the implementation of the marketing cloud solution and are now focusing on service cloud, which includes the integration of data to develop what I call one view of the customer.
Next, I want to touch on our global footprint optimization.
We have discussed the great strides that we have made this year in closing unprofitable stores, including flagships and renegotiating brands.
At the same time, we have our eye out for strategic new store opportunities where the economics make sense.
Current conditions in the real estate market are prime for us as a result of the massive levels of store closures that took place across the world over the last year.
We are also testing some short-term pop up models with different product capsules like Athleisure, for example, using limited capex to expand our footprint and customer base and test future locations.
In short, we believe in the power of the store portfolio as a key pillar of our omnichannel strategy, and we are investing in our growth.
Our last strategic objective is regarding functional capabilities.
During the quarter, we opened a new distribution facility in Poland to service our Eastern Europe e-commerce business.
This initiative will result in significant savings related to processing and transportation costs as well as improved service levels.
In summary, we continue to make progress on the key initiatives of our strategic plan and we can see the benefits already.
So how are we approaching the rest of this year?
We are optimistic about the market recovery based on our experience in the US, where vaccination levels are high and the consumer is willing and capable to spend more in our product categories.
People are starting to go out, socialize and attend events.
And I cannot think of another brand better positioned for those occasions than our own.
To capitalize on this opportunity, Paul plans to invest more aggressively in marketing and advertising for the upcoming seasons.
We also want to prepare our business to respond to an increase in demand.
We are maintaining f capacity to buy additional inventory in key strategic categories like denim, handbags, essentials and dresses, and we are focusing the additional buys on more seasonless products.
In addition, we are equipped to fast track product to chase sales in the back half of the year.
All in all, for the year, we are increasing our outlook on revenue for the year from down high single digits to down mid-single digits.
This may prove conservative if the changes in consumer demand in the US are sustained and replicated in other countries.
But at present, we believe it is more prudent to plan our business as these developments are more temporary.
In closing, I want to say that I have been very fortunate throughout my career, but only a few times I have felt that the company was truly at an inflection point.
Today, I strongly believe that Guess?
is at an inflection point, and we are now set up to capitalize on the work that we have done.
We have a powerful global brand that enjoys strong momentum in the market.
We have amazing product across all categories.
We have transformed the model into a dynamic business with significant digital acceleration and big opportunities to increase market share and expand margins.
And Paul and I have a great leadership team that is highly committed to take the company to the next level of growth, profitability and value creation.
The stars are aligned, and I couldn't be more excited about our future.
With that, let me pass it to Katie to review our financials and outlook in more detail.
I'm excited about our financial performance this quarter, which truly exceeded our expectations by almost every measure.
We saw a sequential improvement in sales performance across our businesses, and the structural changes that we have made to our cost and margin model over the last 15 months allowed us to capitalize on this improvement in demand for our product in a big way.
As a result, we delivered an adjusted operating profit in Q1 for the first time in 6 years, with every of our segments delivering higher profit than pre-pandemic LLY.
I could not be more proud of our results.
Now let me take you through the details.
First quarter revenues were $520 million, down 3% to LLY in US dollars and 5% in constant currency.
This performance exceeded our expectations, driven by sales momentum in our European wholesale and e-commerce channels, US retail business as well as our global licensing business.
Overall, the decrease in revenue is attributable to permanent store closures and negative same-store sales as a result of pandemic related traffic decline.
I want to note that these permanent store closures are really accretive to profitability, representing about $10 million of incremental operating profit in the first quarter.
Additionally, government restrictions for our retail operations in Europe and Canada had a material negative impact on our sales with these temporary store closures worth about 12% of sales versus LLY for the total company during the quarter.
On the other hand, this quarter we benefited from an anticipated shift in European wholesale shipments from Q4 of last year, which is worth about the same amount.
So overall, these two one-time factors offset each other.
I'm happy to report that we continue to see sequential momentum in our e-commerce business, which was up 61% for the quarter in North America and Europe.
This compares to 38% in Q4, 19% in Q3 and 9% in Q2.
Let me get into a bit more detail on sales performance by segment.
In Americas retail, revenues were down 12%.
The decline has driven almost entirely by temporary and permanent store closures.
Store comps in the US and Canada were down 1% in constant currency, a vast improvement to Q4, which was down 21%.
Same-store sales were positive in the US, but Canada remains challenging as they struggle with the pandemic.
The improvement in sales was driven mostly by improved traffic trends, while conversion in AUR remain high.
Tourist centric stores continued to underperform nontourist centric stores by a wide margin during the quarter.
However, over the last few weeks, our tourist stores have picked up, indicating that at least domestic travel could be resuming.
In Europe, revenues were up 15%.
The wholesale business showed strong growth over LLY, benefiting from the shift in shipment timing.
However, our retail business was negatively impacted by lockdowns and operating restrictions.
Store comps for Europe were down 17% in constant currency, still muted by the increase in COVID levels in that region, but also an improvement to last quarter, which was down 26%.
E-commerce sales continue to gain momentum.
This channel is helping us to mitigate some of the headwinds caused by the COVID crisis now, but will also be a key enabler of growth for us in this segment in the future.
In Asia, revenue was down 35%.
This was driven by permanent store closures and negative store comps of down 25% in constant currency.
Sales comps in South Korea and China were down in the high teens, however, other areas in the region, like Japan were down over 50% as they continue to struggle with COVID outbreaks.
Our Americas wholesale sales were down 2% to LLY, this business has shown consistent improvement quarter-to-quarter.
We are happy to see sales in this business back to pre-pandemic operating levels, but this time with much higher profitability.
Licensing revenues also outperformed and were up 14% to LLY in Q1, driven by strong performance in handbags, fragrance and footwear.
Gross margin for the quarter was 40.7%, almost 700 basis points higher than 2 years ago.
Our product margin increased 20 basis points this quarter versus LLY, primarily as a result of higher IMU, which increased 300 basis points, partially offset by business mix.
Occupancy rate decreased 660 basis points.
About half of the decrease is a result of business mix driven by the increase in wholesale, and the rest is attributable to permanent store closures, rent release and lease renegotiations.
This quarter, we booked roughly $6 million in rent credits for fully negotiated rent release deals, mostly in Europe.
There are still some negotiations with our landlords that are outstanding as we continue to extend our conversations to address the second round of temporary store closures.
Adjusted SG&A for the quarter was $186 million compared to $204 million 2 years ago, a decrease of $19 million or 9% and better than our expectations.
We continue to benefit from changes to our expense structure, lower advertising spend and a decrease in expenses related to permanent store closures versus LLY.
In addition, there was a benefit of about $7 million from government subsidies, mainly in Europe, which was partially offset by higher variable expenses related to the growth of our e-commerce businesses.
Adjusted operating profit for the first quarter was $26 million versus an adjusted operating loss of $22 million in Q1, 2 years ago.
Our first quarter adjusted tax rate was 28%, up from 11% two years ago, driven by the mix of statutory earnings.
I'm really proud of the status of our balance sheet.
I will take you through some details comparing now to last year, not LLY.
Inventories were $405 million, up 3% in US dollars and down 4% in constant currency versus last year.
We feel good about our inventory position and believe we have the right assortment to satisfy demand throughout the year.
We ended the first quarter with $395 million in cash.
Cash was $419 million in the prior year.
However, remember that we have proactively drawn down on our credit lines in Q1 and paid them back in Q2.
On a net basis, we grew net cash by $115 million from the prior year.
Our receivables were $306 million, up from $240 million last year.
This increase is a result of the timing shift in the wholesale shipments into this quarter.
We are, however, collecting from our accounts materially faster than last year, with DSO in Europe down about 20% this quarter.
Our payables are up as a result of better payment terms with our vendors as well as a higher portion of fresh inventory on our books.
Capital expenditures for the quarter were $9 million, up from $6 million in the prior year as we begin to strategically reinvest in technology and select remodels.
Free cash flow for the quarter was negative $65 million, an increase of $3 million versus negative $68 million last year.
So now let's talk about next quarter and the rest of the year.
The current environment is still uncertain.
And as a result, we are not going to provide formal guidance, but I will walk you through how we are thinking about the near-term future.
Again, I'm going to anchor our commentary on LLY.
For both the second quarter and the full year, we are raising our revenue expectations from down high single digits to LLY to down mid-single digits as permanent store closures and pandemic related traffic declines are partially offset by continued momentum in our global e-commerce and wholesale businesses.
Because of both the temporary and permanent store closures, we don't think sales comps are the best way to understand our retail performance.
In addition, as you know, our business model has a few dimensions to it, which are moving in different directions.
So I'm going to focus on total revenue by segment to break this out for you guys.
In Americas retail, we continue to see performance roughly follow trends in Q1 and expect total revenue declines for Q2 and the rest of the year to be in line with our Q1 performance, which was down 12% versus LLY, primarily impacted by permanent store closures.
In Europe, Q1 was impacted positively by the shift in wholesale and negatively by temporary store closures.
These are now being lifted in many of the countries in which we operate, Germany being the biggest exception at the moment.
We believe the stores will operate at higher levels of productivity than over the past year but still below LLY.
E-commerce will continue to grow, but at more modest levels given that we are reopening the stores and mapping strong growth from last year.
Together with our expectations for wholesale revenue cadence, we anticipate revenue in Q2 for our Europe segment to be roughly flat to LLY and grow modestly for the full year.
In Asia, we are expecting a Q2 revenue decline similar to that in Q1, but the back half of the year will be slightly better as we anniversary softer performance in LLY.
In Americas wholesale, based on our current order book, Q2 will perform better than Q1, and revenue should be flat to LLY for the full year.
Lastly, in licensing, we had a very strong first quarter, but we are modeling for the year to be down to LLY given the challenges in the wholesale business globally right now.
As Carlos mentioned, this may prove to be conservative, but we want to keep inventory lean and if demand exceeds our expectations, we know that we have the capabilities to react.
In terms of profit, adjusted gross margin in the second quarter is expected to be around 400 basis points better than LLY, driven primarily by lower occupancy costs as well as improved IMUs and lower promotions.
We anticipate that the adjusted SG&A rate will be up 150 basis points as cost savings are offset by lower sales levels and reinvestments and business expansion initiatives, including advertising.
For the full fiscal year 2022, we expect operating margin to expand by approximately 300 basis points to LLY.
This would bring operating margin for the year to around 8.6% versus LLY adjusted operating margin of 5.6%.
In closing, it's truly an exciting time to be a Guess?
After over a year of navigating the company through an extremely turbulent time in our global history, the dust is finally settling.
And even though the near-term macro environment may still be uncertain, I can see very clearly that our business is now primed to gain market share and bring those dollars to the bottom line with a more profitable model, now we need to execute.
| q1 revenue $520 million versus refinitiv ibes estimate of $497.4 million.
quarterly americas retail comp sales including e-commerce increased 6% in u.s. dollars and 5% in constant currency.
|
We're obviously quite content to being able to provide black numbers, maybe to the surprise of many of you.
Q1 '21 was a fairly quiet quarter corporate-wise as we are in a good position financially and no major transactions were concluded during the quarter.
We continue from Frontline a high focus on the well-being of our seafarers as they are out there being exposed to the global ebb and flow of COVID-19 infections.
Our technical and operations team are doing a fantastic job in mitigating the challenges that arise and I'm very happy to report that they are well under way in vaccinating our sailors.
Let's move to Slide 3 and have a look at the highlights.
The Q1 '21 performance is very much a testament to keeping true to our strategy.
Being mostly spot exposed and not expecting an imminent recovery in the market, our charter investment remains true to trading the ships in a month where we allow our vessels to commit to long voyages securing income but potentially giving away upside.
Our modern fuel-efficient fleet is built for this purpose and it also gives us this flexibility.
This proved to be the right call.
In the first quarter of 2021, we made $19,000 per day our VLCC fleet, $15,000 per day on our Suezmax fleet, and $12,000 per day on our LR2/Aframax fleet.
So far in Q1, we have booked 70% of our VLCC days at $18,100 per day, 63% of our Suezmax days have $13,600 per day, and 59% of LR2/Aframax days have $14,200 per day.
All these numbers in the table are on the load to this chart basis.
Before Inger takes you through the financial highlights, let me quickly comment on the fleet development as well.
We took delivery of two of our four LR2s coming this year.
Front Fusion and Front Future in March and April respectively, bringing our number of LR2s on the water to 20.
Further, subsequently, we confirmed acquisition through the resale of six high-spec ECO-scrubbers fleet of VLCCs to be delivered from Hyundai Heavy Industries in Korea.
Five in 2022 and one early in 2023.
I'll now let Inger take you through the financial highlights.
Let's turn the slide to Slide 4 and look at the income statement.
As I said, we are happy to report numbers in black, and Frontline achieved total operating revenues and work expenses of $107 million in the first quarter.
We also have an adjusted EBITDA of $59 million and net income of $28.9 nine million, or $0.15 per share.
Further, we have an adjusted net income of $8.8 million or $0.04 cents per share.
The adjustments consist of a $15.7 million gain on derivatives, a $3.1 million unrealized gain on marketable securities, a $1.2 million on amortization on acquired time charters, and $0.1 million results of associated companies.
The adjusted net income in the first quarter has increased by $21 million compared with the previous quarter.
The increase was driven by a decrease in ship operating expenses of $11 million, mainly as a result of $6.4 million lower dry-docking fund.
We also had an increase of cash and cash equivalents of $6.4 million and that was due to the prior TCE rates, as well as we had a $11.2 million decrease in other costs.
Let us then take a look at the balance sheet on Slide 5.
The total balance sheet numbers have increased by $10 million in the first quarter.
The balance sheet movements in the quarter were related to taking delivery of the energy sector from Fusion in addition to ordinary debt payments and depreciation.
As of March 31, 2021, Frontline had $318 million in cash and cash equivalents including undrawn amounts under our senior unsecured loan facility, marketable securities, and minimal cash requirements.
Let's then take a closer look on Slide 6 on the cash breakeven rates and the opex.
We estimate that risk cash costs break-even rate will remain for 2021 of approximately $21,500 per day for VLCC, $17,700 for days for the Suezmax tankers, and $15,900 per day for LR2 tankers.
This gave a fleet average of about $18,100 per day.
These rates, they are all-in day rates.
That's our vessel rates to cover budgeted operating costs and dried up estimated interest expenses, TCE, and bearable high, and installments on loans, and G&A expenses.
In the quarter, we recorded opex expenses of $7,300 per day for the VLCCs, $7,100 a day for the Suezmax tankers, and $7,200 for the LR2 tankers.
We did dry dock one Suezmax tanker in the first quarter only, and we expect to dry dock up two Suezmax tankers and four LR2 tankers in the second quarter.
Let's then look at the graph on the right hand of the slide.
As usual, we show the incremental cash flow after debt service per year and per share.
Assuming $10,00, $20,000, $30,000, or $40,000 per day achieve rates in excess of all the cash breakeven rates.
The numbers include vessel on timeshare are distant from building deliveries.
And then looking at the period of 365 days from April 1, 2021.
So in this graph, as an example, with a fleet average cash possibly breakeven rates of $18,100 per day and assuming $30,000 on top of the average fleet earnings, then the TCE rate would be $48,100 one per day.
A strong fund would then generate a cash flow per share of the debt service of $3.45.
With this, I'll leave the word to Lars again.
And let's move to Slide 7 and have a look here for a recap of the Q1 '21 tanker market.
And it goes without saying that it's been somewhat demanding.
So total world oil consumption rose by 4.3 million barrels from January to March and reached to 96.5 million barrels per day.
On the other hand, supply fell by 0.5 million barrels.
This was mostly fueled by the actions from Saudi Arabia and their volunteer cuts to -- turn it up at 93.5 million barrels per day at the end of the quarter.
As we continued to draw on inventory, tanker demand remained basically unchanged.
We did, during the quarter, see return of Libyan volumes.
And we had toward the end of the quarter a U.S. -- the U.S. cold snap that created a lot of volatility.
So tanker rates firmed toward the end of the quarter, and this is I find quite positive because it actually is indicating a thinner balance than what may be perceived.
So basically, to wrap up Q1, we see demand or consumption is running ahead of supply and the draw on inventories is come for mitigating that volume.
If you look at the chart on the right-hand side, you see what I refer to as a ripple rather than a very strong market, but we see how quickly rates react where we saw, firstly, the Aframax market move in line with the Libya opening up.
cold snap, affecting what was inside of the U.S. Gulf.
So let's move on to Slide 8 and look at the tanker order books.
On all asset classes, we are observing delayed recycling.
We see very little support for keeping older tonnage in this market.
But they remain in the fleets.
Recycling prices are up 30% year to date and are now count being negotiated around %550 per long ton or $23 million for a VLCC.
This is, to some extent, being outcompeted by the fact that we continue to see demand for vintage tonnage from undisclosed price -- buyers with relatively firm prices.
The overall tanker order book has shrunk year to date by approximately 4%.
This as vessels deliver and new ordering has been fairly muted.
We've seen on the VLCC's 20 new -- 28 new orders placed, but as 25 vessels are delivered at the same time, the order book remains to be fairly flat.
The VLCC order book stands at around 9% of the existing fleet, and the overall order book for tankers is up to around 7% of the existing fleet.
Let's move to Slide 9 and recap what's going on the asset prices.
So the asset prices are on the move.
We have, over the last six months, see more -- seen more than 170 new orders for containerships.
We've also seen quite some ordering on LPG.
And also seeing confirmation of LNG orders, which has further contributed to the activity.
And in line with the entire commodity space, steel prices have appreciated sharply.
The fundamentals of the tanker market suggest a tightening of capacity over the coming years.
And the regulatory tightening in respect of greenhouse gas emissions further supports the case of investing in modern fuel-efficient ships.
Propulsion is yet not the driver.
Right now, it's the yard capacity or rather the lack of it which is driving prices together with the steel.
So let's move to Slide 10 and look at the short-term outlook.
So we're currently right in the middle of OPEC plus productions increasing.
They are increasing somewhat slowly, but they are adding to transportation demand.
Currently, Asia, and in particular, China, are coming out of refinery maintenance.
And oil demand continues to recover.
and Europe in focus as we're coming out of lockdowns.
Inventories, both on land and floating, are now normalized and at pre-COVID-19 levels.
From where we are now, according to EIA, oil supply is expected to grow by 6 million barrels by year-end.
If you look at the graph on the left-hand side below, we see that most of these increases are expected to happen basically from where we stand now and over the summer.
The key to the demand bounces in 2021, you can find on the right-hand side.
We know that gasoline demand fell by 3.3 million barrels per day in 2020.
And it's now expected to grow by 1.8 million barrels per day in 2021.
For jet, it's affected the crude oil balances by 3.2 million barrels per day and negative in 2020 and about 1.3 million barrels per day is expected to return this year.
For diesel, we're actually adding more than we lost, 1.2 million barrels per day.
For fuel oil, we're keeping at level.
Other kind of uses of oil is also linked to this at 0.7 million barrels per day.
Let's move over to Slide 11 and my summary.
So basically, to wrap this up, all key macro indicators points toward a firm recovery.
And global GDP is expected up 6% this year.
Asset prices are on the move as yard capacity is tightening and steel prices are increasing.
I've just mentioned, global oil supply is expected to grow by 6 million barrels by the end of 2021.
The COVID-19 vaccination pace in the developed countries is very encouraging and countries are opening up.
We can see on the graph below, which indicates activity within the various key segments of the shipping sector.
That the cyclical recovery run has started.
All key shipping sectors are firm.
The tankers are lagging.
Frontline is ideally positioned to capitalize on the anticipated recovery in tanker markets with our modern, spot-exposed, fuel-efficient fleet.
And with that, I would like to open up for question-and-answer session.
| frontline q1 net income at usd 28.9 mln.
q1 net profit 28.9 million usd.
q1 diluted earnings per share 0.15 usd.
reg-fro - first quarter 2021 results.
net income of $28.9 million, or $0.15 per diluted share for q1 of 2021.
reported spot tces for vlccs, suezmax and lr2 tankers in q1 of 2021 were $19,000, $15,200 and $12,000 per day, respectively.
high number of ballast days at end of quarter will limit amount of additional revenues to be booked on a load-to-discharge basis.
will recognize certain costs during uncontracted days up until end of period.
we expect spot tces for full q2 of 2021 to be lower than tces currently contracted, due to impact of ballast days at end of q2 as well as current freight rates.
|
Joining me on the call today are Don Kimble, our chief financial officer; and Mark Midkiff, our chief risk officer.
I am now moving to Slide 3.
For the fourth quarter, our earnings per share were $0.64 or $2.63 for the year.
Before we discuss our quarterly results, I would like to provide some perspective on our performance for the year.
Importantly, we continue to deliver on our commitments and make progress toward each of our long-term targets.
I'll start with positive operating leverage.
In 2021, we generated positive operating leverage for the eighth time in the past nine years.
Importantly, we expect to generate positive operating leverage again in 2022.
We delivered record revenue, which was up 9% year over year, with growth in both net interest income and noninterest income.
Pre-provision net revenue also achieved record levels last year, up 10% from the prior year.
We raised a record level of capital for our clients this year, over $100 billion, resulting in a record level of investment banking fees.
Our investment banking business has been a consistent, sustainable growth engine for Key, growing at 15% compound annual growth rate over the last decade.
We expect another year of growth in 2022.
Our pipelines remain strong and are higher than at this time last year.
We continue to take share in our seven industry verticals.
We also have leading positions in some very targeted sub verticals, including renewables financing and affordable housing.
In order to enhance our strong competitive position, we have continued to add bankers.
In 2021, we increased our population of senior bankers by 10%.
And we expect further growth in 2022.
We also saw strong momentum in our consumer business.
We grew net new households at a record pace.
And we continue to expand our existing client relationships.
Our strongest growth in 2021 came from the Western part of our franchise, which grew households at over two times the rate of the rest of our footprint.
Consumer loans in our Western franchise were up 17% last year.
We are also seeing very strong growth with younger clients.
Twenty-five percent of our new households are under 30.
We continue to benefit from two consumer growth engines: Laurel Road and consumer mortgage.
Combined, these businesses generated a record 16 billion in originations for the year ending December 31, 2021.
We also continue to invest in order to support future growth.
In addition to growing the number of bankers, we have continued to make meaningful investments in digital and analytics.
These investments have accelerated our growth, improved our efficiency, and enhanced the client experience.
In 2021, we launched our national digital affinity bank, Laurel Road for Doctors, which expanded our consumer footprint nationally for a very targeted, high-quality client segment.
Seventy-five percent of our new business is coming from outside of our traditional 15-state footprint.
We also acquired AQN Strategies, a leading consumer-focused analytics firm.
And most recently, we acquired XUP, a B2B-focused digital payments platform that provides an integrated and seamless onboarding experience.
Foundational to our model is a relentless focus on maintaining our risk discipline.
Credit quality remained strong throughout the year as net charge-offs as a percentage of average loans remained at historically low levels.
We will continue to support our clients while maintaining our moderate risk profile, which has and will continue to position the company to perform well through all business cycles.
Finally, we have maintained our strong capital position while continuing to return capital to our shareholders.
In 2021, we returned 75% of our net income to shareholders in the form of dividends and share repurchases.
We are committed to delivering value for all of our stakeholders.
I am very proud of our accomplishments in 2021.
I am confident in our future.
We are positioned to deliver on our commitments.
I'm now on Slide 5.
For the fourth quarter net income continuing operations was $0.64 per common share, up 14% from last year.
Our results reflect record performance from many of our businesses, as well as continued strong credit metrics.
Importantly, we delivered positive operating leverage for both the fourth quarter and the full year.
We also achieved record revenue for both the fourth quarter and full year.
We had year-over-year growth in both net interest income and noninterest income.
Our return on tangible common equity for the quarter was 18.7%.
Turning to Slide 6.
Average loans for the quarter were $99.4 billion, down 2% from the year-ago period and down less than 1% from the prior quarter.
The driver of the decline from both periods was a decrease in average PPP balances as we help clients take advantage of loan forgiveness.
Forgiveness this quarter was $1.5 billion.
Importantly, we saw a core growth in both our commercial and industrial books, as well as commercial real estate portfolios, versus the prior year and prior quarter.
If we adjust for the sale of the indirect auto portfolio last quarter, as well as the impact of PPP, our core loans were up approximately $4 billion on average, or 4%, and up over $4.8 billion, or 5%, on an ending basis from the prior quarter.
On the consumer side, we continue to see strong momentum driven by Laurel Road and consumer mortgage.
Combined, these businesses originated $4 billion of high-quality loans this quarter.
Continuing on to Slide 7.
Average deposits totaled $151 billion for the fourth quarter of 2021, up $15 billion or 11% compared to the year-ago period and up $4 billion or 3% from the prior quarter.
The linked-quarter and year-ago comparisons reflect growth in both commercial and consumer balances.
The growth was partially offset by continued and expected decline in time deposits.
Our cost of interest-bearing deposits remained unchanged at 6 basis points.
We continue to have a strong, stable core deposit base with consumer deposits accounting for approximately 60% of the total deposit mix.
Turning to Slide 8.
Taxable equivalent net interest income was $1.038 billion for the fourth quarter of 2021 compared to $1.043 billion a year ago and $1.025 billion for the prior quarter.
Our net interest margin was 2.44% for the fourth quarter of 2021 compared to 2.7% for the same period last year and 2.47% for the prior quarter.
Year over year and quarter over quarter, both net interest income and net interest margin reflect the impact of lower investment fields, as well as the exit of the indirect auto loan portfolio last quarter, which impacted our net interest margin by 3 basis points.
These were largely offset by a favorable earning asset mix.
The net interest margin was also impacted by elevated levels of liquidity as we continue to experience higher levels of deposit inflows in 2021.
A couple of areas of interest in the past have been the impact of the repricing of our interest rate swap portfolio and the potential benefit from investing our excess liquidity position.
Today, the current market rates actually exceed the average received fixed rate of our current swap portfolio.
Also, if we reinvested the $20 billion of liquidity, our benefit to net interest income would be about $350 million a year.
We have also included in the appendix additional detail on our investment portfolio and asset liability position.
Moving on the Slide 9, we reported record of noninterest income for both the quarter and the full year.
Noninterest income was $909 million for the fourth quarter of 2021 compared to $802 million for the year-ago period and $797 million in the third quarter.
Compared to the year-ago period, noninterest income increased 13%.
The increase was largely driven by an all-time high quarter for investment banking debt placement fees which reached $323 million.
Additionally, commercial mortgage servicing fees increased $16 million year over year.
Offsetting this growth was lower consumer mortgage fees reflecting higher balance sheet retention and lower gain on sale margins.
Compared to the third quarter, noninterest income increased by $112 million, again, primarily driven by the record fourth quarter investment banking debt placement fees.
Other notable drivers were other income and commercial mortgage servicing fees, which increased $33 million and $14 million, respectively.
Partially offsetting this was a $25 million decrease in cards and payments income driven by lower prepaid card revenues.
I'm now on Slide 10.
Noninterest expense for the quarter was $1.17 billion compared to $1.128 billion last year and $1.112 billion in the prior quarter.
Our expense levels reflect higher production-related expenses related to our record revenue generation, as well as the investments we've made to drive future growth.
Our expense levels in 2021 reflect a number of direct investments.
As Chris mentioned, we invested in our team, including adding 10% new senior bankers.
We invested in Laurel Road and the rollout of our national digital bank, in the team, and an increased marketing.
And we've strengthened our digital and analytics capability, including the acquisitions of AQN and XUP.
These investments correlated to higher levels of personnel costs from increase in hiring, as well as the production-related incentives.
On the non personnel side, we saw an increase in business services and professional fees, computer processing expense, and marketing.
Now, moving to Slide 11.
Overall credit quality continues to outperform expectations.
For the fourth quarter, net charge-offs remained at historic lows and were $19 million or 8 basis points for the average loans.
Our provision for credit losses was $4 million.
This reflects our continued strong credit measures, as well as our outlook for the overall economy and loan production.
Nonperforming loans or $454 million this quarter or 45 basis points for period-end loans, a decline of $100 million or 22% from the prior quarter.
Now into Slide 12.
We ended the fourth quarter with common equity Tier 1 ratio of 9.4%, with our targeted range of 9% to 9.5%.
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.
The final settlement of our accelerated share repurchase program disclosed last quarter was reflected in our share count this quarter.
No additional open market repurchases were executed.
Additionally, our board of directors approved a fourth quarter dividend increase of 5%, which now places our dividend at $0.195 per common share.
On Slide 13 is our full year 2022 outlook.
The guidance is relative to our full year 2021 results, and ranges are shown on the slide.
Importantly, using the midpoint of our guidance ranges would support Chris' comments by delivering another year of positive operating leverage in 2022.
Average loans will be up low single digits on a reported basis.
Excluding PPP and the impact of the sale of our indirect auto business, average loans will be up low double digits.
We expect continued growth in average deposits, which should be up low single digits.
Net interest income is expected to be relatively stable, reflecting lower fees from PPP forgiveness, offset by growth in average-earning assets, primarily loan balances.
Our guidance assumes three rate increases in 2022, with the last one in December, which would not have a meaningful impact on our results for the year.
On a reported basis, noninterest income would be down low single digits, reflecting lower prepaid card revenue related to the support of government programs.
Excluding prepaid card, our noninterest income would be relatively stable.
We expect noninterest expense to be down low single digits.
Once again, adjusting for the expected reduction in expenses related to prepaid cards, expenses would be relatively stable.
For the year, we expect net charge-offs to be in the range of 20 to 30 basis points.
Given our strong credit trends, we would expect our loss rates to remain below our range early in the year and to move modestly higher later in the year.
And our guidance for the GAAP tax rate is approximately 20%.
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 a moderate risk profile and improving our productivity and efficiency, which will drive returns.
Overall, it was a strong quarter and a good finish for the year.
And we remain confident in our ability to grow and deliver on our commitments to all of our stakeholders.
| compname reports fourth quarter 2021 net income of $601 million, or $0.64 per diluted common share.
compname reports fourth quarter 2021 net income of $601 million, or $0.64 per diluted common share.
average loans were $99.4 billion for q4 of 2021, a decrease of $2.3 billion compared to q4 of 2020.
taxable-equivalent net interest income was $1.0 billion for q4 of 2021 and net interest margin was 2.44%.
qtrly provision for credit losses was $4 million, compared to $20 million in q4 of 2020.
net loan charge-offs for q4 of 2021 totaled $19 million.
|
We have a lot of good news to reward.
So I'll start with a brief summary of the highlights.
Q2 results were significantly ahead of our expectations, including higher earnings, margins and cash flow.
Better market conditions combined with significant cost control resulted in a 40% adjusted EBITDA increase.
In addition, we generated $73 million of year-to-date free cash flow, bringing our leverage ratio back to pre-pandemic levels.
Next, we made significant progress on our strategic initiatives this quarter, including an agreement to sell our liquid-cooled automotive business, which makes up the majority of our automotive segment.
Our Board authorized a $50 million share repurchase program.
This is timely, given our improved liquidity position and provides additional flexibility to manage our future cash flows.
And finally, I'd like to make a quick comment on the CEO search.
The process has been going very well, with very good outside candidates.
We are in the final stages of the search and anticipate completing the process within the coming weeks.
Now before turning to the quarterly results, I would like to provide some more details about our automotive announced on page four.
Earlier this week we announced an agreement to sell the majority of our automotive business, which is a significant step in our strategic transformation.
This transaction provides our company with a number of benefits including reallocating capital and resources, the higher-returning industrial businesses, especially those within our building HVAC segment, eliminating significant liabilities relating to future restructuring along with pension costs and additional cash investments.
And finally, this transaction will lower our future capital spending, improving our cash profile.
The transaction includes seven manufacturing locations around the globe, including several in Western Europe and our headquarters in Germany.
It also includes the assets and liabilities associated with these locations.
While not expecting significant proceeds, we are foregoing significant future cash investments, including ongoing capital spending in future liabilities along with pension and other employee-related costs.
Also I want to highlight that this is a leverage-neutral transaction from a covenant standpoint, consistent with the provisions in our credit agreement.
And last, we expect the transaction to close in the first half of calendar 2021 subject to regulatory approvals and customary closing condition.
I would like to provide some additional details on both the liquid-cooled business that we're selling and the air-cooled business that we're planning to address next as part of our overall auto strategy.
Starting with the liquid-cooled business, it's averaged about $300 million in revenues over the last several years.
And has been recently running below that level due to general economic conditions.
As we've discussed in the past, this has historically been a negative cash flow business with the annual capital spending offsetting cash earnings.
In addition, this business has required significant restructuring and would require additional investments going forward.
Given the a large amount of historical investment the liquid-cooled business carries a significant amount of net asset.
Based on the transaction, we anticipate a large non-cash impairment charge in Q3.
Our view is then that this business is back in the hands of the strategic owner that has the size, scale and desire to make the required investments.
Now, moving onto the air-cooled business, which is the remaining business in our automotive segment and includes a plant in Austria and Germany.
This business represents approximately $100 million of revenue and it's currently running at a lower rate due to the global pandemic.
The majority of this business is comprised of automotive condensers, which are produced in Austria.
Again, as previously discussed, this business runs much closer to breakeven on an adjusted EBITDA basis and will require minimal capital going forward.
We're actively exploring alternatives for portions of this business.
And are currently engaged in discussions with interested strategic buyers.
For the right partner, this business has value due to a relatively new facility, industry leading products and intellectual property along with a solid order book.
We have some more work to do, but much of the heavy lifting is complete with the automotive separation done and the recent sale announcement.
We're optimistic about addressing the small amount of remaining business and further reducing future liabilities and cash needs.
Balance cover and second quarter segment results on page six.
CIS sales were down 14% from the prior year, primarily due to COVID-related declines in our commercial HVAC and refrigeration markets along with lower data center sales.
Approximately half the decline relates to lower sales to our largest data-center customer.
As we have previously discussed, the pullback is due to one customer's reduction in construction and is expected to continue through Q4, after which we will begin to see the recovery.
We're actively working on the testing of a next-generation product and are encouraged by the recent order outlook for next year.
We continue to invest in our coating business, where we're receiving positive feedback from our OEM customers on a new coding process.
Adjusted EBITDA was down 7% on lower sales.
But I'm pleased to report the margin improved 70 basis points despite lower revenue.
Good downside conversion was due to cost-savings initiatives taken earlier in the year.
And a good trend with regards to coils margin improvement.
In fact, if we adjust for the negative effect of lower data center sales, the margin would have improved by approximately 300 basis points versus the prior year and lower sales.
The Building HVAC segment had another great quarter with sales up 11% from the prior year.
This was primarily driven by a significant increase in data center sales due to our aggressive growth plans.
Looking forward, we expect continued growth in our data center sales in the coming quarters and projects.
We'll finish the fiscal year up more than 50%.
In addition, we also had a strong preseason orders of heating products, which was partially offset by lower sales of ventilation and air conditioning products.
On the ventilation side, sales for the hospitality market have been hard hit by COVID-19 causing us to shift focus to both the schools and healthcare markets.
We see future growth opportunities with our valuation products given the growing focus on the benefits of proper ventilation.
I want to highlight that adjusted EBITDA increased 42% from the prior year, primarily due to higher sales volume and favorable product mix.
This resulted in a 500 basis point improvement in EBITDA.
The recent performance of this segment also demonstrates the potential for Modine after we complete the exit of the auto business and continue to reallocate capital.
For example, we're leveraging our success in brand in the UK to produce data center products in mainland Europe.
And equally exciting are the increasing opportunities in the US.
We're industrializing computer room air handlers and chillers in our existing US manufacturing sites and are planning to be in production next fiscal year.
Sales in the HDE or heavy duty equipment were down 12% from the prior year but a significant improvement from Q1 as markets continue to stabilize.
Although sales decreased the most of our major end markets, we actually had higher sales to commercial vehicle and off-highway customers in Asia, partially offsetting the declines in North America.
Adjusted EBITDA was up 42% on a 460 basis point margin improvement despite lower sales.
HDE significantly benefited from temporary cost reductions along with permanent actions, including head count reductions taken earlier in the year procurement savings and improved operational performance.
We're cautiously optimistic about further market recoveries in this segment, while balancing the impact of higher material costs and recently announced tariff.
Sales were down 5% from the prior year, which also represents a large sequential improvement from the first quarter.
Auto sales recovered faster than most people anticipated as we saw lower sales in North America and Europe, partially offset by higher sales in Asia.
Adjusted EBITDA improved significantly, up $5.7 million from the prior year, primarily due to cost reductions and other temporary COVID-related savings actions.
Given the large amount of temporary cost reductions, we expect that the auto segment margins will return to more normal levels in the second half of the year.
I want to point out that we do not anticipate that the recent announcement will change how we report our earnings in this segment.
Obviously things can change, but for now, we expect to report segment sales and earnings in a consistent manner until the transaction closes.
As I mentioned at the beginning, our team adjusted to the challenging economic environment earlier in the year by quickly implementing significant cost reductions.
We prepared for the worst case, but we're pleased to see sales rebound and somewhat more quickly than expected.
Second-quarter sales declined by $39 million or 8% compared to the prior year, driven mostly by the global pandemic and associated economic conditions.
Overall, our results benefited from a combination of the markets recovering better than we anticipated and aggressive cost-cutting measures resulting in both temporary and permanent savings.
I'm very pleased to report our gross profit was $81 million, which was higher than the prior year by $5 million on lower sales.
And the gross margin increased by 240 basis points to 17.5%.
SG&A was $17 million or 25% lower than the prior year.
Given the significant uncertainties surrounding the pandemic, we maintain strict cost controls over spending and benefited from previous FTG savings.
Some of the reductions should be viewed as largely temporary, representing about a third of the SG&A savings this quarter.
Another driver of lower SG&A was a significant reduction in auto separation costs.
Adjusted EBITDA of $55 million was better than the prior year by $16 million or 40%.
Please see our appendix for itemized list of adjustments and a full reconciliation to our US GAAP results.
Our second quarter adjustments totaled $7.6 million including $5.5 million from CEO transition costs, mostly related to severance and benefit-related expenses owed to the previous CEO.
Most of these will be paid over multiples.
We also incurred $1.5 million of restructuring expenses related to plant consolidation activities.
And our adjusted earnings per share was $0.43, higher than the prior year by over 200%.
Let's turn to cash flow and debt on slide 11.
I'm pleased to report our free cash flow for the first six months of fiscal '21 was $73 million, which represents a $97 million improvement over the prior year.
The positive cash flow is driven by numerous items including lower spending on the automotive exit strategy, favorable working capital and nominal capital spending.
We used cash in the quarter to repay debt, increasing our available liquidity.
And I'm very pleased to report that our resulting leverage ratio was 2.2, back to pre-pandemic levels and within our target range.
We expect slightly positive cash flow for the remainder of the year, resulting in full year free cash flow of $70 to $80 million.
Anticipated lower second half cash is due to a number of timing factors including the deferral of certain cash items.
For example, we have approximately $20 million in pension contributions along with the phase-out of payroll tax deferral under the care of that.
We also expect higher capital spending in the second half of the fiscal year along with some working capital growth in-line with the recovery.
Overall, the cash-and-debt position is a great story for Modine, especially given the current economic environment.
Like many companies, we're hesitant to provide full-year guidance, especially given the ever-changing dynamics prior of COVID.
Based on the recent results, our full-year outlook is clearly improved.
But we want to be careful not to extrapolate all of the Q2 upside through the balance of the year.
We have a reasonable amount of visibility into our third fiscal quarter ending December 31.
Our Q4 is more uncertain, especially as it expands into calendar 2021.
We expect our net sales to be down between 7% and 12% from the prior year.
And for adjusted EBITDA to be in a range of $155 to $165 million.
While the markets are changing continuously, we expect sequential revenue improvement in the third and fourth quarters.
Positives include good momentum as we enter the heating season and a solid data center order book, plus strong vehicular market trends we also see some higher costs in the second half, particularly related to employee compensation expenses as we reverse some of the temporary cost control measures taken earlier in the year.
As well as higher metals prices, including the negative impact of the newly announced tariffs in the US.
I also want to point out that our outlook includes the automotive business that is subject to the recent sale announcement.
Our full-year results could be different if this or another transaction is completed before fiscal year-end.
| q2 adjusted earnings per share $0.43.
q2 sales fell 8 percent to $461.4 million.
sees fiscal 2021 year-over-year sales down 7 to 12 percent.
sees fiscal 2021 adjusted ebitda of $155 million to $165 million.
expect some cost increases in second half of our fiscal year.
|
I'm here with Arvind Krishna, IBM's chairman and chief executive officer; and Jim Kavanaugh, IBM's senior vice president and chief financial officer.
I'll remind you the separation of our managed infrastructure services business, Kyndryl, was completed on November 3.
As a result, our income statement is presented on a continuing operations basis.
Our results also reflect the incremental revenue from the new commercial relationship with Kyndryl.
Because this provides a one-time lift to our growth, we will provide the contribution to our revenue growth for the next year.
For example, all of our references to revenue and signings growth are at constant currency.
These statements involve factors that could cause our actual results to differ materially.
Additional information about these factors is included in the company's SEC filings.
Our fourth-quarter results reinforce our confidence in our strategy and model.
With solid revenue growth, we are on track to the mid-single-digit trajectory we had laid out in our investor briefing last October.
The trend we see is clear.
Across industries, clients see technology has a major source of competitive advantage.
They realize that powerful technologies embedded at the heart of their business can lead to seismic shifts in the way they create value.
This reality of technology being about a lot more than cost will persist and explains why clients are eager to leverage hybrid cloud and artificial intelligence to move their business forward.
Our fourth-quarter results illustrates the strong client demand we see in the marketplace for our technology and consulting.
IBM Consulting again had double-digit revenue growth as our ecosystem play continues to gain momentum.
Software revenue growth reflects strength in Red Hat and our automation offerings.
Infrastructure had a good quarter, especially with regards to IBM Z and storage.
Over the last year and a half, we have taken a series of actions to execute our hybrid cloud and AI strategy and improve our revenue profile, optimizing our portfolio, increasing investments, expanding our ecosystem, and simplifying our go-to market.
As we start to yield benefits from these actions, our constant-currency performance improved through 2021.
Our most significant portfolio action was the separation of Kyndryl.
You will remember we had initially expected the spin by the end of the year, and we completed it in early November.
As we discuss our results, we'll focus on the new basis and structure that encompasses today's IBM.
As we look to 2022, we expect mid-single-digit revenue growth before Kyndryl and currency and $10 billion to $10.5 billion of free cash flow for the year.
Both of these are consistent with our medium-term model.
Let me now spend a few minutes on what we are seeing in the market, how we address it, and the progress we are making.
We are seeing high demand for our capabilities in several areas.
Clients are eager to automate as many business class as possible, especially given the new employee demographics.
This dynamic is likely to play out over the long term.
They are also using AI and predictive capabilities to mitigate friction in their supply chains.
Cybersecurity remains a major area of concern as the cost of cybercrime, already in the billions of dollars, rises each year.
As clients deal with these challenges and opportunities, they are looking for a partner they can trust and who has a proven track record in bringing about strategic transformation projects.
This is why our strategy is focused on helping our clients leverage the power of hybrid cloud and AI.
Hybrid cloud is about providing a platform that can straddle multiple public clouds, private cloud, and as-a-service properties that our clients typically have.
Our approach is platform-centric, and the platform we have built is open, secure, and flexible and it provides a solid base of the multiplier effect across software and services for IBM and our ecosystem partners.
It starts with Red Hat, which offers clients unique software capabilities based on open-source innovation.
Our software, which has been optimized for that platform, helps our clients apply AI, automation, and security to transform and improve their business workflows.
Our consultants deliver deep business expertise and they co-create with our clients to advance their digital transformation journeys.
And our infrastructure allows clients to take full advantage of an extended hybrid cloud environment.
This strategy, along with the differentiated capabilities we bring to bear to our clients, have led to an increase in platform adoption and new business opportunities across the stack.
We now have more than 3,800 hybrid cloud platform clients, which is up 1,000 clients from this time last year.
IBM Consulting continues to help drive platform adoption, with about 700 Red Hat engagements for the year.
Clients like Dun & Bradstreet, National Grid, AIB, and Volkswagen have all recently chosen IBM's broad hybrid cloud and AI capabilities to transform their processes and move their business forward.
As I look back on the year, we had good success in broadening our ecosystem to drive platform adoption and to better respond to client needs.
During our investor briefing, we talked about strategic partnerships that will yield billion-dollar businesses within IBM Consulting.
As we move toward that, we had more than 50% revenue growth this year in partnerships with AWS, Azure, and Salesforce.
This adds to the strong strategic partnerships we have with others such as SAP, Oracle, and Adobe.
We're continuing to broaden our ecosystem reach.
In the fourth quarter, we announced an expansion of our strategic partnership with Salesforce to run MuleSoft integration software on Red Hat OpenShift.
We also created a host of new consulting services with SAP to help clients accelerate their journey to S/4HANA.
Together with Deloitte, we announced DAPPER, an AI-enabled, managed analytics solution.
And we have expanded our partnership with EY to help organizations leverage hybrid cloud, AI, and automation capabilities to transform HR operations.
We have also recently announced a host of new strategic partnerships with Cisco, Palo Alto Networks, and TELUS, all focused on the deployment of 5G, edge, and network automation capabilities.
During 2021, we have been making changes to increase our focus and agility and build a stronger client-centric culture.
This includes putting experiential selling, client engineering, and co-creation at the heart of our client engagement model.
We have completed thousands of IBM Garage engagements.
And today, we have nearly 3,000 active engagements.
We've invested in hundreds of customer success managers to help clients capture more value from our solutions.
And we have upgraded our skills with fewer generalists and more technical specialists.
This is resonating well with our clients, and it's starting to contribute to our performance.
The most important metric, of course, is revenue growth, but we are also pleased to see our client renewal rates increasing and our recurring revenue base growing.
We are starting to see signs of sales productivity improvements, with average productivity per technology seller increasing from the first to the second half.
At the same time, innovations that matter to our clients remain a constant focus, and our teams have worked hard to deliver a series of important innovations in the past quarter.
Starting with AI, we added new natural language processing enhancements to Watson Discovery.
We're also combining and integrating products such as Turbonomic, Instana, and Watson AIOps to offer a complete set of AI-powered automation software to address the significant demand.
This quarter, Red Hat announced that the Ansible automation platform is now available on Microsoft Azure, bringing more flexibility to clients and how they adopt automation.
In partnership with Samsung Electronics, IBM announced a breakthrough that reorients how transistors are built upon the surface of a chip to enable tremendous increases in energy density.
In Quantum, we unveiled Eagle, 127-qubit quantum processor.
This is the first quantum chip that breaks the 100-cubic barrier and represents a key milestone on our path toward building a 1,000-cubit processor in 2023.
While organic innovations are important, we continue to acquire companies that complement and strengthen our portfolio.
We made five acquisitions in the fourth quarter and a total of 15 acquisitions in 2021.
Two weeks ago, we announced the acquisition of Envizi.
Many consumers are willing to pay more for products that are made by companies that are more environmentally sustainable.
As the world continues to move toward a more circular economy, our clients' need is the ability to manage and measure their progress.
Envizi's capabilities complement our own and help us respond to that client demand.
Sustainability is important across a number of stakeholder groups, including clients, employees, and investors.
We are continuing to make good progress and are particularly proud of our diversity and inclusion scores, and our ability to attract and retain talent.
Our efforts were recently recognized by JUST Capital who named IBM as one of America's most just companies.
Let me now close by emphasizing once again our fourth-quarter results strengthen the conviction that we have in our ability to deliver our model of mid-single-digit revenue growth.
Jim will take you through the fourth quarter and then provide more color on 2022.
Jim, over to you.
Let me start out with a few of the headline numbers.
We delivered $16.7 billion in revenue, 58% operating gross margin, operating pre-tax income of $3.5 billion, and operating earnings per share of $3.35 for continuing operations.
Last January, we said we expected performance to improve over the course of 2021 as we start to benefit from the actions we've taken.
We have seen progress in our constant-currency revenue growth rate every quarter and now again in the fourth.
This is the first view of IBM post-separation.
We had solid revenue performance, up nearly 9%.
I'll remind you, this includes the incremental revenue from the new commercial relationship with Kyndryl, and we said we would be transparent on the contribution to our revenue growth for the first year.
This quarter, our revenue growth includes about 3.5 points from the new relationship.
Excluding this, IBM's revenue was up 5%.
We have aligned our operating model and segment structure to our platform-centric approach.
In the fourth quarter, Software was up 10%, and Consulting was up 16%.
These are our two growth vectors and together represent over 70% of our annual revenue.
Infrastructure, more of a value vector, tends to follow product cycles and was up 2%.
The Software and Infrastructure growth each include nearly 5 points from the new Kyndryl relationship while there is no contribution to Consulting's growth.
Our platform-centric model has attractive economics.
For every dollar of hybrid platform revenue, IBM and our ecosystem partners can generate $3 to $5 of software, $6 to $8 of services, and $1 to $2 of infrastructure revenue.
This drives IBM's hybrid cloud revenue, which is up 19% for the year.
Post-separation, revenue from our full-stack cloud capabilities from Infrastructure up through Consulting now represents $20 billion of revenue or 35% of our total.
Looking at our P&L metrics.
Our operating gross profit was up 3%, and the $3.5 billion of operating pre-tax profit was up over 100%.
Operating net income and earnings per share also grew.
Let me highlight a couple of items within our profit performance.
First, the year-to-year pre-tax profit reflects $1.5 billion charge to SG&A last year for structural actions to simplify and optimize our operating model and improve our go-forward position.
We're continuing to invest to drive growth.
Throughout the year, we have been aggressively hiring, with about 60% of our hires in Consulting.
We're scaling resources in Garages, sign engineering centers, and customer success managers, all to better serve our clients.
We're increasing investments in R&D to deliver innovation in AI, hybrid cloud, and emerging areas like Quantum.
We're ramping investment in our ecosystem, and we acquired 15 companies in 2021 to provide skills and technologies aligned to our strategy, including capabilities to help win client architecture decisions.
Regarding tax, our fourth-quarter operating tax rate was 14%.
This was up significantly from last year but roughly 2 to 3 points lower than what we estimated in October due to a number of factors, including the actual product and geographic mix of our income in the quarter.
Let me spend a minute on our free cash flow and balance sheet position.
Our full-year consolidated cash from operations was $12.8 billion, and free cash flow was $6.5 billion.
These are all-in consolidated results and include 10 months of Kyndryl and the cash paid for the 2020 structural actions and spin charges.
IBM's stand-alone or baseline free cash flow for the year was $7.9 billion, which is aligned to our go-forward business.
This excludes Kyndryl charges and pre-separation activity but includes the IBM portion of the structural actions.
Payments for these IBM-related structural actions and deferred cash tax paid in 2021 contributed to the year-to-year decline in the stand-alone results.
In terms of uses of cash for the year, we invested over $3 billion in acquisitions.
We continue to delever, with debt down nearly $10 billion for the year and over $21 billion since closing the Red Hat acquisition.
And we returned nearly $6 billion to shareholders in the form of dividends.
This results in a year-end cash position of $7.6 billion, including marketable securities and debt of just under $52 billion.
Our balance sheet remains strong, and I'd say the same for our retirement-related plans.
You'll remember that over the last years, we've shifted our asset base to a lower risk profile.
In 2021, the combination of modest returns and higher discount rates improved the funded status of our plans.
In aggregate, our worldwide tax-qualified plans are funded at 107%, with the U.S. at 112%.
Now, I'll turn to the details by segment, and I'll remind you we have put in place a simplified management system and segment structure aligned to our platform-centric model.
And within the segments, we're now providing new revenue categories and metrics that will provide greater transparency into business trends and drivers.
IBM Software delivered double-digit revenue growth in the quarter.
This was driven by good revenue performance in both hybrid platform and solutions and transaction processing, the latter benefiting significantly from the new Kyndryl content.
Software is important to our hybrid cloud strategy and our financial model.
Our hybrid cloud revenue in software is up 25% for the year to more than $8.5 billion.
And subscription and support renewal rates continue to grow again this quarter, contributing to a $700 million increase in the software deferred income balance over the last year.
Hybrid platform and solutions revenue was up 9%.
This performance is an indication of the strength across the software growth areas focused on hybrid cloud and AI.
It's worth mentioning this includes only a point of help from the new Kyndryl commercial relationship.
Let me highlight some of the trends by business area.
Red Hat revenue, all in, was up 21%.
Both infrastructure and app dev and emerging tech grew double digits as RHEL and OpenShift address enterprise's critical hybrid cloud requirements.
With this performance, we're continuing to take share with our Red Hat offerings.
Automation delivered strong revenue growth, up 15%.
As Arvind mentioned, there is strong market demand for automation.
We had good performance in AIOps and management this quarter as we address resource management and observability.
Clients are realizing rapid time to value from Instana and Turbonomic, two of our automation acquisitions.
And integration grew with continued traction in Cloud Pak for Integration.
Data and AI revenue grew 3%.
We have particular strength in data fabric, which enables clients to connect siloed data distributed across the hybrid cloud landscape without moving it.
You'll recall, we talked about the data fabric opportunity back in October.
We also had strong performance in business analytics and weather.
Within these solutions, clients are leveraging our AI to ensure AI models are governed to operate in a fair and transparent manner.
Security revenue declined modestly in the quarter driven by lower performance in data security, while revenue grew 5% for the year.
As we called out in our recent investor briefing, security innovation is an integral part of our strategy.
In December, we launched a new data security solution, Guardium Insights, with further plans to modernize the broader portfolio throughout the year.
This quarter, we also completed the acquisition of ReaQta, which leverages AI and machine learning to automatically identify and block threats at the endpoint.
Putting this all together, our annual recurring revenue, or ARR, is now over $13 billion, which is up 8% this quarter.
This demonstrates the momentum in our hybrid platform and AI strategy, including Red Hat and our suite of Cloud Paks.
Moving to transaction processing.
Revenue was up 14%.
This is above our model driven by a few underlying dynamics.
First, all of the growth in transaction processing came from the new Kyndryl commercial relationship, which contributed more than 16 points of growth.
Second, I'll remind you that we're wrapping on a very weak performance in the fourth quarter of last year, which was down 26%.
And lastly, we had some large perpetual license transactions given the good expansion in the IBM Z capacity we've seen this cycle.
While the new capacity is important, what's just as important is the continued strong renewal rates this quarter.
These are both good proof points of our clients' commitment to our infrastructure platform and these high-value software offerings.
Looking at software profit.
We expanded pre-tax margin by 12 points, including nearly 10 points of improvement from last year's structural actions.
Revenue grew 16% with acceleration across all three revenue categories.
Complementing this strong revenue performance, our book-to-bill was 1.2.
Clients are accelerating their business transformations powered by hybrid cloud and AI to drive innovation, increase agility and productivity, and capture new growth opportunities.
Enterprises are turning to IBM Consulting as their trusted partner on this journey.
They are choosing us for our deep client, industry, and technical expertise, which drives adoption of our hybrid cloud platform and pulls through key technologies.
Consulting's hybrid cloud revenue grew 34% in the quarter.
For the year, cloud revenue is up 32% to $8 billion.
Offerings and application modernization, which are centered on Red Hat, contributed to this growth.
The Red Hat-related signings more than doubled this year and are now over $4 billion since inception.
This quarter, we added over 150 client engagements, bringing the total since inception to over 1,000.
Our strategic partnerships also drove our performance.
Revenue from these partnerships accelerated as the year progressed and was up solid double digits in the fourth quarter led by Salesforce, SAP, AWS, and Azure.
Turning to our business areas.
Our Consulting's growth was led by business transformation, which was up 20%.
Business transformation brings together technology and strategic consulting to transform critical workflows at scale.
To enable this, we leverage skills and capabilities in IBM technologies and with strategic ecosystem partners such as SAP, Salesforce, and Adobe.
Our practices are centered on areas such as finance and supply chain, talent, industry-specific solutions, and digital design.
This quarter, we had broad-based growth, reflecting strong demand for these solutions.
In technology consulting, revenue was up 19%.
Technology consulting architects and implements cloud platforms and strategies.
We leverage hybrid cloud with Red Hat OpenShift and work with providers, such as AWS and Azure, in addition to IBM Cloud.
This quarter, we continue to see good performance in application modernization offerings that build cloud-native applications and that modernize existing applications for the cloud.
Finally, application operations revenue grew 8%.
This business line focuses on application and cloud platform services required to operationalize and run in both cloud and on-premise environments.
Revenue growth was driven by offerings, which provide end-to-end management of custom applications in cloud environments.
Moving to consulting profit.
Our pre-tax income margin expanded about 8 points, including just over 9 points from last year's structural actions.
We're in a competitive labor market, and we continue to have increased pressure on labor costs due to higher acquisition, retention, and wages.
While we still expect to capture this value in our engagements, it will take a few quarters to appear in our profit profile.
So, now, turning to the new Infrastructure segment.
Revenue was up 2%.
The Kyndryl commercial relationship contributed about 5 points of growth, which is higher than we expected in October.
In this segment, we brought together hybrid infrastructure with infrastructure support, which was formerly technology support services.
This allows us to better manage the life cycle of our hardware platforms and to provide end-to-end value for our clients.
Hybrid infrastructure and infrastructure support revenue were up 2% and 1%, respectively, with pretty consistent contribution from the new Kyndryl relationship.
Hybrid infrastructure includes IBM Z and distributed infrastructure.
IBM Z revenue performance, now inclusive of both hardware and operating system, is down 4% this quarter.
This is the 10th quarter of z15 availability and the combination of security, scalability, and reliability continues to resonate with clients.
This program continues to outpace the strong z14 program, and we ship more MIPS in the z15 program than any program in our history.
Our clients are leveraging IBM Z as an essential part of their hybrid cloud infrastructure.
And then in distributed infrastructure, revenue was up 7% driven by pervasive strength across our storage portfolio.
Looking at infrastructure profit.
The pre-tax margin was up over 9 points but essentially flat, normalizing for last year's structural action.
Now, I'll wrap up with a discussion of how our investments and actions position us for 2022 and the longer term.
We've been laser-focused on our hybrid cloud and AI strategy.
Our portfolio, our capital allocation, and the moves we've been making are all designed to create value through focus for our clients, our partners, our employees, and our shareholders.
We took significant steps during 2021.
The most impactful portfolio action was, of course, the separation of Kyndryl.
We've also been allocating capital to higher-growth areas, investing in skills and innovation, and expanding our ecosystem.
We've aligned our business to a more platform-centric business model.
And we're simplifying and redesigning our go-to-market to better meet client needs and execute on our growth agenda.
Bottom line, we're exiting 2021 a different company.
We have a higher-growth, higher-value business mix, with over 70% of our revenue in software and services and a significant recurring revenue base dominated by software.
This will result in improving revenue growth profile, higher operating margin, strong and growing free cash flow, and lower capital intensity, leading to a higher return on invested capital business.
We also continue to have attractive shareholder returns through dividends.
In October, we laid out a model for IBM's performance over the medium term defined as 2022 through 2024.
The model is focused on our two most important measures of success: revenue growth and free cash flow.
As we enter the new year, I'll talk about our expectations for 2022 performance along those dimensions.
We expect to grow revenue at mid-single-digit rate at constant currency.
That's consistent with the model.
On top of that, in 2022, the new commercial relationship with Kyndryl will contribute an additional 3 points of growth spread across the first three quarters.
Currency dynamics, unfortunately, will be a headwind.
At current spot rates, currency is roughly a 2-point headwind to reported revenue growth for the year and 3 points in the first quarter.
For free cash flow, we expect to generate $10 billion to $10.5 billion in 2022.
To be clear, this is an all-in free cash flow definition.
The adjusted free cash flow view we provided in 2021 was useful given the significant cash impact associated with the separation and structural actions.
Now in 2022, despite the fact we still have nearly $0.5 billion of impact from the charges, we're focusing on a traditional free cash flow definition.
The $10 billion to $10.5 billion reflects a year-to-year improvement driven by lower payments for the structural actions, a modest tailwind from cash taxes, working capital improvements, and profit growth resulting from our higher growth and higher value business mix.
With this performance, we're on track to our model.
So, now, let me provide some color on our expectations for segment performance.
Because this is a new segment structure, I'm going to spend a little more time and provide perspective on constant-currency revenue growth and pre-tax margin in the context of our segment models.
In Software, as we benefit from the investments in innovation and our go-to-market changes, we're seeing progress in our Software growth rate.
In 2022, we expect growth at the low end of the mid-single-digit model and then another 5 to 6 points of revenue growth from our external sales to Kyndryl.
We expect Software pre-tax margin in the mid-20s range for the year.
We have solid momentum in IBM Consulting revenue and expect this to continue into 2022 as we help clients with their digital transformations.
This momentum and our book-to-bill ratio support revenue at the high end of our high single-digit model for the year, with double-digit growth in the first half.
We expect low double-digit pre-tax margin for the full year with improving performance through the year as we make progress on price realization.
Infrastructure revenue performance will vary with product cycle.
In 2022, with a new IBM Z introduction late in the first half, we expect performance above the model and a slight contribution to IBM's overall growth.
On top of that, we're planning for about 2 to 3 points from the external sales to Kyndryl in 2022.
This supports a high-teens pre-tax margin rate for the full year.
These segment revenue and margin dynamics will yield about a 4-point year-to-year improvement in IBM's pre-tax operating margin for the full year and 2 to 3 points in the first quarter.
In terms of tax, we expect a mid- to high-teens tax rate, which is a headwind to our profit growth.
Bringing this all together, we expect mid-single-digit revenue growth before Kyndryl and currency and $10 billion to $10.5 billion of free cash flow for the year, both in line with our midterm model.
Patricia, let's go to the Q&A.
Before we begin the Q&A, I'd like to mention a couple of items.
In addition to our regular materials, we've included a summary of our new segments for your reference and historical data on segment pre-tax income.
And then, second, as always, I'd ask you to refrain from multi-part questions.
| compname posts qtrly revenue of $16.7 billion, up 6.5%.
ibm - qtrly gaap earnings per share from continuing operations $2.72; qtrly operating (non-gaap) earnings per share $3.35.
ibm - qtrly revenue of $16.7 billion, up 6.5%, up 8.6% at constant currency (including about 3.5 points from incremental external sales to kyndryl).
ibm - q4 results give us confidence in ability to deliver objectives of sustained mid-single digit revenue growth & strong free cash flow in 2022.
ibm - qtrly operating (non-gaap) gross profit margin of 58% versus 60%.
ibm - unless otherwise specified, q4 results are on continuing operations basis.
|
Dan Amos, Chairman and CEO of Aflac Incorporated, will begin with an overview of our operations in Japan and the US.
Fred Crawford, President and COO of Aflac Incorporated, will then touch briefly on conditions in the quarter and discuss key initiatives, including how we are navigating the pandemic.
Members of our US executive management team joining us for the Q&A segment of the call are: Teresa White, President of Aflac US; Virgil Miller, President of Individual and Group Benefits; Eric Kirsch, Global Chief Investment Officer and President of Aflac Global Investments; Al Riggieri, Global Chief Risk Officer and Chief Actuary; June Howard, Chief Accounting Officer; and Steve Beaver, CFO of Aflac US.
We're also joined by members of our executive management team in Tokyo at Aflac Life Insurance Japan: Charles Lake, Chairman and Representative Director, President of Aflac International; Masatoshi Koide, President and Representative Director; Todd Daniels, Director and CFO; Koji Ariyoshi, Director and Head of Sales and Marketing and Assistant to Director Sales and Marketing.
Before we begin, some statements in this teleconference are forward looking within the meaning of federal securities laws.
Although we believe these statements are reasonable, we can give no assurance that they will prove to be accurate because they are prospective in nature.
Actual results could differ materially from those we discuss today.
We encourage you to look at our Annual Report on Form 10-K for some of the various risk factors that could materially impact our results.
aflac.com and includes reconciliations of certain non-US GAAP measures.
I'll now hand the call over to Dan.
At our first quarter conference call one year ago, we were facing the early days of the pandemic.
At that time, I shared with you, actions that we've taken to ensure that we protect the employees, the distribution partners, the policyholders, and the communities.
I'm proud of our response and our ability to handle these challenging times for everyone.
Our People First embodies the spirit of corporate culture, which we refer to as the Aflac way.
Within the pandemic environment, we are encouraged by the production of the distribution of the COVID-19 vaccines.
But we also recognize that vaccination efforts are still in the early stages around the world.
Our thoughts and prayers are with everyone affected.
And we are cautiously optimistic, while also remaining diligent.
There is one essential message that I continue to emphasize with our management team.
It is imperative that we control the factors we have the ability to control.
And what we don't have the ability to control.
We must monitor continually to be ready to adapt.
This approach allows us to respond in the most effective way possible.
In the first quarter adjusted earnings per diluted share increased 26.4%.
While earnings are off to a strong start for the year, it's important to bear in mind that they are largely supported by low-benefit ratio associated with -- excuse me associated with a pandemic condition.
Before covering our segments, I'll make a few comments about the overall perspective.
Pandemic conditions in the first quarter continued to impact our sales results, as well as earn premium and revenues, both in the United States and Japan.
We continue to expect these pandemic conditions to remain with us through the first half of 2021, but look for improvement in the second half of the year, as communities and businesses, further open-up, allowing more face to face interactions.
Despite the fact that sales in both the United States and Japan had been suppressed considerably due to the constrained, face-to-face opportunities, we did not sit still.
We continue to make progress in integration of our accelerated investment in our platform, while continuing strong earnings performance.
Looking at the operations in Japan in the first quarter, Aflac Japan generated solid overall financial results with a profit margin of 23.1%, which was above the outlook range that we provided at the Financial Analyst briefing.
Aflac Japan also reported strong premium persistency of 95%.
Sales were essentially flat for the first quarter, with the January launch of our new medical product.
All said, that continued impact of the pandemic conditions.
We are encouraged by the reception of the new medical product, by both, consumers and the Salesforce.
In addition, Japan Post group's announcement, to resume proactive sales in April, paves the way for gradual improvement in Aflac Cancer Insurance sales in the second half of the year.
We are actively working with Japan folks to ready the platform, recognizing that it will take time to return to the full string.
We continue to navigate evolving pandemic conditions in Japan, including the recent reestablished state of an emergency, for Tokyo, Osaka and two other prefectures, affected from April, the 25th, through May the 11th.
Restrictions will be tightened to curb the movement of people and group activities during the major holiday known as Golden Week.
Turning to the US, we saw a strong profit margin of 27.3%, Aflac US also reported very strong premium persistency of 80%.
Max will cover the persistency later.
Current pandemic conditions continue to notably impact our sales results, largely due to reduced face-to-face activity.
As expected, we saw modest sequential sales improvement in the quarter with an overall decrease of 22.1%.
In the US Small businesses are still in the recovery mode, and we expect that they will be that way for most of 2021.
At the same time, larger businesses remain focused on returning employees to the worksite rather than modifying the benefits for their employees.
We strive to be where the people want to purchase insurance.
That applies to both Japan and the United States.
In the past, this is meeting face-to-face with individuals to understand their situation, propose the solution and close the sale.
Face-to-face sales are still the most effective way for us to convey the financial protection only Aflac products provide.
However, the pandemic has clearly demonstrated the need for virtual means.
In other words, non face-to-face sales that help us reach potential customers and provide them with the protection that they need.
Even prior to the pandemic, we've been working on building our virtual capacities.
Given the current backdrop, we have accelerated investments to enhance the tools available to our distribution in both countries, and continue to integrate these investments into our operation.
In addition, we continue to build out the US product portfolio with previously acquired businesses that serve as a base for Aflac network dental and vision and group, absence management and disability.
While these acquisitions have a modest near-term impact on the top line, they better position Aflac for future long-term success in the United States.
Our core earnings drivers, which are persistency, underwriting profits, investment income and expense ratios continue to drive strong pre-tax margins both in the United States and in Japan.
Both Japan and the US, we experienced sequential sales growth in the months of January, February and March.
In addition, provided we don't experience the setback in terms of pandemic conditions, we're forecasting a sequential increase in absolute sales in the second quarter over the first quarter in both the US and in Japan.
As always we placed significant importance on continuing to achieve strong capital ratios in the US and in Japan on behalf of our policyholders and shareholders.
We remain committed to prudent liquidity and capital management.
We issued our first sustainability bond in March as we seek to allocate proceeds from the issuance to reinforce our commitment to social and environmental initiatives as we balance purpose for profit.
We treasure our 38-year track record of dividend growth and remain committed to extending it, supported by the strength of our capital and cash flows.
At the same time, we will continue to tactically repurchase shares.
Focus on integrating the growth investments we've made in our platform.
By doing so, we look to emerge from this period in a continued position of strength, and leadership.
I've always said that the true test of strength is how one handles adversity.
This past year confirms what I knew all along, and that is that Aflac is strong, adaptable and resilient.
We will continue to work to achieve long-term growth, while also ensuring we deliver on our promise to our policyholders.
By doing so, we look to emerge from this period in a continued position of strength and leadership.
I don't think it's a coincidence that we've achieved success, while focusing on doing the right things for the policyholders, the shareholders, the employees, the sales distribution, the business partners and the communities.
In fact, I believe success, and doing the right thing go hand-in-hand.
I'm proud of what we've accomplished by balancing purpose with financial results.
This is ultimately translated into a strong, long-term shareholder value.
Now I turn the program over to Fred.
I'm going to touch briefly on current pandemic conditions in Japan and in the US, then focus my comments on efforts to restore our production platform in 2021.
Japan has experienced approximately 575,000 COVID cases and 10,000 confirmed deaths since inception of the virus.
Through the first quarter of 2021 and since the inception of the virus, Aflac Japan's COVID impact has totaled approximately 10,500 claimants with incurred claims of JPY1.9 billion.
We continue to experience a low level of paid claims for medical conditions other than COVID, as policyholders refrain from routine hospital visits.
There are essentially three areas of focus in building back to pre-pandemic levels of production in Japan.
Our traditional product refreshment activities, online sales driving productivity in the face of pandemic conditions and active engagement with Japan Post to begin the recovery process in cancer insurance sales.
As Dan noted, there has been a positive reception to our revised medical product.
This product was designed to better compete and the independent agent channel where we had seen a decline in market share heading into 2020.
Sales of medical insurance are up 34% over the first quarter of 2020 and up 8% over the 2019 quarter.
The new product called EVER Prime has enhanced benefits that on average result in 5% to 10% more premium per policy versus our old medical product.
The product also includes a low claims bonus structure that has contributed to growth among younger demographics.
We have technology in place to allow agents to pivot from face to face to virtual sales, and an entirely digital customer experience.
The agent is not removed from the process.
The agent can make the sale and process the policy from point of solicitation to point of issuance entirely online without face-to-face contact.
We introduced this capability in October of 2020 and for the month of November, we processed 1,600 applications utilizing this digital experience.
In the month of March that number doubled to approximately 3,200 applications.
Not surprisingly, we are seeing higher adoption rates among younger demographics.
On March, 26, we launched a national advertising campaign promoting the capability and expect to see increased utilization.
We see this capability contributing to productivity even after pandemic conditions subside.
On Japan Post, as Dan noted, we anticipate sales volume will recover gradually in the second half of 2021.
Separate from Japan Post activities to revive sales, Aflac Japan is actively supporting recovery in the sale of cancer insurance.
This includes reinforcing communication on Japan Post sales policy, down to the postal branch level, training and education on our latest cancer products, and sales proposal strategies and identifying existing cancer policyholders in the Japan Post system to both explain the benefits of their current products and create an opportunity for potential upgrade.
It's important to remember that the Japan Post sales force has been inactive for 18 months.
Therefore product training and sales coaching are critical efforts in the coming months.
Turning to the US, there is approximately 32 million COVID-19 cases and 575,000 deaths as reported by the CDC.
As of the end of the first quarter, COVID claimants since inception of the virus has totaled approximately 38,000, with incurred claims of $130 million.
Along with infection rates declining from peak levels in 2020, our data suggests hospitalization rates and days in the hospital have trended lower.
However infection hotspots in areas of the US remain.
And as is the case in Japan, there is concern over a potential fourth wave of infection.
Executive orders requiring premium grace periods are still in place in nine states with six states having open ended expiration dates, persistency has improved.
However, most of that improvement is attributed to the combination of state orders and lower overall sales as we typically experienced higher lapse rates in the first year after the sale.
Turning to recovery and restore efforts, we have seen our agent channel and small business benefit franchise hurt by the pandemic.
It's important to note that roughly 390,000 of our 420,000 US business clients have less than 100 employees, critical areas of investment include recruiting, training, technology advancement and product development, key indicators of recovery include agent and broker recruiting, a built in average weekly producers and traction in the rollout of our dental and vision products.
For the first quarter, we are running at approximately 70% of the average with the producers during the same period in pre-pandemic 2019.
Trends are positive, and we expect to narrow this gap throughout the year assuming pandemic conditions improve.
We are experiencing favorable recruiting numbers, have reopened training centers closed during the pandemic and veteran agents are reengaging, after a difficult year.
We are in the early days of our national rollout of Aflac network dental and vision.
Our dental product is approved in 43 states, and vision in 41 states with more states coming online throughout the year.
Network dental and vision is critical in the small business marketplace, and a key component to agent productivity, along with new account growth, retention and penetration or seeing more employees at a given employer.
This month, we are completing the national training programs, making select product refinements and reinforcing incentives to drive new dental accounts.
In addition, we are busy upgrading our administrative platforms to ready for increased volumes.
2021 is the year of launch, learn and adjust, and we expect to see our pipeline, close rate and new accounts gradually increasing throughout the year.
Our premier life and disability platform acquired from Zurich is now operating under the Aflac brand.
We have started to see our quoted pipeline build in the last 45 days.
However, many employee -- employers are reluctant to move critical benefit plans while sorting through returning to work site and changing workforce dynamics.
In addition, benefit consultants often proceed with caution in a year or so after an acquisition.
We need to remain patient over the next few years as we settle into this new line of business.
Our competitive calling card is the proven premier service and technology capabilities of the acquired platform, coupled with Aflac Group's core leadership in supplemental work site benefits.
We will not resort to winning business via relaxed underwriting and pricing standards in this highly competitive market.
Finally, earlier this year, we launched our new e-commerce direct-to-consumer platform, Aflac Direct.
We offer critical illness, accident and cancer and are approved in approximately 30 states with more states and product coming online throughout the year.
This platform targets individuals, the self employed, gig workers and part-time employees.
In short, those who are not offered traditional benefit packages at the work site.
We are actively building out a licensed agent call center to better manage conversion rates and control overall economics.
With a modest amount of committed marketing dollars, we are attracting about 500,000 visitors per month to aflac.com, which has resulted in 120,000 leads for call center conversion this year.
We are currently experiencing a 15% conversion rate once in the call center.
This is a data analytics-driven business and core metrics will improve as this model matures.
In terms of the contribution of these businesses to overall sales in 2021, we expect these three growth initiatives will make up roughly 10% of sales in 2021 after having contributed less than 5% to 2020 sales.
We remain committed to the revenue growth targets discussed at our November investor conference.
We expect these initiatives to drive incremental revenue in excess of $1 billion over the next five to seven years.
As these separate initiatives mature, they leverage off each other.
Network dental and vision drives agent recruitment and conversion to average weekly producers, employer paid benefits drives supplemental work site sales, and direct-to-consumer expands our addressable market, while being leveraged to funnel work site leads to our agents in the field.
In the future, as employees leave the work site, a digital relationship directly with Aflac helps with persistency and customer satisfaction.
As Dan noted, we issued our inaugural sustainability bond, raising $400 million to be invested toward our path to net zero emissions by 2050 and investments that support climate, as well as diversity and inclusion efforts.
The bond offering itself is an important step, in that it requires formal processes around reporting, tracking and auditing of qualified sustainable investments.
This rigor serves to benefit the control environment surrounding our enterprisewide ESG reporting and accountability.
In addition, Aflac Global Investments announced late February, a partnership with Sound Point Capital Management to create a new asset management business, focused on the transitional real estate loan market.
As part of that alliance, we have made an initial $1.5 billion general account allocation to the newly created Sound Point Commercial Real Estate Finance, LLC, with $500 million of that amount dedicated to providing transitional and other debt financing to support economically distressed communities, designated as qualified opportunity zones.
Aflac will hold a 9.9% minority interest in this newly created investment LLC, with the ability to grow our stake over time in line with future growth of the new venture.
I'll now pass on to Max to discuss our financial performance in more detail.
Let me follow my comments with a review of our Q1 performance, with a focus on how our core capital and earnings drivers have developed.
For the first quarter, adjusted earnings per share increased 26.4% to $1.53, with a $0.02 positive impact from FX in the quarter.
This strong performance for the quarter was largely driven by lower utilization during the pandemic, especially in the U.S. and a lower tax rate compared to last year.
Variable investment income went $24.5 million above our long-term return expectations.
Adjusted book value per share, including foreign currency translation gains and losses, grew 20.6%, and the adjusted ROE, excluding the foreign currency impact, was a strong 16.7%, a significant spread to our cost of capital.
Starting with our Japan segment.
Total earned premium for the quarter declined 3.6%, reflecting first sector policies paid up impact, while the earned premium for our third sector product was down 2.2%, as sales were under pressure in 2020.
Japan's total benefit ratio came in at 68.4% for the quarter, down 100 basis points year-over-year, and the third sector benefit ratio was down -- was 58%, also down 100 basis points year-over-year.
We experienced slightly higher than normal IBNR release in our third sector block as experience continues to come in favorable relative to initial.
This quarter, it was primarily due to pandemic conditions constraining utilization.
Persistency remains strong, with a rate of 95%, up 50 basis points year-over-year.
Our expense ratio in Japan was 21.3%, up 130 basis points year-over-year.
With improved sales activity, expenses naturally pick up in our technology-related investments into converting Aflac Japan to a paperless company continues, which also includes higher system maintenance expenses.
Adjusted net investment income increased 6.9% in yen terms, primarily driven by favorable returns on our growing private equity portfolio and lower hedge costs, partially offset by lower reinvestment yield on our fixed and floating rate portfolio.
The pre-tax margin for Japan in the quarter was 23.1%, up 60 basis points year-over-year, a very good start to the year.
Turning to the US, net earned premium was down 4.1% due to weaker sales results.
Persistency improved 240 basis points to 80%, as our efforts to retain accounts and reduce lapsation show early positive results.
As Fred noted, there are still nine states with premium grace periods in place.
So we are monitoring these developments closely.
Breaking down the 240 basis points persistency rate improvement further, 70 basis points can be explained by the emergency orders in place, 90 basis points by lower sales as first year lapse rates are roughly twice total in-force lapse rates.
And the residual of 80 basis points includes conservation efforts executed on last year.
Our total benefit ratio came in much lower than expected.
At 39.1%, a full 900 basis points lower than Q1 2020.
In the quarter, we experienced lower paid claims, especially in the month of January, as pandemic conditions impacted behavior of our policyholders.
This is in line with disclosures in 2020, indicating a negative correlation between infection levels and claims generating activities like accidents, elective surgeries and physical exams.
This low activity level related to non-COVID claims accounted for most of the year-over-year drop in the benefit ratio.
Our total incurred COVID-related claims also came in lower than expected due to an IBNR release.
We estimated new COVID claims at approximately $42 million, and this was offset by an IBNR release of $41 million.
As our experience accumulates, we have refined our assumptions, and this led to this IBNR reserve release.
We expect the benefit ratio to increase gradually throughout the remainder of the year, with the resumption of normal activity in our communities and by our policyholders.
For the full year, we now expect our benefit ratio to be toward the lower end or slightly below our guided range of 48% to 51%.
Our expense ratio in the US was 38.5%, up 10 basis points year-over-year, but with a lot of moving parts.
Weaker sales performance negatively impacts revenue.
However, the impact to our expense ratio is largely offset by lower DAC expense.
Higher advertising spend increased the expense ratio by 70 basis points along with our continued build-out of growth initiatives, group life and disability, network and innovation and direct-to-consumer.
These contributed to a 110 basis point increase to the ratio.
The strategic growth initiative investments are largely offset by our efforts to lower core operating expenses as we strive toward being the low-cost producer in the voluntary benefit space.
Net-net, despite a lot of moving parts, Q1 expenses are tracking according to plan.
In the quarter, we also incurred $6 million of integration expenses not included in adjusted earnings associated with recent acquisitions.
Adjusted net investment income in the US was down 0.6% due to a 22 basis points contraction in the portfolio yield year-over-year, partially offset by favorable variable investment income.
Profitability in the US segment was very strong, with a pre-tax margin of 27.3%, with a low benefit ratio as the core driver.
With Q1 now in the books, we are increasing our pre-tax margin expectation for the full year.
Initial expectations were for us to be toward the low end of 16% to 19%.
We now expect to end up for the full year toward the high end of this range indicated at start.
In our Corporate segment, we recorded a pre-tax loss of $26 million as adjusted net investment income was $20 million lower than last year, due to lower interest rates at the short end of the yield curve.
Other adjusted expenses were $7 million lower as our cost reduction activities are coming through.
Our capital position remains strong, and we ended the quarter with an SMR north of 900% in Japan and an RBC of approximately 563% in Aflac Columbus.
Unencumbered holding company liquidity stood at $3.9 billion, $1.5 billion above our minimum balance, excluding the $400 million proceeds from the sustainability bond that we issued in March that reinforced our ESG initiatives and believe that sustainable investments are also good long-term investments.
Leverage, which includes the sustainability bond, increased but remains at a comfortable 23% in the middle of our leverage corridor of 20% to 25%.
In the quarter, we repurchased $650 million of our own stock and paid dividends of $227 million, offering good relative IRR on these capital deployments.
We will continue to be flexible and tactical in how we manage the balance sheet and deploy capital in order to drive strong risk-adjusted ROE with a meaningful spread to our cost of capital.
And with that, I'll hand it over to David to begin Q&A.
[Operator Instructions] Natasha, we will now take the first question.
| q1 adjusted earnings per share $1.53.
|
On Slide 3, in order to provide improved transparency into the operating results of our business, we provided non-GAAP measures adjusted net earnings, adjusted earnings per share, and adjusted segment earnings that exclude the severance and restructuring charges related to aligning our business to current market conditions.
Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up question per turn.
If you have multiple questions, please rejoin the queue.
Before I summarize the quarter and Chuck goes through the results, I want to express how proud I am of our global team.
We faced challenges and complexities to our business that we have never faced before.
Our number one goal was and remains to keep our employees safe while delivering our essential products to our customers.
I say confidently that our team met and often exceeded my expectations.
You truly make A. O. Smith a remarkable company.
The business performed in the second quarter is largely in line with what we saw in April.
Continuing the pace of growth we saw in the first quarter, our North America water treatment business organically grew 19%.
Direct-to-consumer and retail sales were particularly strong as consumers became more health conscious during the pandemic and the shelter-in-place orders confined many of us to our homes.
As expected, industry volumes of residential water heaters in the U.S. held up notably well.
Based on our June shipments, we estimate industry volumes were flat to slightly up [Phonetic] in the quarter compared to last year.
Due to construction project delays and postponements in North America, we saw commercial water heater and boiler volumes decline, in line with our estimates of the industry declines of 20% to 25% in the quarter compared with last year.
Consumer demand for our products in China was flat to slightly positive compared to the second quarter of 2019 as restaurants and shopping malls reopened and retail foot traffic increased.
We remained operational with no significant disruptions.
Our Juarez, Mexico plant, which we voluntarily closed in April, reopened in May and ramped up production over the latter portion of the quarter.
We have taken numerous and meaningful steps to protect our employees, suppliers, and customers in the pandemic.
These important steps, in many cases reduced efficiencies, and include continuous communication and training to our employees on living and working safely in a COVID-19 world, client [Phonetic] accommodations and reconfiguration to maintain social distancing, masks for all employees, implementation of sanitizing stations, temperature taking, and regular proactive deep cleaning and sanitization of our facilities.
Our global supply chain remain operational.
We continue to monitor and manage our ability to operate effectively as tariffs and the evolving nature of the COVID-19 pandemic and the related stresses on the supply chain and periodic marketplace disruptions impact our operation.
To align our business with current market conditions, primarily in China and to a lesser extent in North America, we reduced headcount and incurred other restructuring costs totaling $6 million in the second quarter.
Second quarter 2020 sales of $664 million declined 13% compared to the second quarter of 2019.
The decline in sales was largely due to lower water heater volumes in China and lower commercial water heater and boiler volumes in North America driven by the COVID-19 pandemic.
As a result of lower sales, second quarter 2020 adjusted earnings of $73 million and adjusted earnings per share of $0.45 declined significantly compared with the same period in 2019.
Sales in our North America segment of $481 million declined 8% compared to the second quarter of 2019.
Organic growth of approximately 19% in North America water treatment sales was more than offset by lower commercial water heater volumes, lower boiler volumes, and a water heater sales mix composed of more electric models which have a lower selling price.
Rest of the World segment sales of $190 million declined 24% compared to the same quarter of 2019.
China sales declined 20% in local currency related to higher mix of mid-price products and further reductions in customer inventory levels.
Consumer demand for our products in China was flat to slightly positive compared with the second quarter of 2019.
China currency translation negatively impacted sales by approximately $6 million.
Our sequential sales in China improved through the quarter and China was profitable in May and June.
India sales declined significantly as the economy was shut down during a majority of the quarter to minimize the spread of the virus.
On Slide 7, North America adjusted segment earnings of $108 million were 12% lower than segment earnings in the same quarter in 2019.
The decline in earnings was driven by lower volumes of commercial water heaters, lower boiler volumes, and a mix skew to electric water heaters.
Certain costs directly related to the pandemic including temporarily moving production from Mexico to the U.S., paying employees during temporary plant shutdowns, facility cleaning, paying benefits for furloughed employees and other costs were $5.5 million in the second quarter.
Adjusted earnings exclude $2.2 million in pre-tax severance costs.
As a result, second quarter 2020 segment -- adjusted segment margin of 22.4% declined from 23.5% achieved in the same period last year.
Rest of the World adjusted segment loss of $2 million declined significantly compared with 2019 second quarter segment earnings of $22 million.
The unfavorable impact to profits were lower China sales and a higher mix of mid-price products which have lower margins more than offset the benefits to profits from lower SG&A expenses.
These results exclude $3.9 million in pre-tax severance and restructuring costs.
As a result of these factors, adjusted segment margin was negative compared with 9% in the same quarter of 2019.
Our corporate expenses of $10 million and interest expense of $3 million were similar to last year.
Cash provided by operations of $179 million during the first half of 2020 was higher than $144 million in the same period of 2019 as a result of lower investment in working capital, including deferral of our April estimated federal income tax payment to July, which was partially offset by lower earnings compared with the year ago period.
Our liquidity and balance sheet remained strong.
We had cash balances totaling $569 million and our net cash position was $288 million at the end of June.
Our leverage ratio at the end of the second quarter was 14.5% as measured by total debt to total capital.
We had $332 million of undrawn borrowing capacity on our $500 million revolver.
[Technical Issues] the second quarter and our share repurchase activity continues to be suspended.
During the first half of 2020, we repurchased approximately 1.3 million shares of common stock for a total of $57 million.
Our 2020 adjusted earnings per share guidance excludes $0.03 per share in severance and restructuring costs included that were incurred in the second quarter.
Our adjusted guidance assumes the conditions of our business environment and that of our suppliers and customers is similar for the remainder of the year to what we are currently experiencing and does not deteriorate as a result of further restrictions or shutdown due to the COVID-19 pandemic.
We expect our cash flow from operations in 2020 to be approximately $350 million compared with $456 million in 2019, primarily due to lower earnings.
Our 2020 capital spending plans are between $60 million and $70 million and our depreciation and amortization expense is expected to be approximately $80 million.
Our corporate and other expenses are expected to be approximately $47 million in 2020, slightly higher than 2019 primarily due to lower interest income on investments.
We expect our interest expense to be $9 million in 2020 compared with $11 million in 2019.
Our effective income tax rate is expected to be between 23% and 23.5% in 2020.
Our assumptions assume no additional share repurchase resulting in an average diluted outstanding shares in 2020 of approximately 162.5 million.
Our outlook for 2020 includes the following assumptions.
We project U.S. residential water heater industry volumes will be flat in 2020 driven by resilient replacement demand and similar levels of new home constructions as last year.
We expect commercial industry water heater volumes will decline approximately 10% as job sites and business closures due to the pandemic delay or defer new construction and discretionary replacement installation.
It is encouraging to see consumer demand for our China product similar, if not a little higher than last year over the last four months.
We are also seeing sequentially quarterly improvement in market share both online and offline for water heater and water treatment products driven by our mid-price range products.
We took additional charges in Q2 for further restructuring of the business.
We believe these restructuring charges are largely behind us.
We continue to target closure of 1,000 existing stores while targeting to open 500 small store relationships in Tier 4 through 6 cities.
Cost actions and restructuring activity are projected to result in $35 million of savings in 2020 over 2019, $15 million of which will be realized in the second half of 2020.
We expect year-over-year declines in local currency sales of 18% to 20% and protract sequential quarter-over-quarter growth in the second half of the year as China appears to be making sustainable progress in reopening their economy and keeping the virus in check.
We expect our North America boiler sales will decline approximately 10% for the full year.
Commercial boilers represent 65% to 70% of our boiler sales.
With many job sites temporarily closed during the second quarter, we believe as job sites reopen, the orders will sequentially improve in the second half of the year.
We project 20% to 22% sales growth in our North America water treatment products which include incremental Water-Right sales.
We ended 2019 with a $2.6 million loss in India and expect a similar loss in 2020 as a result of the pandemic.
Please advance to Slide 11.
We project revenue will decline by 7% to 8% in 2020 as strong organic North America water treatment sales and resilient North America residential water heater volumes are more than offset by weaker North America commercial water heater and boiler volumes and lower China sales, largely due to the pandemic.
We expect North America segment margin to be between 22.5% and 23% and Rest of World segment margins to be negative 1% to negative 2.5%.
We believe particularly in these uncertain times A. O, Smith is a compelling investment for a number of reasons.
We have leading share positions in our major product categories.
We estimate replacement demand represents approximately 80% to 85% of U.S. water heater and boiler volumes.
We have a strong premium brand in China, a broad product offering in our key product categories, broad distribution, and a reputation for quality and innovation in that region.
Over time, we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We have strong cash flow and balance sheet supporting the ability to continue to invest for the long-term with investments in automation, innovation, and new products as well as acquisitions and returning cash to shareholders.
We will continue to proactively manage our business in this uncertain environment.
We see improving consumer demand trends emerge in China where we were first impacted by the pandemic and see China operations pivot to profitability for the remainder of the year.
In North America, as the economy begins to reemerge after [Phonetic] the economic shut down, persistent COVID-19 cases and related potential implications to returning to a more stable environment in the market, workplace and supply chain will continue to be challenging throughout the remainder of the year.
We have a strong and dedicated team, which has navigated successfully through prior downturns and I'm confident in our ability to execute similarly through COVID-19.
| suspended its share repurchase program in mid-march 2020 and repurchased no shares in q2 of 2020.
forecasts capital expenditures between $60 and $70 million in 2020.
continues to strategically invest in its business for long-term.
q2 adjusted earnings per share $0.45.
qtrly sales were 13 percent lower than sales of $765.4 million reported in same quarter of 2019.
|
These statements are based upon information that represents the company's current expectations or beliefs.
The results actually realized may differ materially based on risk factors included in our SEC filings.
aeo-inc.com in the Investor Relations section.
I hope everyone is doing well.
I'm extremely happy with the continued strength across our business.
It was truly a milestone quarter in which we posted best ever third quarter results and announced an important strategic acquisition.
I'll start with our results, which were simply outstanding.
This quarter, we delivered record revenue of $1.27 billion, reflecting growth at 24% from 2020, and an increase of 19% to 2019.
Healthy sales and merchandise margins combined with cost efficiencies drove profit flow-through, which surpassed our expectations.
Record operating income of $210 million, reflecting a margin at 16.5%, our highest rate since 2007.
We are extremely pleased to see a sustained momentum across our brands and channels, which posted growth versus 2020 at pre-pandemic 2019 levels.
Casualwear remains in high demand, and AE and Aerie are perfectly positioned to benefit.
We are delivering great product and sharper marketing as well as brand [Phonetic] experiences, both in-store and online that are second to none.
AE brand is achieving exceptional results.
Under Jen's leadership, the product style and quality has improved remarkably and customers are noticing.
As back-to-school came rolling back, AE received more than its fair share of growth.
Shopping frequency and spend is up dramatically and we are acquiring and reactivating more customers.
At the same time, we are seeing renewed growth in categories that have been underpenetrated in recent years.
Aerie's growth continues at a fast pace, with momentum across all categories, including our new activewear brand OFFLINE by Aerie.
Customers who try Aerie love it and the brand is just beginning to unlock its true potential.
Healthy acquisition retention are fueling strong sales and we are seeing nice reception as we expand into new markets.
strategic pillars have provided a roadmap and instilled focus across the company.
Simply put, we are running our business better than ever.
Key initiatives such as inventory and real estate optimization and the transformation of our supply chain are driving significant profit flow-through.
The processes, disciplines and capabilities we have put in place over the past 18 months will continue to set us apart, fueling strong returns and taking AEO to even greater heights.
As an organization, innovation is a core value and at the heart of everything we do.
We clearly recognize that many of the changes in our industry over the past year are here to stay.
In order to remain competitive today and in the years to come, we must pivot and think differently about our business.
That brings me to our exciting plan to acquire Quiet Logistics.
This acquisition marks a major milestone for our company, which I believe will be transformative.
Acquiring Quiet allows us to build on the efficiencies we've gained over the past 12 months and position us for success as we grow our business over the coming years.
We also have a broader vision.
We expect the combination of Quiet Logistics and the recent acquisition of AirTerra to create a unique platform that revolutionizes logistics within our business and retail.
Through consolidation and pooled resources, the customer at Quiet and AirTerra will enjoy the agilities and efficiencies that were previously only available to the world's largest brands and retailers.
I believe this will create an exciting new profit center with meaningful growth opportunities for AEO.
Lastly, our efforts around sustainability and building a better world through our ESG initiatives remain front and center at all times.
We continue to increase our most sustainable real good styles across all merchandise categories.
Additionally, we are investing to decrease emissions in our operations as we make progress toward becoming carbon-neutral.
AE's outperformance year-to-date was truly remarkable and exceeded our expectations.
They clearly demonstrated the agility to meet unexpected challenges, while also staying the course toward our long-term goals.
Our results continue to be fueled by a sound and meaningful strategy, resilient operations and focus on innovation and a passionate world-class team.
Strong demand continues and we expect a strong close to 2021.
This was another amazing quarter for AEO.
We saw tremendous excitement around Aerie and AE as customers turned to their favorite brands this back-to-school.
Customer KPIs were very favorable as we brought in new customers and won more of their wallet.
It was a great set up for the holiday season, where I'm happy to note the energy has stayed just as elevated.
Starting with Aerie, we consistently reach new heights each and every quarter.
28% revenue growth in the third quarter following a 34% increase last year demonstrates Aerie's strong growth path.
This marked the 28th consecutive quarter of double-digit growth.
Profit flow-through was also very healthy with a 16.5% operating margin, reflecting new third quarter highs for the brand.
We achieved this despite some unevenness of inventory flow during factory shutdowns in South Vietnam.
This occurred primarily in our high demand legging business, which is also one of our best margin categories.
Sales metrics in the third quarter were incredibly healthy.
The AUR was up in the high teens, driven by higher full price selling and more strategic decision-making around promotions.
Demand was strong across the Aerie portfolio with our core intimates bralettes and apparel leading the charge.
The OFFLINE activewear brand is continuing to generate excitement as it expands its product offering.
We feel great about what's to come as we grow the store footprint and widen the customer base.
Marketing is also playing a key role.
In August, we launched the Voices of AerieREAL.
This was Aerie's largest integrated marketing campaign featured across TikTok and connected TV and Snapchat.
This platform is giving our customers a voice and opportunity to share what makes them real.
The response was truly amazing, hundreds of customers shared their touching and funny real stories and will be featured in our upcoming campaigns.
Year-to-date, Aerie's customer file has expanded 15%.
Customers are transacting more frequently and across more categories.
This is driving higher spend per customer as Aerie becomes the go-to for intimates activewear and cozy apparel.
We opened 29 new Aerie doors in the quarter, including a mix of new stand-alone and side-by-side formats, roughly a quarter of them are OFFLINE doors.
Momentum heading into the holiday season remains strong.
We are focused on driving broad-based scale recognition of Aerie as a must-stop gifting destination, and I am so excited for what we have planned and I look forward to sharing more Aerie highlights in the upcoming quarters.
Now, turning to American Eagle.
I'm thrilled with the great progress we're making just 11 months into the launch of our new strategy.
As I shop our website and walk our stores, I have to tell you the strong AE heritage we all know and love is back.
The assortment has been refreshed, our advertising and messaging is reenergized and it's working.
Sales in the quarter rose 21% compared to 2020 and increased 8% to 2019.
Reigniting our brand product together with inventory optimization and promotional discipline drove strong AUR growth and merchandise margin expansion.
This resulted in significant profit flow-through and operating margin of 27.8% that reflected new highs.
Our strength during back-to-school is clear -- is a clear signal that we are the destination for jeans, which continues to hit new highs.
AE's customer file is up and, here too, customers are buying more frequently and spending more.
As we predicted, current trends and shifts in silhouettes are playing right into AE's strengths as the market leader.
In the quarter, our men's business saw tremendous growth across all categories.
The women's business also posted strong sales, supported by our signature denim category and a focus on outfitting.
AE continues to explore innovative ways to reach and broaden its audience.
I am so proud to share that AE was included in TikTok's pilot of its social commerce program this quarter.
Being a part of the new initiative is a true testament to the growing strength of the AE brand and its importance to customers.
AE also launched a store on Snapchat and became the official partner of twitchgaming, a new channel created by gamers for gamers.
There is so much momentum across the brands as we head into the holiday season.
The teams did a great job getting our product out here and we're positioned to meet strong demand.
It's paying off in spades and I'm so happy how far we have come and how much we've accomplished in such a short period of time.
More to share in the coming quarters.
I'm very pleased with how we executed this quarter.
The teams did a remarkable job managing through a highly disrupted operating environment.
Strong top and bottom line results are a clear indication that our strategies are working.
We are making sustained progress against the strategic pillars outlined in our Real Power.
And with this, we are unlocking structural benefits across our business and building a competitive edge in the industry.
A key pillar of our strategy is to create the best brand experience for our customers and our selling channels really delivered this quarter.
We are pleased to see store traffic rebuild rising in the double-digits, driving a 29% increase in store revenue.
Selling trends were robust across our factory outlets and mainline stores, with both formats also seeing significant profit improvement.
Momentum was broad-based across all regions in the US, and all international markets also posted positive results.
Our digital business continued at a healthy pace with revenues up 10%, successfully lapping 29% growth in the prior year.
I am pleased to note that both our store and digital revenues and profits in the quarter surpassed levels we achieved in the third quarter of 2019.
This is reaffirming that we are emerging from the pandemic stronger.
Year-to-date, digital penetration is 35%, and our trailing 12-month digital revenue is approximately $1.8 billion with very strong profitability.
As we prioritize enhancing the omnichannel shopping experience, we are launching new tools and technologies.
This quarter, we expanded our virtual selling tool, AE Live, which leverages our amazing store teams and local influencers to connect directly with customers looking for inspiration and guidance on the latest trends.
We also launched Afterpay in stores, enhanced our e-gifting for a more engaging experience and expanded both same-day delivery services and customer self-checkout to more geographies.
I am very encouraged by the strength in our customer data.
We closed the third quarter with the highest active customer count and highest average annual spend since 2010.
Over the past 12 and 24 months, we added almost 1.75 million and 2.25 million new customers, respectively.
Approximately a third are engaging across both brands and spending approximately 2 times that of our average customer annually.
Following a successful relaunch last summer, the royalty program is growing, with members spending more and staying longer.
Now, shifting gears to logistics and supply chain, we continue to reap the benefits from our in-market fulfillment model.
Delivery costs leveraged 120 basis points in the quarter.
In fact, delivery cost dollars were down year-on-year, led by efficiencies created in digital delivery.
With product located closer to stores and customers, delivery times and the average cost per shipment declined versus last year.
And with greater control over inventory placement, shipments per order were also down dramatically.
This created enormous cost savings and efficiencies.
As Jay said, we are thrilled to announce the purchase of Quiet Logistics, which will allow us to increase these benefits over time.
In particular, the ability to drive substantially greater sales and margin on far less inventory, create more precision in our inventory allocation decisions and deliver products to customers both faster and at a lower cost.
This comes shortly after our acquisition of AirTerra, which we discussed on last quarter's call.
The combination of Quiet and AirTerra has meaningful growth potential, offering a one-stop shop for cost-effective transportation and fulfillment solutions to a growing customer base.
A technology-led supply chain is the backbone of the successful retail business today and into the future.
We believe we are demonstrating the power of this and that Quiet and AirTerra are providing capabilities that are much needed in today's marketplace.
As we discussed in September, the global supply chain remains highly disrupted with core backlog and shifting production schedules leading to longer delivery times and higher transportation costs.
Overall, we managed effectively through these challenges.
In the third quarter, the AE brand essentially had no disruption.
However, as Jen discussed, Aerie's legging category experienced uneven inventory flows when factory closures in Vietnam created product delays.
As a result, we chose to air the product to ensure we were in stock for the holidays.
Although there is a related cost that Mike will discuss in more detail, we are in a healthy inventory position and are set up for a very strong holiday.
In closing, I'm extremely pleased with our performance year-to-date and I'm looking forward to sharing more details on our new investments in the coming quarters.
In the third quarter, we built on strong momentum from the first half of the year, posting yet another record revenue and profit result.
Even with the global operating environment still in flux, our teams executed with precision, guided by the initiatives we outlined in our Real Power.
value creation plan back in January.
We continued to place strong emphasis on product innovation that strengthens customer affinity for our brands, inventory discipline and focus, and real estate optimization and supply chain investments that build on our leading omnichannel capabilities.
Together, these initiatives are fueling our performance and improving our gross margin for the long-term.
Revenue of $1.27 billion, operating income of $210 million and adjusted earnings per share of $0.76 marked third quarter records for the company.
Gross margin of 44.3% and operating margin of 16.5% hit their strongest levels since 2007.
Growth across the business was also exceptional compared to the pre-pandemic 2019 period.
Consolidated third quarter net revenue increased $242 million or 24% versus third quarter 2020 and is up $208 million or 19% from 2019.
Across brands, sales metrics were very favorable, strong demand, higher full price sales and fewer promotions drove the average unit retail up 15% and fueled a high single-digit increase in our average transaction value.
As Michael noted, our selling strategy as an omnichannel retailer continues to be a competitive advantage fueling growth across channels.
We offer customers the convenience they seek on where and how to shop and continue to work to optimize the costs associated with that convenience.
From a brand standpoint, Aerie continued its industry-leading multiyear growth trajectory.
Revenue rose 28% from third quarter 2020 and over 70% from third quarter 2019.
Aerie's operating profit rose 46% and the operating margin expanded to 16.5%, marking a new third quarter high.
Incremental freight costs were $5 million or a 170 basis point headwind to brand operating margins in the quarter.
Additionally, uneven flow of goods, particularly in our signature leggings business put pressure on volumes as well as product mix as this is one of our highest margin categories.
Despite these headwinds, Aerie posted a significant improvement in profitability compared to prior years, almost tripling versus third quarter 2019.
Moving to American Eagle's brand performance, I cannot be more pleased with our results here.
The third quarter saw a significant profit unlock at AE as top line grew 21% and operating profit jumped 68%.
Operating margins hit a remarkable 27.8%.
As Jen mentioned, with improvements across key categories, the top line grew 8% against 2019.
We are seeing far better profitability even beyond our expectations.
Strong demand for our products is being met with healthier decision-making across all areas of the business, and we are truly benefiting from the inventory optimization work unveiled in January.
With significant progress here, we see -- still see room for further unlock moving forward.
Total company consolidated gross profit dollars were up 36% compared to the third quarter of 2020, reflecting a 44.3% gross margin rate.
A strong top line allowed us to realize expense leverage and rent as we benefited from lease negotiations.
And as Michael indicated, efficiencies in our distribution network fueled leverage and delivery.
Merchandise margins also expanded due to our focus on inventory optimization, promotional discipline and higher full price selling, partially offset by higher freight costs.
As a result of strong sales, we saw SG&A leverage 190 basis points.
The dollar increase of $41 million was due primarily to higher store payroll, especially as we lapped capacity constraints last year as well as new store openings and increased advertising.
This was partially offset by lower incentive compensation due to accruals earlier in the year.
Record operating income of $210 million reflected a 16.5% operating margin, our highest third quarter rate since 2007.
Adjusted earnings per share was $0.76 per share, marking a record third quarter.
Our diluted share count was 205 million and included 34 million shares of unrealized dilution associated with our convertible notes.
Ending inventory was up 32% compared to a 13% decline last year.
The increased freight costs had about a 10 point impact on ending inventory at cost.
We're really happy with our inventory position.
I'd like to take a minute to recognize the hard work our teams put in to get our product here on time to support strong demand this holiday season.
Our balance sheet remains healthy and we ended the quarter with $741 million in cash, up from $692 million in the third quarter 2020.
Capital expenditures totaled $58 million in the quarter and $144 million year-to-date.
For 2021, we continue to capital expenditures to come in on the low end of our $250 million to $275 million guidance range, reflecting cost savings and project timing.
With regards to our real estate strategy, we have significant flexibility in managing our store fleet to support our revenue and profit goals.
As we work toward our long-term target of rightsizing AE store footprint, we are dealing with a sharp eye on maximizing profitability.
For Aerie, we are focused on markets with the greatest opportunity.
Due to backlogs in building materials and fixtures, several of our third quarter store openings shifted into the fourth quarter, we expect the majority of these stores to open by the end of the year.
We're very excited about our recently announced acquisition of Quiet.
This will improve our ability to service both channels and lock in the cost benefits and overall gross margin efficiencies we've consistently seen over the past last year.
To wrap up, our performance year-to-date has been truly phenomenal and even more so in the context of challenges and uncertainties in our external environment.
We're extremely pleased with our record results year-to-date and continued progress on our strategic initiatives.
Sales trends remain strong heading into the key Black Friday and Cyber Week period.
We have met our goal to ensure our customers do not feel any impact from the supply chain disruptions and we're well positioned to meet holiday demand.
However, that has come with additional freight costs in the range of $70 million to $80 million, which will impact the fourth quarter.
Of course, we expect to nicely exceed $600 million of operating income for the year, well above the $550 million 2023 target.
We will be updating our longer-term financial targets at ICR this January.
Our results year-to-date continue to reaffirm that the Real Power.
value creation plan is working and that we're focusing on the right levers to drive financial success and returns to our shareholders.
| american eagle outfitters exec sees $70 mln to $80 mln of freight cost in q4.
in q3, co saw some unevenness of inventory flow during factory shutdowns in south vietnam.
in q3, aerie's legging category experienced uneven inventory flows when factory closures in vietnam created product delays.
several q3 store openings shifted into q4; expect majority of stores to open by end of year.
co missed some business in aerie's leggings to the tune of an estimated $15 million in quarter.
american eagle exec sees $70 million to $80 million of freight cost in q4.
qtrly earnings per share of $0.74; qtrly adjusted earnings per share of $0.76.
qtrly total net revenue increased $242 million, or 24% to $1.27 billion.
qtrly total digital revenue up 10%; qtrly consolidated store revenue up 29%.
qtrly aerie revenue of $315 million rose 28%; qtrly american eagle revenue of $941 million rose 21%.
quarter-end total consolidated ending inventory at cost increased 32% to $740 million versus 13% decline last year.
confident that we will exceed $600 million of operating income for year, well above $550 million 2023 target.
|
Today's call will begin with a business update from Chris, highlighting third quarter results, current trends and context around our continued progress toward achieving our strategic plan, Vision 2025.
Bob will discuss the financial details of Carlisle's third quarter performance and current financial position.
Those considering investing in Carlisle should read these statements carefully and review reports we file with the SEC before making an investment decision.
With that, I introduce Chris Koch, Chairman, President and CEO of Carlisle.
I can start by saying I hope all of you, your families, coworkers and friends are returning to some semblance of your pre-pandemic lives while remaining safe and healthy.
As you all know very well, the challenging and uncertain environment that we have experienced since the pandemic began in early 2020 continued through the third quarter of 2021.
This year has truly been a story of two halves.
When we entered 2021, global prospects remained highly uncertain, new virus mutations were occurring, and we were slowly and unevenly emerging from lockdowns.
Entering the second quarter, the rollout of vaccine started to gain momentum as access to vaccines became widespread and the extraordinary stimulus being injected into the global markets took hold.
We began to turn a corner and slowly return to our pre-pandemic activity, which in turn drove increased economic growth in the world that was woefully unprepared to absorb the rates of gain.
And during factory shutdowns, stressed labor markets and lack of supply manifested themselves in increased inflation, the major challenges to normal business operations.
These dynamics, coupled with the Delta variant spiking in the summer months and effects of Hurricane Ida made the third quarter even more challenging.
Carlisle's team leveraged our continuous improvement culture, exhibiting grit and determination to deliver on the Carlisle Experience, which I'm happy to report drove outstanding performance, including record third quarter revenue.
Simply put, we have asked a lot of our employees over the past 1.5 years, and the team has risen to the occasion every time, especially in the third quarter.
There's no doubt, everyone at Carlisle is working on solutions and innovative approaches to help alleviate the pressures and deliver for our stakeholders as strong order trends across our businesses suggest demand will remain strong as we close out 2021 and continue through 2022.
That said, we do expect supply chain issues to ease slightly in the fourth quarter and gain more traction early next year, with a better balance being achieved perhaps by mid-2022.
Over the last several years and in particular through the pandemic, Vision 2025 has ensured clarity of mission and consistent direction for our entire organization.
In the third quarter, we successfully delivered on our key pillars of Vision 2025, including driving organic growth in excess of 5%.
In the third quarter, we delivered over 19% organic growth for the company.
As we rebound off the COVID-induced lows in last year and look forward to the prospects for growth across our business segments, we remain very confident in our ability to generate targeted mid-single-digit organic growth CAGR through 2025.
An important component of organic growth is demonstrated price leadership.
We've always focused on earning price in the marketplace by delivering on the Carlisle Experience, which means providing our distributors, contractors and other channel partners with innovative products of the best quality at the right place, at the right time and as efficiently as possible.
We couldn't do that without diligent planning and collaboration with our suppliers to ensure a steady flow of our necessary inputs.
And while extremely challenging in the third quarter, this collaboration proved particularly valuable in this uncertain environment.
Our ability to anticipate these challenges, especially this year, and maintain a proactive posture on pricing has enabled us to provide a high level of service to our channel and to our end user contractor base.
Through a disciplined and proactive approach, we are successfully navigating the current inflationary environment.
In the third quarter, we more than offset the significant raw material and freight cost increases experienced in CCM with pricing and notably are on track to be price-cost neutral for the full calendar year 2021.
Another important pillar of Vision 2025 is to build scale in our higher-returning businesses through acquisitions.
Since the inception of Vision 2025, we've expanded into polyurethanes with the 2017 acquisition of Accella.
We've moved into Architectural Metals with the 2018 and 2019 acquisitions of Drexel and Petersen, respectively.
And most recently, expanded into weather, vapor, air and energy barrier systems with the acquisition of Henry Company in the third quarter.
Henry not only clearly demonstrates our strategy of expanding further into the Building Envelope, but also highlights our drive to increase the content of energy-efficient products in our portfolio.
As a reminder, buildings account for approximately 30% to 40% of annual global greenhouse gas emissions.
Henry's weather, vapor, air and energy barrier systems contribute to the reduction of these emissions.
One example of this is Henry's Air and Vapor barrier product called Blueskin.
Blueskin prevents uncontrolled air leakage and can yield up to 30% savings on heating and cooling costs.
With accelerating demand for energy-efficient products made for more sustainable buildings in the future, we will continue to emphasize the development of products that help reduce the carbon emissions of buildings, positively impacting the environment.
Finally, in the third quarter, we also continued to execute on our Vision 2025 capital deployment strategy.
Despite closing on Henry, which was the largest acquisition in Carlisle's history, we continue to repurchase shares, spending $25 million during the third quarter and bringing our total repurchases year-to-date to $291 million.
As a reminder, since 2016, we have had over $1.8 billion in share repurchases.
We also anticipate continuing our long history of consistently raising our dividend, which we did again in August, marking the 45th consecutive year of increases.
We are very proud of the near half century of stability in our business model that affords us the ability to consistently return capital to shareholders.
Turning to slide four and transitioning to our ESG efforts.
As we close out 2021, we continue to make steady progress and are performing audits to establish baseline data at our manufacturing facilities, identify opportunities for energy, waste, water and greenhouse gas reduction and establish achievable reduction targets for the future based on real, measurable and impactful actions.
With the Carlisle Operating System core to our culture is a key driver of our success, continuous improvement applies to our ESG efforts as well.
We're utilizing the Carlisle Operating System toolkit and processes to establish ESG goals and targets, which among many benefits will result in meaningful reductions in our emissions and energy consumption.
We will set and publish these targets in the coming year.
Citing a few notable ESG projects with impactful results that progressed in the third quarter.
We started recycling production materials made of paper such as facer, cardboard, office wastepaper from our Carlisle, Pennsylvania campus back into our polyiso insulation products in mid-2020.
Throughout 2021, we've expanded this program to three more CCM manufacturing sites around the U.S. And through the third quarter, we have recycled nearly one million pounds of what would have been waste back into our insulation products.
Another effort has been to upgrade our factories with more efficient LED lighting.
Throughout 2021, we have added LEDs and motion controls at many factories, saving more than 3.5 million kilowatt-hours of electricity, which translates into a reduction of close to 1,300 metric tons of greenhouse gases.
In an exciting new program, we plan to upgrade our expanded polystyrene facility in Dixon, California, to enable production using 100% recycled materials by the end of next year.
We'll have the ability to recycle as much as 150 tons of our production and customer scrap annually, which avoids significant waste from entering landfills.
Subsequent expansion of the facility will provide for the recycle of any earnings per share product away from any source.
I was in Dixon this fall -- or at the beginning of this fall, and I was really pleased with what the team was doing and the fact that this initiative was driven by the folks in the facility there.
And we're proud to see ESG moving through our entire company with such momentum.
Turning to slide five.
Our performance in the third quarter of 2021 evidence is solid execution.
Revenue increased 25% year-over-year with organic revenue up over 19%.
All segments contributed to this growth.
Adjusted earnings per share increased 27% year-over-year to $2.99 as higher volumes and price and cost discipline more than offset inflation during the quarter.
And let me provide some additional divisional highlights, starting with CCM.
Our Construction Materials business delivered an outstanding quarter despite the severe challenges across its supply chain.
CCM's organic growth in the third quarter was over 23% year-over-year.
And notably, organic sales were close to 14% higher than the third quarter of 2019.
CCM continues to benefit from a growing backlog fueled by the strong reroofing cycle in the U.S., which we estimate will grow from a market size of $6 billion to $8 billion in the next decade and with an ever-increasing emphasis on the energy efficiency of buildings, our proactive pricing actions and our investments in expanding our presence in the Building Envelope.
We believe CCM's third quarter results on top of their performance through the pandemic support our view that replacing a roof can only be postponed for so long, ensuring that the underlying demand trends are very much intact.
On slide six, you can see how we're continuing into and expanding the Building Envelope, providing solutions from the ground-up.
Our increasing focus on the Building Envelope is exemplified by our recent acquisition of Henry, which delivered excellent results in its first month with Carlisle, and the integration thus far has been very smooth.
As the integration has progressed, we've really become more appreciative of Henry's seasoned management team, which is executing all fronts -- on all fronts and already proving to be a great addition to Carlisle.
With similar cultures around innovation, pricing to value, focus on customers and continuous improvement and strong results out of the gate, we are increasingly confident in Henry's ability to exceed our preliminary forecast of $1.25 in adjusted earnings per share accretion in 2022.
We're also pleased with our other growing platforms that represent our initial expansion efforts into the Building Envelope.
Architectural Metals and polyurethanes were both up over 35% in the quarter and continue to progress well on profitability improvements.
And regarding our presence and our expansion geographically, our new CCM European leadership team continues to make really good progress growing the core business, improving their profitability and driving new energy-efficient product introductions.
And our recent investments to expand our capacity in our Waltershausen, Germany facility will only serve to support that growth.
Lastly, on CCM drivers, given our history of price leadership, proactive approach to pricing coming into 2021 and actions taken year-to-date, we're very pleased that pricing more than offset raw material and freight cost inflation in the quarter.
Our multiyear focus on price began in 2016, gained traction in 2017 and continued to evolve.
This evolution has resulted in a more robust and comprehensive pricing management philosophy and execution at CCM, which demonstrated its power during the inflationary environment in 2021.
And finally, I'd like to take a moment to note that our results could not have been generated without the stellar work of our sourcing team at CCM.
They're doing an excellent job ensuring CCM is able to produce all it can, especially as demand across product lines is showing no signs of slowing.
Ultimately, their hard work contributes significantly to our ability to deliver the Carlisle Experience.
Moving to slide eight.
At CIT, third quarter revenue grew 6% year-over-year, evidence of continued progress in both CIT's Commercial Aerospace and Medical Technology platforms.
The Commercial Aerospace backlog has now reached levels not seen since May of 2020, which is a significant milestone.
We're encouraged by the growing demand related to narrow-body production, driven by a steady rebound in air travel domestically.
And longer term, when demand for wide-body production returns, CIT is well positioned to capture and leverage that growth.
Over the last several quarters, CIT has taken significant restructuring actions such as closing our facility in Kent, Washington to drive improved profitability.
The impact of these actions has shown over the past several quarters, driving CIT's profitability on an adjusted EBIT basis to swing positive during the quarter.
Now on the Medical side, record revenues supported CIT's sequential and year-over-year revenue growth as hospital capital spending has resumed.
Longer term, as our Medical business gains momentum and adds to its record backlog, we believe the platform is well positioned to drive and leverage mid- to high single-digit annual growth going forward.
On CFT, given its reenergized commitment to new products, improved operational efficiencies, price realization from earning the value of innovation and an improved customer experience, CFT generated revenue growth of 9% year-over-year and adjusted EBIT growth of 16% year-over-year in the third quarter.
CFT is benefiting from increasing industrial capital expenditures across its end markets despite supply chain issues in the automotive markets.
It's also making solid progress integrating and growing its newer platforms of Sealants & Adhesives, Foam and Powder.
With the focus on innovation, a leader cost structure and a push into automation, we are optimistic about CFT's ability to generate sustainable value creation by driving and leveraging solid growth and healthy incremental margins.
We expect the team to continue executing on its Vision 2025 growth strategy and to deliver continued improvement in the fourth quarter and certainly next year and beyond.
As Chris mentioned earlier, we had a strong third quarter.
There are some items -- several items that I'm especially pleased with: CCM's ability to offset challenging operating cost conditions by focusing on delivering Carlisle Experience, the growing backlog at CIT and CFT, our successful senior notes issuance, our disciplined approach to capital deployment in the form of share repurchases and dividends, continued investment in our high ROIC businesses to drive organic growth, and finally, our portfolio optimization actions, including divesting CBF and the acquisition of Henry Company.
Revenue was up 25% in the third quarter, driven by volume growth at all of our businesses, price and the acquisition of Henry.
Organic revenue was up 19%, driven by CCM, which delivered 23.3% organic growth.
Acquisitions contributed 4.8% of sales growth for the quarter, and FX was a 30 basis point tailwind.
On slide 10, we have provided an adjusted earnings per share bridge.
We can see third quarter adjusted earnings per share was $2.99, which compares to $2.35 last year.
Volume, price and mix combined accounted for $2.15 of the year-over-year increase.
Raw material, freight and labor costs were a $1.75 year-over-year headwind.
Interest and tax together were a $0.05 tailwind.
Share repurchases contributed $0.06.
And higher opex was an $0.11 headwind year-over-year.
At CCM, the team again delivered outstanding results, with revenues increasing 29%, driven by volume, price, contributions from Henry, along with a 10 basis point foreign currency translation tailwind.
All of CCM's product lines delivered double-digit percentage growth.
CCM effectively managed raw material inflation headwinds experienced in the quarter with disciplined pricing, proactive sourcing and allocating products to the strategic customers.
Adjusted EBITDA margin at CCM was 22.6% in the third quarter, a 240 basis point decline from last year, driven by higher raw material prices, labor inflation and a return to more normalized SG&A spending, partially offset by volume, price and COS savings.
We continue to anticipate net neutral price cost for the full year.
Adjusted EBITDA grew 16.6% to $240.5 million, again demonstrating the earnings power of our CCM business.
CIT revenue increased 6.1% in the third quarter.
As we expected, CIT returned to growth and promisingly returned to profitability on an adjusted basis.
CIT's Commercial Aerospace backlog has consistently grown in 2021 and has now surpassed second quarter 2020 levels.
CIT's Medical platform continues to build a robust pipeline of revenue-generating products with increasing backlog.
The team delivered record sales in this business in the third quarter, and we continue to expect sequential improvement from pent-up demand as the impacts of COVID on hospital capex and postponed elective surgeries ease.
CIT's adjusted EBITDA margin improved year-over-year 13%, driven by Commercial Aerospace and Medical volume recovery, along with COS, partially offset by raw material and labor inflation.
Given the positive indicators and actions undertaken in 2020 and 2021 to rightsize the business, we are optimistic that CIT is positioned to leverage a return to growth over the coming quarters and years.
While mix influences and timing of channel inventory depletion are our biggest watch items, we remain confident in CIT's ability to manage through these, ensuring greater leverage to the recovery in the coming quarters and years, with the line of sight to profitability exceeding pre-pandemic levels as demand returns.
Turning to slide 13.
CFT's sales grew 9.4% year-over-year.
Organic revenue improved 6.3%.
Additionally, acquisitions added 0.9% in the quarter, and FX contributed 2.2%.
CFT is well positioned to accelerate through the recovery due to continued stabilization in end markets, driven by an improved industrial capital spending outlook, coupled with new product introductions, which have included $12.4 million of incremental new product sales in 2021 year-to-date, along with pricing results.
Adjusted EBITDA margins of 15.3% or 40 basis point decline year-over-year.
This decline was driven by labor inflation and higher operating costs, partially offset by volume, price and mix.
On slide s 14 and 15, we show selected balance sheet metrics.
Our balance sheet remains strong.
We ended the quarter with $296 million of cash on hand and $1 billion of availability under our revolving credit facility.
We continue to approach capital deployment in a balanced and disciplined manner, investing in organic growth through capital expenditures and opportunistically repurchasing shares, while also actively seeking strategic and synergistic acquisitions.
In the quarter, we repurchased 124,000 shares for $25 million, bringing our 2021 year-to-date total to 1.7 million shares for $291 million.
We paid $28 million in dividends in the third quarter, bringing our '21 total to $84 million.
We invested $34 million of capex into our high-returning businesses to drive organic growth, bringing our 2021 total to $89 million.
Finally, we had a successful debt issuance of $850 million of senior notes at a weighted average coupon of 1.6%, which lowered Carlisle's cost of debt from 3.35% to 2.85%.
In addition, as has been noted, we completed the purchase of Henry Company for $1.575 billion.
Henry is expected to deliver approximately $100 million in free cash flow on our first full year of ownership.
We expect meaningful cost synergies of $30 million annually by 2025.
Finally, we expect Henry to be immediately accretive to Carlisle's EBITDA margin, adding over $1.25 of earnings per share in 2022.
Free cash flow for the quarter was $82 million, a 55% decline year-over-year due to increased working capital usage related to our 25% revenue growth in the quarter.
Turning to slide 16.
You can see the outlook for 2021 and corporate items.
Corporate expense is now expected to be approximately in the $120 million to $122 million range, slightly lower than our previous estimate of $125 million.
We expect depreciation and amortization expense to be approximately $230 million, which now reflects the Henry acquisition.
We expect free cash flow conversion to be in the 105% to 110% range, slightly lower than our previous estimate, primarily due to high-cost raw materials that we are holding in inventory.
We now expect capital expenditures of approximately $125 million, lower than previous estimates mostly due to timing.
Net interest expense is now expected to be approximately $94 million for the year, higher than previous guidance due to our debt issuance in the quarter.
We continue to expect our tax rate to be approximately 25% for the year.
And finally, we expect restructuring expense to be approximately $15 million to $20 million in 2021.
Entering the third quarter, we continue to be optimistic about the remainder of 2021 and the first half of 2022.
There are numerous reasons for this optimism, including record backlogs at CCM, supportive trends in CIT's aerospace markets, growing strength at CFT, improvements in our supply chain, the impact of positive and proactive pricing actions and significant traction on our ESG journey, all the while leveraging COS and the Carlisle Experience to deliver innovative products to our customers.
For these reasons, we're confident in our continued ability to deliver results for all Carlisle stakeholders.
For full year 2021, we anticipate the following: at CCM, the underlying reroofing trends that have provided a solid foundation for growth over the past decade picked up in the second half of 2021 after a pause in 2020.
Through the pandemic, we continue to invest in CCM in order to ensure we would be ready when demand returned.
In addition, our expansion further into the Building Envelope, the increasing importance of energy-efficient products, contributions from Henry and our proactive pricing actions have positioned CCM well for continued growth over the coming quarters.
Considering this momentum, we are increasing our anticipated revenue growth to mid-20% in 2021.
At CIT, we are encouraged by the recovery in narrow-body commercial aircraft.
While this first step to recovery is encouraging, demand for wide-body aircraft, driven by international travel, remains muted in 2021.
We anticipate this demand will return to previous levels as COVID concerns subside and countries relax their travel restrictions.
In addition, CIT's Medical business has built a record backlog.
Taken together and coupled with significant restructuring at CIT over the past 18 months, CIT is now positioned to take advantage of the ongoing recovery.
We continue to expect sequential improvements and now expect CIT revenue will only decline in the mid-single-digit range in full year 2021.
At CFT, with end markets strengthening due to increasing industrial capital expenditures and improvements in the team's execution of our key strategies, including new product introductions, accelerating growth in our new platforms and price discipline, we continue to expect mid-teens revenue growth in 2021.
And finally, for Carlisle as a whole, we are now increasing our expectations to deliver high teens revenue growth in 2021.
As we progress through the final quarter of 2021, we are tracking to deliver a record year despite one of the most challenging time periods in our history.
We remain committed to our Vision 2025 goals of $8 billion in revenues, 20% operating income and 15% ROIC, all driving to exceed $15 of earnings per share by 2025.
Despite the continued uncertainties around COVID, stressed supply chains, raw material shortages, labor inflation and winter weather, Carlisle's resilient employees have adhered to our COVID protocols, shown respect for each other in the workplace, focused on safety, most importantly, remain focused on delivering results for all our Carlisle stakeholders.
With that, we'll conclude our formal comments, Bethany.
| q3 adjusted earnings per share $2.99.
|
Today's call will begin with Chris discussing business trends experienced during the second quarter of 2021, views of what's to come and context around our continued progress toward and unwavering commitment to achieving Vision 2025.
Bob will discuss the financial details of Carlisle's second quarter performance and current financial position.
Those considering investing in Carlisle should read these statements carefully and review the reports we file with the SEC before making an investment decision.
With that, I introduce Chris Koch, Chairman, President and CEO of Carlisle.
While we recognize that there are still many people suffering from the continued effects of the pandemic globally and an uneven recovery, we hope all of you, your families, coworkers and friends are healthy, and you're reengaging as global economy is open.
I'm also pleased to report Carlisle's COVID-19 infection rates approach zero in the second quarter, which wouldn't have happened without our team's strict adherence to our safety protocols and commitment to each other across our global footprint.
I'm also very pleased that Carlisle's performance continues to strengthen, as we further accelerate into the economic recovery.
Vision 2025 has provided the clarity and consistency of direction that proved to be essential in guiding our efforts during the depths of the pandemic last year.
It continues to guide us today, as we seek to leverage improving demand across our end markets in 2021 and beyond.
Vision 2025 provides Carlisle and our stakeholders a clear and direct vision that unites us in a collective goal, which in turn drives our priorities and everyday actions.
We are very much on track to exceed the $15 of earnings per share targeted in Vision 2025.
Our performance in the second quarter of 2021 illustrates our continued solid execution toward our stated goals.
Several highlights of this continued progress include: CCM's continued rebound in sales from the bottom of the pandemic in the second quarter of 2020.
As a reminder, CCM sales were down approximately 20% in the second quarter of last year.
As we entered the third quarter of last year, we had already begun to see improvement, sooner than many industries, and that has continued sequentially through today.
That positive momentum drove 28% organic growth year-over-year at CCM in the second quarter of this year and added to a significant and growing backlog.
The rapid recovery from the lows of 2020 reinforced our confidence in this business.
As we commented on in the fourth quarter 2020 earnings call, we envision 2021 being a year of challenges as pent-up reroofing demand returned rapidly, and supply chains, distribution channels, contractors and labor markets came under increasing pressure to deliver their services and meet customer expectations.
Our conviction in the late fall of last year that all of the fundamental drivers of growth we saw prior to the pandemic were still in place, led us to take significant action on securing raw materials, ensuring production facilities were fully capable and putting in place pricing actions to offset what we anticipated to be significant raw material headwinds in the year.
Looking at the future, we continue to believe that the multi-decade trends in reroofing demand, increased emphasis on energy efficiency and tight labor markets will drive solid growth in our CCM business.
As a result, we will continue to invest significant capital into our building products businesses.
A few recently announced examples of our steadfast commitment to CCM's future include our plans to invest more than $60 million to build a state-of-the-art facility in Sikeston, Missouri where we will manufacture energy-efficient polyiso insulation; we're also constructing our sixth TPO manufacturing line in Carlisle, PA, which will produce the commercial roofing industry's first 16-foot wide TPO membranes.
We're breaking ground on Phase two of the EUR8 million expansion of our CCM Waltershausen Germany facility, which as a reminder, produces our unique EPDM-based Restorix product.
And lastly, a significant investment in our R&D capabilities and manufacturing capacity in our Cartersville, Georgia spray foam insulation business.
Shifting gears to other parts of Carlisle.
We continue to leverage the Carlisle Operating System to drive efficiencies across our platforms and geographies.
And in the second quarter, COS delivered 1% savings as a percent of sales and continued to further its role as a culturally unifying continuous improvement foundation for Carlisle employees globally.
In seeking to raise the return profile of Carlisle Companies, we continue to focus on optimizing our business portfolio.
During the quarter, we announced the divestiture of CBF, and earlier this week, we announced an agreement to acquire Henry Company which we will talk about later.
Both changes to our portfolio will enhance long-term value creation for our shareholders.
We continue to be a consistent and meaningful return of capital to our shareholders.
Since 2016, we have returned over $1.8 billion in share repurchases alone.
Bob will provide more details later, but we continue to be active in the capital markets opportunistically repurchasing shares when appropriate.
We also anticipate continuing our long history of consistently raising our dividend.
And when completed in August will be our 45th consecutive year.
We're very proud of this symbolic act in the nature of nearly half a century of stability of our business model, financial profile and commitment to our shareholders.
Moving to slide four.
Driven by the growing strength in our CCM business and momentum building at CFT, our revenue increased 22% year-over-year.
CCM had outstanding performance, growing revenue 28% year-over-year.
CFT continues to drive new product innovation and operational efficiencies to better leverage improving dynamics in its global end markets.
Partially offsetting this growth was commercial aerospace, which continues to weigh on CIT with revenues declining 8% year-over-year in the quarter.
That said, aerospace orders have stabilized, and we have line of sight to continued sequential revenue improvement in 2021.
While aerospace markets have been depressed, our team at CIT has remained focused on innovation and continuing our long-term commitment to our customers, and most importantly, preparing for the inevitable recovery.
Carlisle Construction Materials segment continues to demonstrate its extremely durable business model and to execute very well in the face of numerous challenges.
CCM volumes in 2021 are benefiting from work postponed in 2020 due to the COVID-19 pandemic.
And given both material and labor constraints, we believe even more deferrals experienced in the first half of this year will only add to the pipeline of roofing contractors workload in the second half of 2021.
We maintain our strong conviction in the sustainability of reroofing demand in the U.S. where we continue to expect the market to grow from $6 billion to $8 billion in the next decade.
We continue to be very proud of the CCM team's ability to keep the Carlisle experience intact, managing a record level of incoming orders, ensuring we keep our contractors working and maintaining our commitment to being the best partner in the industry.
And as a reminder, by the Carlisle Experience, we mean ensuring delivery of the right product at the right place at the right time.
We do this by deploying industry-leading investment in production and R&D capabilities.
These investments have totaled over $300 million in the past five years.
We also continue to invest in best-in-class education for our channel partners on the latest roofing products and installation best practices, including over 20,000 hours of virtual learning courses during the pandemic.
I mentioned our world-class customer service team that processed over 65,000 orders in the second quarter, a remarkable feat at nearly 2 times the normal quarter's activity.
We continue to innovate and provide value-added products that ensure quicker, more efficient and safer installation of our building envelope systems and solutions in an increasingly labor and material-constrained environment.
Finally and importantly, we continue to focus on producing products that contribute to a better environment for all stakeholders.
A few comments on our other businesses.
CIT's second quarter results were in line with subdued expectations given the ongoing disruption in the commercial aerospace market.
Despite a difficult past 18 months, the CIT team is taking significant actions to position CIT to be stronger when the market rebounds.
We acted to create more -- a more rational footprint in 2020 and 2021, closing three of our facilities.
And while these decisions are not taken lightly, they were necessary to position CIT to return to and exceed our legacy profitability levels when demand returns.
Also during this time, we have continued to invest in R&D in order to build our new product pipeline and support our customers.
We continue to see some light at the end of the tunnel evidenced by improving leading indicators for commercial aerospace, including the expanding vaccine rollout, numbers of TSA daily screenings increasing from a low of 20% of normal last year to over 80% in July; growing activity at our aircraft manufacturers; and corresponding improvements in CIT's order books.
All of this gives us confidence that CIT is positioned for sequential improvement going forward.
CFT delivered improved revenue and profitability performance in the second quarter, driven by its reenergized commitment to new product introductions, improved operational efficiencies, price realization from earning the value that comes with innovation and an improved customer experience.
I'm very heartened by the progress the team has made over the last year in improving our sales and profitability, putting us back on track to achieve our expectations for this business.
We expect the team to continue executing on its Vision 2025 growth strategy, and to deliver continued improvement moving into the second half of 2021.
Turning to slide six.
Hopefully, everyone had the opportunity to listen to our call on Monday during which we introduced our agreement to acquire Henry Company, a best-in-class provider of building envelope systems that control the flow of water, vapor, air and energy and a building to optimize building sustainability.
Henry delivered revenues of $511 million and adjusted EBITDA of $119 million or 23% margin in the last 12 months ended May 31, 2021.
Bob will review more of the financial details related to Henry later in the call, but we expect Henry to add more than $1.25 of adjusted earnings per share in 2022.
All of us at Carlisle are very excited to work with the Henry team, which has a proven track record of growth, a very strong brand and a long history of new product innovation.
The announced agreement to acquire Henry is another clear example of how we are executing on our Vision 2025 strategy to optimize our portfolio, which includes our efforts to expand further into the building envelope.
For those of you new to Henry, let me give you a few examples of how, in practice Henry complements CCM.
Henry's large direct sales force who have been focused on helping architect specify waterproofing and air and vapor barriers can now assist in specifying CCM single-ply roofing solutions on the same buildings.
Additionally, Henry has a presence in the residential and big box marketplaces, markets not previously a substantial part of CCM's business.
Moving to slide seven, our ESG efforts also continue to gain momentum.
In April, we published our 2020 sustainability report, which built on the foundations of our first report in 2019.
And for the first time, the 2020 report disclosed in detail how Carlisle was tracking on the global reporting initiative, or GRI standards.
We're also in the process of establishing achievable water, energy and emission reduction targets based on detailed audits of our global facilities.
During the course of April, Carlisle employees participated in the CEO Action for Diversity & Inclusion Day of Understanding.
The Day of Understanding created a singular focal point in our year and is an opportunity for leaders to guide open dialogue about diversity in their workspace.
Carlisle has been a member of the PwC-led CEO Action for Diversity & Inclusion since 2018 and an organization that now includes over 2,000 CEO signatories.
In order for Carlisle employees to participate in our ongoing success, we issued a special stock option grant or equity equivalent of 100 shares to employees on May 2, 2018.
Those shares vested in the second quarter of 2021 having appreciated almost 80%.
For each participating employee, this meant a gain of over $8,000.
I'm very pleased the share has performed so well for our employees, because Carlisle's success wouldn't be possible without their efforts.
Finally, one area where we have made significant improvement is in our industry-leading safety record.
Our incident rate of approximately one quarter of the industry average demonstrates the work that has been done by all employees to ensure a safe workplace.
While staying ahead of the industry is important, in the past six years, our incident rate has fallen 52%.
Of all of our tracked metrics, this is especially meaningful because reducing employee injuries by 50% has had a tangible benefit and meaningful impact on people's lives.
To continue to drive the importance of safety in our operations in early 2020, we announced Path to Zero, which represents our commitment to creating the safest possible work environment and features the goal of zero accidents and zero industries.
This program was launched globally in the second quarter of this year.
And now Bob will provide operational and financial detail about the second quarter, review our balance sheet, and cash flow.
As Chris mentioned earlier, we had a very solid second quarter.
I'm especially pleased about the margin expansion at CCM, CIT coming off market lows and positioned to deliver sequential growth for the next few quarters; CFT's order book improving; our disciplined approach to capital deployment in the form of share repurchase and dividends; continued investment in our high ROIC businesses to drive organic growth; and our portfolio optimization actions, including divesting CBF and the announced agreement to acquire Henry Company.
Revenue was up 22% in the second quarter driven by CCM and CFT, offset by the well documented commercial aerospace declines at CIT.
Organic revenue was up 20.7%.
CCM and CFT each delivered greater than 25% organic growth in the quarter.
Acquisitions contributed 0.4% of sales growth for the quarter, and FX was a 90 basis point tailwind.
On slide nine, we have provided an adjusted earnings per share bridge, where you can see second quarter adjusted earnings per share was $2.16, which compares to $1.95 last year.
Volume, price and mix combined were $1.30 year-over-year increase.
Raw material, freight, and labor costs were a $0.95 headwind.
Interest and tax together were a $0.01 headwind.
Share repurchases contributed $0.07, and COS contributed an additional $0.12.
Higher OpEx was a $0.32 headwind year-over-year, half of which is related to the May vesting and cash settlement of stock appreciation rights granted to all Carlisle employees outside the US in 2018, with the remainder reflecting the resumption of more normalized expense level versus last year's cost containment measures taken in the depths of the pandemic.
At CCM, the team again delivered outstanding results with revenues increasing 27.5% driven by volume and price, along with 70 basis points of foreign currency translation tailwind.
All of CCM's product lines delivered 20% growth with particular strength in architectural metals and spray foam insulation.
CCM effectively managed raw material inflation headwinds experienced in the quarter with disciplined pricing, proactive sourcing and allocating products to strategic customers.
Adjusted EBITDA margin at CCM was 21.5% in the second quarter, a 60 basis point decline from last year driven by higher raw material prices, partially offset by volumes, price, and COS savings.
Despite raw materials being a headwind in the second quarter, we continue to anticipate net neutral price raws for the full year.
Adjusted EBITDA grew 24% to $201.2 million, again, demonstrating the earnings power of our CCM business.
CIT revenue declined 8.2% in the second quarter.
As has been well publicized, this decline was driven by the pandemic's continued impact on commercial aerospace markets.
We still anticipate a prolonged recovery in aerospace, but are optimistic there will be resumption in growth as we enter the second half of the year.
CIT's medical platform continues to build a robust pipeline of projects with an increasing backlog.
We continue to expect sequential improvement from pent-up demand as the impacts of COVID hospital capex and postponed elective surgeries ease.
CIT's adjusted EBITDA margins declined year-over-year to 8%, driven by commercial aerospace volumes, partially offset by price, COS and lower expenses.
Given the positive indicators, we are optimistic that CIT will deliver sequentially improving financial performance into the second half of 2021.
Turning now to slide 12.
CFT's sales grew 54% year-over-year.
Organic revenue improved 44.3% and acquisitions added 3.6% in the quarter.
CFT is well positioned to accelerate through the recovery due to continued stabilization in key end markets driven by an improved industrial capital spending outlook in 2021, coupled with new product introductions, would have included $4.1 million of incremental new product sales in 2021 year-to-date, along with our continued pricing results.
Adjusted EBITDA margins of 15.9% or over 100 basis point improvement from last year.
This improvement primarily reflects volume, price and mix.
On slide 13 and 14, we show selected balance sheet metrics.
Our balance sheet remains strong.
We ended the quarter with $713 million of cash on hand and $1 billion of availability under our revolving credit facility.
We continue to approach capital deployment in a balanced and disciplined manner, investing in organic growth through capital expenditures and opportunistically repurchasing shares, while also actively seeking strategic and synergistic acquisitions.
In the quarter, we repurchased 643,000 shares for $116 million bringing our 2021 year-to-date total to 1.6 million shares for $266 million.
We paid $28 million of dividends in the second quarter, bringing our 221 total to $56 million.
We invested $32 million of capex into our high-returning businesses to drive organic growth, bringing our 2021 total to $55 million.
A few examples of these investments include our new Missouri Polyiso facility, expansion of our TPO line Carlisle, PA, and investment in our spray foam capabilities in Cartersville, Georgia.
In addition, as has been noted, we announced an agreement to purchase Henry Company for $1.75 billion.
Henry generated revenue of $511 million and adjusted EBITDA of $119 million, representing a 23% EBITDA.
Additionally, Henry was expected to deliver $100 million of free cash flow in our first year of ownership.
We also expect meaningful cost synergies of $30 million by 2025.
Finally, we expect Henry to be immediately accretive to Carlisle's EBITDA margin, adding over $1.25 of adjusted earnings per share in 2022.
Free cash flow for the quarter was $64.6 million, a 54% decline year-over-year due to increased working capital usage related to our high sales growth of 22%.
Turning to slide 15, you can see the outlook for 2021 in corporate items.
Corporate expense is now expected to be approximately $125 million, up from the previous estimate of $120 million.
The increase is wholly related to the vesting and cash settlement of our stock appreciation rights discussed earlier.
We expect depreciation and amortization expense to be approximately $210 million.
We still expect free cash flow conversion of approximately 120%.
For the full year, we continue to invest in our business and expect capital expenditures of approximately $150 million.
Net interest expense is still expected to be approximately $75 million for the year, and we still expect our tax rate to be approximately 25%.
Finally, restructuring is expected in 2021 to be approximately $20 million.
Entering the third quarter, we continue to be very optimistic about the remainder of 2021 from record backlogs at CCM to supportive trends in CIT aerospace markets to growing strength at CFT, coupled with excellent sourcing and price discipline and significant traction on our ESG journey, we are confident in our ability to deliver solid results for all Carlisle stakeholders.
For full year 2021, we anticipate the following: At CCM, as previously mentioned, the trends that began in Q3 2020 gain momentum as we moved into 2021.
We anticipate this momentum to carry over in the third and fourth quarters of 2021.
Considering this momentum, coupled with record backlogs stemming from project deferrals that occurred in 2020, positive momentum in our newer businesses of architectural metals and spray foam and expansion of our European business, we are increasing our anticipated revenue growth to high teens in 2021.
At CIT, we are encouraged by leading indicators trending positive, but it remains difficult to gauge when a complete recovery in commercial aerospace will occur.
Given a very difficult year-over-year comparison in the first and second quarters, we continue to expect CIT revenue will decline in the mid- to high single-digit range in full year 2021.
At CFT, with end market strengthening and improvements in the team's execution of our key strategies, we now expect mid-teens revenue growth in 2021.
And finally, for Carlisle as a whole, we are now increasing our expectations to mid-teens revenue growth in 2021.
As we pass the midpoint of 2021, we are tracking to deliver our Vision 2025 goals of $8 billion in revenues, 20% operating income and 15% ROIC, all driving to exceed $15 of earnings per share by 2025.
Despite lingering uncertainties around COVID, supply chain constraints, and what we perceive as near-term raw material inflation, Carlisle's employees across the globe remain focused on the execution of the strategies and key actions that support Vision 2025.
Our team continues to embody a positive and entrepreneurial spirit, a commitment to continuous improvement and a focus on delivering results for the Carlisle shareholder.
Given our 100-year-plus history and the resilience this company has shown in times of adversity and uncertainty, we remain confident in Carlisle's outlook, our strong financial foundation, cash-generating capabilities, unwavering commitment to our Vision 2025 strategic plan and to providing products and services essential to the world's needs.
This concludes our formal comments.
| q2 adjusted earnings per share $2.16.
compname says q2 adj earnings per share $2.16.
|
Such risk factors are set forth in the company's SEC filings.
We appreciate you joining us to discuss our 2021 third quarter results.
I'm very pleased to start off by saying that our industry and our company continue to make significant progress in recovering from the effects of the pandemic.
We're highly encouraged by the continuing positive trends with increasing consumer demand for the cinematic theatrical experience and growing momentum at the box office.
This favorable progress was demonstrated in our third quarter's 61% growth in worldwide attendance since last quarter in 2Q '21.
Importantly, that growth in attendance flowed through to our bottom line results in the third quarter, which included positive adjusted EBITDA of $44 million.
Our 3Q results marked a significant milestone for Cinemark as it represents our first quarter since the pandemic began with positive total company adjusted EBITDA.
Furthermore, every month in 3Q delivered positive EBITDA, which tangibly underscores our company's resurgence.
Strength in the domestic box office was a key driver of our third quarter performance, as the North America industry delivered $1.4 billion of gross proceeds on a larger volume of more sizable commercial releases.
Top hits in the quarter included Shang-Chi and the Legend of the Ten Rings, Black Widow, Jungle Cruise, Free Guy, Space Jam and the carryover from 2Q's highly successful release of Fast and Furious Nine.
And consistent with last quarter, I'm thrilled to report that Cinemark once again over-indexed the North America industry box office performance relative to 3Q '19 with a substantial outperformance of 700 basis points.
This outperformance helped us capture an approximate 15% market share of North America box office, which significantly exceeded our historic average of just under 13%.
Our 15% market share achievement is particularly meaningful this quarter as the vast majority of theaters in the U.S. and Canada had reopened.
During our last several calls, we talked about four key factors that impact theatrical exhibition recovery, all of which continue to experience noteworthy progress.
First, is the status of the virus.
Driven by vaccine penetration to date as well as impacts from the virus beginning to subside, COVID rates have plunged 73% since the Delta variant peaked in September.
Vaccination rates continue to rise across the U.S., especially with the recent approval of inoculation for children five and older.
Moreover, vaccination rates are also rapidly progressing throughout Latin America.
The second factor is government restrictions, which have largely gone away in the U.S. at this juncture and continue to reduce in Latin America.
Third is consumer sentiment.
While the Delta variant threw us a curve ball during the third quarter and caused a meaningful dip in consumer comfort regarding visiting theaters, that sentiment has since recovered to 77% of U.S. moviegoers expressing comfort and going to the theater in the current environment.
This level of positive response is in line with the peak levels of sentiment we witnessed in early July of 78%.
And the final key factor of the theatrical exhibition recovery is the consistent flow of new film content with broad consumer appeal, which clearly is now underway.
Of course, these recovery factors not only apply to the U.S., but are also applicable on a global basis.
And while the domestic market is further along in its rebound cycle, we're also seeing positive trends in Latin America.
Currently, 100% of our theaters have reopened across the region, and even though certain capacity and operating hour restrictions persist in Central and South America, consumer demand to return to the theaters is very strong.
There is no question that theatrical exhibition is meaningfully recovering around the world, and Cinemark is extremely well positioned to benefit during this comeback on account of the many operational advancements we made during the pandemic as well as our ongoing efforts to maximize attendance and drive new ancillary revenue opportunities.
Some examples include improved operating efficiencies, enhanced marketing programs and capabilities and our recently implemented online food and beverage platform, new alternative content possibilities and ongoing impact of our premium amenities.
In terms of operational efficiencies, we have made some significant strides over the course of the pandemic.
For instance, we're optimizing operating hours and showtime schedules through utilization of enhanced data management analytics.
We have simplified and streamlined numerous theater practices, such as ticket issuance, inventory procedures and ushering routines to be leaner and more efficient.
And we've refined the degree of staffing that is required to operate our theaters, including enhanced planning and management controls.
We also continue to significantly advance our digital and social marketing capabilities, utilizing proven best practices from retail, travel and technology industries.
Examples include leveraging iterative A/B testing to identify and scale winning concepts, simplifying consumer touch points to drive a more frictionless experience and applying advanced analytics against our highly valuable customer database to drive improved targeting accuracy and contextually relevant messaging.
These actions and capabilities are focused on increasing moviegoing frequency and overall consumer spend, and we believe they will be highly valuable in navigating the competitive landscape ahead and maintaining our increased market share.
In tandem with our digital and social marketing actions, we continue to leverage our unique industry-leading transaction-based subscription program, Movie Club, to drive attendance.
During the third quarter, we completed billing reactivation on all Movie Club accounts that were proactively paused for the past 1.5 years during the pandemic.
In doing so, we have been extremely pleased by the minimal amount of churn we've experienced, which represented only a modest 6% dip in our pre-pandemic membership base that was largely driven by credit cards that expired during that timeframe.
This dip was better than expected due to our member-first approach, and we're already seeing new net positive Movie Club additions as we actively work to reattain those expired members as well as attract new ones.
We've also continued to further enhance Movie Club and recently introduced Movie Club Platinum, an earned premium tier that provides our most frequent moviegoers with even bigger incentives.
We expect this heightened tier will serve to further increase loyalty of our most active customers as well as stimulate incremental transactions.
Since we announced the launch of Movie Club Platinum just over a month ago, 64% of Movie Club members familiar with the program stated that they have been incentivized to achieve Platinum status this year.
Another foray into simplifying and enhancing our customer experience while driving ancillary revenues is Snacks In A Tap, our recently launched online food and beverage ordering platform.
This platform enables guests to skip the line and have their concessions ready for pickup upon arrival or delivered to their seats for a nominal fee.
The added convenience and time savings provided by Snacks In A Tap have been extremely well received by our moviegoers, and we look forward to continuing to grow the program's awareness and utilization in the months ahead.
We're also continuing our reintroduction of select expanded food and beverage options as a more consistent release cadence of stronger film content takes hold and moviegoer attendance increases.
Another exciting new business venture that we announced last week is our heightened focus on gaming initiatives, including our plan to hire a new Vice President to forge strategic relationships and pursue content and licensing agreements in the gaming realm.
Gaming is the latest evolution in our ongoing focus to secure alternative content, further utilizing our auditoriums to supplement Hollywood film content, and we have seen several promising indicators with regards to consumer interest in both spectator and participatory gaming events.
Additionally, we're continuing to explore other alternative content offerings and have seen similar positive results from events such as professional wrestling with AEW and WWE, boxing with Triller Fight Club, movie premiers, special live Q&A sessions with talent and concerts, all in addition to ongoing events provided by Fathom entertainment.
We're also continuing to reap benefits from investments we've made in premium amenities that enrich the moviegoing experience, which movie fans continue to seek out, including reclining seats with approximately 65% of our entire domestic circuit featuring country loungers, the highest recliner penetration among the major theater operators.
Premium large-format auditoriums led by our XD, our proprietary brand, which ranks number one in the world, which delivered 12% of our box office in the third quarter alone on only 4% of our screens and an increase in D-Box motion seats, which are synchronized with the on-screen action.
And finally, Cinionic laser projectors.
In line with our previously announced partnership, we are featuring laser projections crystal clear picture in all of our new build theaters and continue to upgrade our existing theaters with laser technology, which lasts longer and operates more efficiently.
We're happy to share that in addition to other locations across the U.S., we have completely converted all of our Dallas-Fort Worth theaters and screens, our home city, delivering consistently bright, colorful and sharp images on laser.
Speaking of new theaters, strategic new-builds are a cornerstone of our strategy, and we are thrilled to have opened six new theaters and 67 screens already this year, all of which were committed to prior to the onset of COVID.
These new-build theaters are all in high-growth areas with significant opportunities to capture moviegoing attendance.
While it's still early days, we're highly encouraged by the results to date.
We have opened three locations in the U.S., Kirkland, Washington, just outside of Seattle; Jacksonville, Florida; Waco, Texas; and three in Latin America, Guatemala, Chile and Peru.
We also have one more theater open -- to open later this year in Roseville, California, just outside of Sacramento.
Based on everything I've just shared, I hope it's clear that we are pleased with our performance trend in the third quarter and the advancements we made to continue to make our business more vibrant through business development.
While we're cognizant, there's still a long road ahead.
Over the course of the coming months, we continue to expect an ongoing ramp-up of box office and overall financial results.
The fourth quarter has already started out strong as October delivered our best monthly box office results since the onset of COVID.
Notably, our cash generation during the month of October was significant enough to more than cover all of our variable and all of our fixed costs.
Looking ahead, upcoming film content for the balance of the year includes highly anticipated blockbusters appealing to families and adults alike, such as Eternals, which opened with previews last night to outstanding results.
Ghostbusters: Afterlife, Encanto, House of Gucci, West Side Story, Spider-Man: No Way Home, Matrix: Resurrection and Sing two to highlight just a few.
And the slate next year looks absolutely tremendous with broad range of highly promising films for all moviegoing audiences.
Importantly, these films were made to be experienced in a cinematic out-of-home entertainment environment that only a movie theater can provide.
We're also optimistic about the future of exclusive theatrical windows as it's such a meaningful contributor to the overall media landscape.
As we've witnessed with the positive box office results generated most recently, I have been a significant proponent of the longevity of the theatrical exhibition industry, and especially for Cinemark, as the company is uniquely positioned and poised for long-term success.
As previously announced, this is my last earnings call as CEO of Cinemark before I hand over the reins to Sean at the end of this year.
It has been an honor serving as CEO and leading the incredible people of Cinemark the past 6.5 years.
It has been tremendous getting to know so many of you over the years, and we appreciate your ongoing support.
I, along with the rest of the Board, are highly confident in Sean and his ability to lead Cinemark going forward.
His operational background and strategic mindset along with his keen eye for efficiencies and business opportunities will be especially advantageous as Cinemark continues to emerge from the effects of the pandemic.
I look forward to watching the company thrive under his direction as I continue in a strategic capacity through my position on the Board.
You've been a tremendous leader for our company and our industry over the past 6.5 years.
And to say you'll be missed from our day-to-day operations is clearly an understatement.
On a related note, three weeks ago, we announced Melissa Thomas will be joining Cinemark as our next CFO.
Melissa was most recently the CFO for Groupon and has a strong and impressive leadership and financial background.
We believe she will be a great cultural fit for Cinemark and an excellent complement to our leadership team and finance organization.
Melissa will officially start this coming Monday, November 8, and we look forward to formally introducing her in the near future.
As Mark already highlighted, the resurgence of theatrical moviegoing is in full swing, and Cinemark delivered another quarter of meaningful financial improvement.
During 3Q, our average monthly cash burn reduced to approximately $11 million after normalizing for working capital timing.
This rate was in line with the expectation of a $10 million to $15 million monthly cash burn that we communicated on our last earnings call.
As of today's current operating environment, we have now flipped to modestly positive average monthly cash flow, and we expect this rate will continue to improve as our industry further rebounds.
At the end of the third quarter, we had a global cash balance of $543 million.
As of October 31, that balance had increased to approximately $595 million, driven by the strong box office results of Venom: Let There Be Carnage, No Time To Die, Halloween Kills and Dune as well as working capital timing associated with corresponding film rental payments.
Based on our current and improving cash flow position, we continue to believe we have ample liquidity and will not require any additional financing.
That said, multiple financing opportunities still remain available to us, including drawing on our $100 million revolving credit line, tapping incremental term loan borrowing capacity within our credit facility, executing sale-leaseback arrangements on unencumbered properties we own and issuing equity.
Also, as we described last quarter, following our recent refinancing transactions, our revolver maturity now sits at November of 2024 and all other significant debt maturities extend through March of 2025 and beyond.
Turning now to our third quarter results.
Furthermore, as we have indicated in previous quarters since the onset of the pandemic, our traditional metrics continue to be somewhat distorted in the current environment.
Considering our theaters were only beginning to reopen with limited new film content in the third quarter of 2020, we will compare our most recent quarter's results to 2Q '21 and 3Q '19 in select instances.
During the course of the third quarter, we continued to further expand operating hours in response to increasing consumer demand for a growing volume of new commercial film releases.
Compared to second quarter, our third quarter domestic operating hours expanded by nearly 40%, although still remained approximately 25% below 3Q '19.
Expanded hours and increased moviegoing led to quarter-over-quarter domestic attendance growth of 42.4% to 21.5 million patrons.
Domestic admissions revenues were $195.3 million with an average ticket price of $9.08.
Our average ticket price increased 14.1% versus 3Q '19, primarily as a result of price increases and ticket type mix largely on account of fewer matinee and weekday showtimes.
Domestic concessions revenues were $142.6 million and yielded another all-time high food and beverage per cap of $6.63.
Our third quarter per cap was roughly flat with 2Q accrued 27% compared to 3Q '19 as pent-up moviegoing demand continues to drive a heightened indulgence in food and beverage consumption across our core concession categories and operating hours remain concentrated in timeframes that are more conducive to concession purchases.
Our third quarter results also benefited from ongoing strategic promotions and pricing initiatives, the reintroduction of various enhanced food offerings and recognition of previously deferred revenues associated with the issuance of loyalty points.
Domestic other revenues also continued to rebound during the quarter and grew 28.3% to $37.6 million, driven by volume-related increases in screen ads, transaction fees and promotional income.
Altogether, third quarter total domestic revenues were $375.5 million, with positive adjusted EBITDA of $44.8 million.
Internationally, we also continue to see material recovery in Latin American box office and operating results during the third quarter.
Driven by expanded theater openings and increased availability of new film -- new commercial film content, our third quarter international attendance grew 128% versus 2Q '21 to 9.2 million patrons, which generated $30.2 million of admissions revenues and $21.6 million in concession revenues.
Total international revenues were $59.3 million and yielded adjusted EBITDA that was just shy of breaking even for the quarter.
Globally, film rental and advertising expenses were 51.9% of admissions revenues, which increased 200 basis points compared to 2Q '21.
This increase was expected and resulted from a higher concentration of larger, more successful new film releases.
That said, compared to the third quarter of 2019, our film rental rate was still down 420 basis points, predominantly due to reduced film grosses as skew lower on our film rental scales.
Concession costs were 17.2% of concessions revenues and were in line with both our second quarter results and pre-COVID averages.
Third quarter global salaries and wages were $67.6 million and increased 34.1% versus 2Q '21.
This increase was driven by additional theater reopenings, extended operating hours to accommodate growing consumer demand and the reintroduction of select enhanced food and beverage options that require more labor.
Facility lease expenses were $68.8 million, and while largely fixed, experienced a modest uptick from the second quarter due to a slight increase in percentage rent in common area maintenance as volumes increased.
Worldwide utilities and other expenses were $81.8 million and increased 33.7% quarter-over-quarter, driven by variable costs that grew in line with volume, such as credit card fees, janitorial expenses and commissions paid to third-party ticket sellers.
Utility expenses also increased as we expanded operating hours while other costs within this category, such as property taxes and property and liability insurance remained predominantly fixed.
Finally, G&A for the quarter was $38.6 million and remained considerably lower than pre-pandemic levels as a result of the restructuring actions we pursued in the second quarter of 2020 and our ongoing efforts to minimize nonessential operating expenditures.
Collectively, our worldwide adjusted EBITDA for the third quarter was positive $44.3 million.
As Mark previously described, this result represents a significant milestone for our company as it was our first quarter of positive total company adjusted EBITDA since the onset of the pandemic and our second consecutive quarter of material adjusted EBITDA recovery.
Our net loss also materially improved in 3Q to $77.8 million, reducing by $64.7 million quarter-over-quarter.
We'd like to congratulate our studio partners on the success their films achieved in the quarter, and we like to commend our hard-working teams on their relentless execution and drive to deliver these results.
Capital expenditures during the quarter were $24.4 million, of which $13.6 million was associated with new-build projects that had been committed prior to the COVID-19 pandemic and $10.8 million was driven by investments and maintenance in our existing theaters.
Our consistent investment in proactively maintaining and enhancing our theaters over the years has enabled us to scale back capital expenditures in the near term without hindering our asset quality or guest satisfaction.
As such, we continue to anticipate spending a highly reduced level of capex in 2021 relative to pre-pandemic ranges, which we previously estimated at approximately $100 million.
However, due to varied supply chain constraints that have started impacting the delivery timing of certain equipment and supplies, we now anticipate capex may come in slightly below $100 million for the full year.
That said, we do not expect these delays will have any adverse impact on our daily operations.
In closing, we are thrilled with the positive momentum we continue to experience regarding the rebound of theatrical exhibition and our company's financial results, and we are optimistic about the robust release calendar that lies ahead in the fourth quarter and beyond as well as further improvements in consumer moviegoing enthusiasm as the pandemic subsides.
We are proud of the advancements our team has already made to set up Cinemark for success in a post-pandemic environment, and we look forward to the impact our strategic initiatives will continue to have on further enhancing the cinematic entertainment experience we provide our guests and delivering long-term shareholder value.
| expect a continued ramp-up in box office performance over course of coming months.
|
We're coming to you in strange times.
This is the first call that we've ever done where the management team is not together in one location.
So Leslie and Tom are in Miami, I'm in New York, and we are doing this virtually.
Also, I've never done a conference call where we've had more than one or two pieces of paper in front of me with some bullet points on them.
And today, Leslie has put in front of me a 27-page deck and talking points that are several pages long.
So forgive me for all the shuffling that you might hear on the call.
Instead of jumping straight into the earnings for the quarter, I would like to take five minutes of your time to first talk about exactly -- give you kind of a state of the union for BankUnited.
What is it that we've been doing over the last six to seven weeks as the situation has evolved?
What are we prioritizing now and then give you just a lay of the land, and then we'll get into the numbers and discuss in detail what first quarter was like.
So let me start by, first and foremost, giving a big shout out to the BankUnited team.
Every person who comes here calls this home and works hard.
A crisis revealed the character of people.
I think that is true, not just for people, but also reveals the true character of an organization.
And I'm very proud to say that what I have seen over the last six or seven weeks, it really fills me with great pride that I'm leading this organization.
People have come together, as help each other, work ungodly hours while they were under immense amount of personal distress.
So there are too many examples to get into, but I just want to give a big one shout out to everyone in the company, not just people working in PPP, on the branches or keeping our call centers up, but everyone, right down to the person who's making sandwiches in the cafeteria all the way to the last day when we shut down the cafeteria.
We have, as you can imagine, going through this early in March, we made our employees' wellbeing and safety our No.
We enable 97%, as of now, 97% of our employees are working from home.
And this is 97% of our nonbranch employees, of course.
We have extended our paid time off policy.
We have increased our health benefits to cover any expense associated with this COVID.
We have not furloughed any employees.
I'm a very superstitious person, so it is -- I'd say this very carefully.
We were recently awarded by South Florida Business Journal an award for being one of the healthiest employers in South Florida.
And I hope that we can claim this again next year.
So far, we've had only one confirmed COVID case in the employee base.
We do think there are a couple of others who will never get tested but have overcome COVID as well.
It sounds like it, but only one confirmed COVID case, which is pretty good, given though what is going on.
When you take care of your employees, they in turn then take care of your customers.
And if they take care of your customers, then that takes care of the company.
That's sort of the chain that I follow.
So quickly, let me tell you what we've been doing to support our customers.
The most obvious thing is offering the operational resilience that is needed at a time like this.
We activated our business continuity plan.
We beefed up all the back office IT infrastructure that is needed to run the company from afar with no really any significant operational issues on customer service disruptions.
If you'd asked me this -- how I felt about our ability to do this in the first week of March when we were preparing to do this, I was pretty nervous, but I'm happy to say that everything has also gone without a glitch and the bank is working fine from an operational perspective.
Our employees, several hundreds of them, have worked tirelessly now for about three weeks to deliver the PPP program.
We are also -- I think as of last night, are close to $700 million or maybe over $700 million in loans that we've done through the PPP program.
And our estimates are that we've helped retain about 85,000 or 86,000 jobs in our footprint through this program.
And we're not done.
There's more going through as we speak.
The team has been working around the clock, and we will help a few hundred more small businesses before eventually the money runs out on the PPP.
We have approved deferrals for many borrowers who have contacted us and asked for assistance because of pandemic.
And equally importantly, we have honored all our commitments whether they were lines that we've had or a business that was in the pipeline where we had made a commitment to close in our loan.
We did not back away from anyone, and that is equally important.
We have waived select fees, and we have also temporarily halted new residential foreclosure actions.
By the way, while all this is happening, I just want to clarify, when I say 97% of the employees, nonbranch employees are working remotely, 76% of our branches are still open.
They are open on a limited basis, of course, drive-throughs and appointment-only method, but they are open and we are serving clients.
The traffic, as you can imagine has gone down substantially.
Also, we have -- from somewhere in the second week of March or mid-March, we have made sure that we have enough liquidity to take care of any client needs in case somebody would need it.
We continue to hold an excessive amount of liquidity, but we now feel the time is right to start taking it down.
I think beginning next week, we will take down this excess liquidity that we've been sitting on to serve our clients.
Now turning back internally, as you can well imagine, we are prioritizing the risk management and credit quality and credit quality risk management.
We've identified portfolios and borrowers that we believe will be under an increased stress in the environment.
I call these sort of the sort of the -- you're in direct line of fire-type of our portfolios.
We have reached out to every single borrower in these segments, and we will talk in detail about what these segments are and how big they are.
But we have reached out to all borrowers in these segments.
And in other segments, we have reached out to everyone over $5 million in exposure to understand this exactly what the impact will be to our balance sheet.
While we always do stress testing sort of it's a routine business for us, in this environment, we have significantly enhanced these processes that you would expect us to.
But through all of this, I -- it's important while you're managing a crisis, not to forget what the long-term plan is and to keep those long-term plan is and to keep those long-term strategic objectives in mind, and we're doing that while we're fighting the immediate economic crisis.
So again, so I think the biggest question here that you probably have is, what does it mean for our balance sheet, right?
I will start by saying that our balance sheet is strong.
I feel very good about our balance sheet, our capital levels, our liquidity levels.
And you see at March 31, our regulatory ratio, no matter which you look at bank holding company, they're also insignificantly in excess of well-capitalized thresholds.
We are committed to our dividend, which we very recently increased by 10%.
I think it was in the middle of February.
We did, however, stopped our share buyback program.
We were very -- we had an authorization from I guess -- I think it was the fourth quarter, it was authorized $150 million.
We executed about $101 million, and we stopped that, and we're going to put it aside at least until the dust settles on the economy.
A question that we have seen a lot of other bank teams have been asked, who presented earnings in the last week or so, anticipating the same question, we did some analysis for you.
By the way, there's a slide deck.
Like I said, this time around, we've never had a slide in our calls, but at this time, we have provided a lot more disclosure and there's a 27-page slide deck.
So from time to time, I will make references to certain slides.
I'm not going to flip every page, but I will make the references.
So for example, right now, I'm talking about Page 4 in the slide deck, which then takes the DFAST severely adverse scenario for 2018 and 2020 and runs that on the March 31, 2020, portfolio to see what the losses would be.
And by the way, not just 9 quarters of losses, but lifetime losses.
DFAST is a nine-quarter exercise.
But with this, we've actually used lifetime losses.
And we have used those, which we don't think are really relevant.
But nevertheless, since that question will probably be asked, we did that analysis anyway.
We use full 2018 and to 2020 DFAST severely adverse scenario, and said, OK, if -- what are the losses that are generated, and you can see them on Slide 4.
And if those were the -- channels were to be used now, would we still be well capitalized and the capital ratios hold up?
And the answer is yes, they do.
So quickly, one question so I don't forget again about liquidity, which is the next slide.
We have tons of liquidity.
We are -- we currently have over $8 billion, I think it's $8.5 billion of liquidity, safe liquidity available.
A lot of it is in cash.
We will take some of the cash position down as we think things are settling down in the marketplace.
But with that, let me switch over quickly and talk about the quarter.
We reported a net loss of $31 million, $0.33 a share.
This is driven in the large part to the large provision that we do.
The provision for this quarter was $125 million.
This increased our credit losses to $251 million, which is 1.08%.
So we used to be, at December 31st, we were at $109 million or 47 basis points.
On January 1st, under CECL, that number bumped up to $136 million or 59 basis points and now in the end of March, we were at 1.08% or $251 million.
And that obviously was the biggest driver in the $31 million loss that we are posting this quarter.
I will ask Leslie to give you some more detail around CECL and the assumptions that went into calculating that provision.
But I will say, before I hand it over to her, is that we believe this at March 31st, our reserve estimate is based on both data that is current and conservative at that quarter end.
This reflects our best estimate of lifetime credit losses on the portfolio.
In second quarter, we will go through the same exercise.
There are three big areas, which will impact our CECL estimates for the next quarter, which is going to be an update of the macroeconomic outlook.
An update of our portfolio, especially our high-risk sectors.
And also, our assessment of impact of government stimulus because we've seen more stimulus this time around than we've ever seen in the history of the Republic.
So $2.5 trillion and counting in fiscal stimulus and God knows how much on the monetary side.
So I'm going to refer you to Slide 8 in the supplemental deck that talks a little bit about our CECL methodology.
Fundamentally, for the substantial majority of our portfolio segments, we're using econometric models that forecast PDs, LGDs and expected losses at the loan level for those are then aggregated by portfolio segment.
Our March 31st estimate was largely driven by the Moody's March mid-cycle pandemic baseline forecast that was issued on March 27.
This forecast assumes an approximate 20% decline in GDP in Q2, unemployment reaching about 9% in Q2, the VIX approaching 60 and year-over-year decline in the S&P 500 approaching close to 30%.
The forecast path assumes a recovery beginning in the second half of 2020, with unemployment levels remaining elevated into 2023.
I know there's been a lot of focus on GDP and the current unemployment in all the discussions taking place around the CECL forecasts, and those are certainly important reference points.
But I do want to remind you that these are very complex models, and there are, in fact, hundreds, if not thousands, of national, regional and MSA-level economic variables and data points that inform our loss estimates.
Some of the more impactful ones are listed on the right side of Slide 8 there for you.
Another thing that I want to point out about our CECL estimate at 3/31, we did not make a qualitative overlay.
We don't think our models really take into account fully the impact of all of the government assistance that's being provided to our clients, PPP, other deferral programs that we might have in place.
We did not make this qualitative overlay for that at March 31st.
The reason we didn't is we just felt it was premature to really be able to dimension those things at March 31st.
And as Raj pointed out, that's something we'll take into account when we consider our second quarter estimate.
I want to refer you now to Slide 9.
Leslie, just one second.
I just got a text from someone saying that the call cut off for about 20 seconds, and they couldn't hear you for the first 20 seconds.
So you may want to just repeat what you said because I think those are important points because I want to make sure everyone gets those.
So best to start on CECL.
Maybe I'll do better this time.
Hopefully, I won't contradict myself.
So again, I'm referring to Slide 8 in the deck about our CECL methodology.
Fundamentally, for the substantial majority of our portfolio segments, we use econometric models that forecast PDs, LGDs, and expected losses at the loan level, which are then aggregated by portfolio segment.
Our March 31st estimate was largely driven by Moody's March mid-cycle pandemic baseline forecast that was issued on March 27th.
That forecast assumes an approximate 20% decline in GDP in Q2, unemployment reaching about 9% in Q2, the VIX approaching 60, and year-over-year decline in the S&P 500 approaching close to 30%.
The forecast pass assumes a good recovery beginning in the second half of 2020 with unemployment levels remaining elevated into 2023.
And well, there's been a lot of focus on GDP and unemployment, and the discussions taking place around these CECL forecasts, and those are certainly important reference points, these are complex models, and there are, in fact, hundreds, if not thousands, of national, regional and MSA-level economic variables and data points that inform the loss estimates, and some of the more impactful ones of those are listed for you on Slide 8.
I also want to mention briefly that we did not incorporate in our CECL estimates at 3/31 any significant qualitative overlay related to the impact of the government direct assistance, PPP, deferral programs that we may put in place.
At 3/31, we felt we just didn't have enough data to properly dimension the impacts of those, so we did not reduce our reserve levels to take those into account.
And as Raj mentioned, that's something we'll be considering in more detail in Q2.
And now I'll refer you back to the deck and look at Slide 9.
And Slide 9 provides for you a visual picture of what changed our reserve form 12/31/19 to 3/31/20.
We started at $108.7 million.
You can see here the $27.3 million impact of the initial implementation of CECL.
The most significant driver of the increase in the reserve from January 1st after initial implementation to March 31st is not surprisingly, the change in the reasonable and supportable forecast, which increased the reserve by about $93 million.
We've also taken an additional $16 million in specific reserves this quarter, the majority of this related to the franchise finance portfolio.
While the credits that are driving these reserves had been identified as potential problem loans prior to the onset of COVID, we believe the underlying issues and amount of those reserves were certainly further aggregated by the COVID crisis and particularly as workout solutions have become more limited.
I want to reemphasize that we ended at -- for the quarter at 3/31/20 with a reserve of 1.08% of loans, and we certainly don't think that's outside in comparison to other banks whose results we've seen released.
I want to take a minute and just focus you on Slide 10.
And it gives you a distribution of the reserve by portfolio segment at March 31st.
And you can see here that on a percentage basis, the franchise portfolio, not surprisingly, carries the highest reserve, followed by the C&I portfolio.
And you can see the results of those on Slide 4 in the deck.
And what we did here was we took our March 31, 2020, portfolio, and we ran that portfolio through both 2018 DFAST severely adverse scenario and the 2020 DFAST severely adverse scenario.
In the table here showing you total lifetime, not nine-quarter, projected credit losses for our significant portfolio, C&I, CRE, BFG, residential under each of those scenarios as well as the bank's pro forma regulatory capital ratios.
Now those were calculated as if all incremental losses were applied to the March 31, 2020, our capital position.
So they don't really take into account any PPNR that might offset losses over the course of the forecast horizon or any actions management might take to reduce risk weight -- risk-weighted assets during a period of stress, both of which would have been taken into account in a DFAST regulatory submission.
So you can see that our reserves at March 31, 2020, stand at about 44% of severely adverse projected losses under 2018 DFAST and about 56% of some severely adverse projected losses under the 2020 DFAST severely adverse scenario.
And you can see in the box there that all of our capital ratios that remain in excess of our well-capitalized threshold of under those distressed scenarios.
Let's talk PPNR, pre-provision pre-tax net revenue.
It came in at $85 million this quarter, and that compares to $104 million last quarter.
So what was that delta of that $19 million?
So, really three buckets.
First, NII was down by $5 million.
NII really is for two reasons; one, our margin contracted by 6 basis points from 2.41% to 2.35%.
And the reason for that is asset yields came down faster.
Deposit pricing really wasn't changed much until pretty late in the quarter.
You will see a very meaningful impact on deposit pricing going forward.
But for this quarter, that the basis risk between these assets are priced and what things they're tied to versus deposits.
There was that gap of a few weeks, which is what caused margin to come down.
Also, first quarter is not a very strong asset growth quarter for us.
The nature of our business is first quarter tends to be our slowest quarter.
So we didn't see that much in terms of asset growth.
So you combine little-to-no asset growth.
And by the way, a lot of other banks are seeing asset growth coming from time draws.
Our business is not built around that kind of business.
And we did not get that benefit, and we did not see a lot of line growth.
I don't think it's a benefit.
I think it's a good thing that we did not have that business but that creates little bit of asset growth and NIM that compressed 6 basis points leads to a $5 million reduction in NII.
Also on fee income.
Last quarter, we had $7.5 million or so of securities gains.
Well, this quarter, we've had $3.5 million of securities losses.
So that's an $11 million-or-so swing in fee income.
By the way, in the $3.5 million securities losses in this quarter, it includes a $5 million of unrealized losses on equity securities.
We haven't sold them, but the accounting makes us take it through the P&L.
And lastly for expenses, again, first-quarter expenses are always higher because you start to fight the cycle all over again.
HSA contributions, the 401(k) contribution, and all that stuff hits in the first quarter, so that is what drove expenses higher.
If you compare it into expenses from a year ago, that's probably a better way to compare, and those expenses were obviously much lower.
Our first quarter this year, it was much lower.
So what does it really mean for next quarter?
Well, for next quarter, we expect asset growth to pick up for no other reasons, and we're doing a lot of PPP loans.
We'll probably do some Main Street Lending loans.
We expect margin to expand.
Deposit prices have come down very, very aggressively, not just in the middle of this March, but also at the beginning of May.
And that should feed into margin, and we are very positively biased toward our margin in the second quarter and beyond.
Expenses should come down as well because all that five-level stuff that I talked to you about will be behind us after the first quarter.
And naturally, expenses will get better next quarter.
So that's what all the guidance we'll be able to give you, but I do feel it's important to mention these things in some level of detail.
I mentioned a little bit on PPP program.
So I think we could rename BankUnited for the month of April as Bank of PPP.
That's like all we've been doing.
To give you a little comparison, we have an SBA business where we probably do roughly about 200 units of business in a year.
We are now in the process of trying to do over 3,000 loans through the SBA in less than a month or so.
It has -- has been a very large operational challenge that people across the company have been recruited to help in.
And so far, we've already close to $700 million of loans that we've done and we're not done yet.
We still have a few more that we will do over the course of today and tomorrow, or day after, until the money runs out.
We're also now on a case-by-case basis providing deferrals to borrowers, who are being impacted by the pandemic, and that started somewhere in the middle of March.
Those requests have now tapered off somewhat in the last week to two weeks, and Tom can talk about that in a little more.
But before that, Tom, why don't you spend a little time talking about loans and deposits?
Just give a little more detail around that.
So let's start off with deposits, where we've continue to make good progress on our deposit growth initiatives.
As you can see, deposits grew for the quarter by $606 million, and just over 50% of that or $305 million was noninterest DDA, which now stands at the 18.4% of total deposits, compared to 15.9% a year ago.
I guess, as we've talked in all of these calls, growing noninterest DDA is one of the most important things that we're trying to do in the bank right now.
And unlike what some other banks have reported, most of this DDA growth was really core DDA growth.
This wasn't related to draws on lines of credit.
And I'll go into a little bit more detail about that later.
We've consistently been moving down deposit pricing as the Fed has reduced rates.
The cost of total deposits declined by 12 basis points this quarter from 1.48% to 1.36%.
Additional moves by the Fed in late March had minimal impact on our ability to move cost of funds down further in Q1.
But as Raj mentioned, you'll see that impact much larger in Q2.
To give you a better idea of this, the spot rate on total interest-bearing deposits, including our certificates of deposit, declined by 36 basis points of December 31, 2019, to March 31, 2020, and then by another 27 basis points through April 17th of 2020.
So a total of 63 basis points decline during that period of time.
And if you go to Slide 7 in the deck, you'll get a little bit more information and detail on that.
On the loan side, Raj mentioned, loans that are relatively flat for the quarter with net growth of $29 million.
There were some parts of the portfolio where we actually saw very good growth.
The C&I business had total growth of $353 million, which was a good quarter for that segment.
Mortgage warehouse outstandings have also increased by $84 million, but really offsetting that, our CRE book declined by $315 million, which is pretty much in line with what we expected, primarily driven by the continued decline in New York multi-family, which was $249 million.
And unlike a lot of banks, particularly some of the larger banks, we have not experienced any real growth in our line utilization since the onset of this crisis.
The majority of our C&I growth, as I mentioned, was not the result of draws.
Our utilization ratio, which we track consistently throughout this process really hasn't moved too much during this entire thing, only by a few percentage points through the total period of time.
It has generally remained in line with our three-year averages with the exclusion of the mortgage warehouse business.
I would like you to flip to Page 16.
This is what I was talking about at the beginning of the call.
These are the segments that we have sort of circled around and saying these are the portfolios that will have increased stress based on our estimation: this is retail in the CRE book; retail in the C&I book; the franchise finance that we've talked about to you in the last six months; hotels for obvious reasons, airlines, cruise lines and energy.
So in total, it's about 14% of our portfolio.
What we're trying to show you here is what -- as of March, what part of these individual portfolios were past-weighted and what were classified, criticized and nonperforming.
So now let me say something sort of which is obvious, but I'll mention it anyway.
Just because we have highlighted these portfolios, I'm not trying to say that loans on these portfolios are going to go back.
We also expect the large portion of these loans will be just fine.
Sponsors with deep pockets will be able to bear the brunt of the pain here.
But in terms of monitoring, we are calling these sort of the ones what we will monitor on a heightened basis because we think these are in harms' way more than other parts of the portfolio.
By the same logic let me say, it doesn't mean that anything that is outside of this portfolio is all fine.
We have to monitor everything because there will second, third, fourth quarter impacts in other parts of the business as well and we will monitor them, too.
But this is where that the heightened monitoring will be.
So it's too early to really see the impact of the COVID situation on risk rating migration.
And you can see that, with the exception of franchise finance portfolio, substantially, most of these segments are past-rated at March 31st.
We did move a bunch in the franchise portfolio into those lower categories in the quarter.
Let me talk a little bit about NPAs, a little bit of our course of actions and then charge-offs.
NPAs -- of NPLs for this quarter, they were basically flat.
NPAs were down a little bit, a couple of basis points.
NPLs were also down a few basis points from 88 basis points to 85 basis points.
And just to remind you that these numbers in NPAs and NPLs, the way we report them included guarantee portion of nonaccrual SBA loans.
So really just keep that in mind that the criticized classified this quarter went up by $269 million, $207 million of that $269 million was in the franchise portfolio.
And 90% of that $207 million was really attributable to COVID as that kind of play itself out in the month of March.
Charge-offs were 13 basis points.
They elevated from last quarter mostly because of one credit in BFG equipment where we took the charge-off, but we're already seeing recoveries from that situation this quarter.
So more detailed metrics are toward the end of the slide deck, Page 22, 23, 24 and 25.
So I will encourage you to spend some time on to those as well.
Tom, I mentioned these portfolios for heightened monitoring.
So, why don't you spend a few minutes and just give them a little more -- with a little more detail?
So we'd refer you to Slide 14 in the deck, which provides some additional detail around the level of deferrals and segments.
But through April 20, we have received request for deferrals from almost 800 commercial borrowers and approved modifications for about 500 of those borrowers, totaling a little over $2 billion.
We've also processed about $500 million in residential deferrals, excluding the Ginnie Mae that's early buyout portfolio, which would represent about 10% of that portfolio.
These deferrals typically take the form of a 90-day principal and/or interest payment deferrals for commercial loans, and those payments are generally due at maturity.
For residential borrowers, these payments are typically at the end of the deferral period consistent with deferral programs being offered by the GSEs.
Now we'll obviously be reassessing each of these loans at the end of the 90 days and looking in making the best decisions we can at that point in time.
As you can see, the large amount of commercial deferrals is in the commercial real estate portfolio, particularly the hotel subsegment, where 90% of the borrowers, by dollars, have requested and been approved for deferrals, followed by the retail subsegment.
We have also received a high level of deferral requests from borrowers in the franchise finance portfolio, as we've mentioned, where 74% of the borrowers have been approved for deferrals.
On other C&I portfolio subsegments with this -- where we're seeing higher levels of deferral request include accommodation and food services, arts and entertainment and recreation and the retail trade.
At this point, and as of today, modification requests appear to be slowing over the last 10 to 15 days.
Starting on Slide 17, we provide a little bit deeper dive into some of the higher-risk portfolios, subsegments that Raj has already mentioned.
And in the retail segment, the CRE book contains no significant exposure to big box or large shopping malls.
We estimate that about 60% of the CRE retail exposure is supported by businesses that we would categorize as essential or moderately essential and the remainder we would categorize as nonessential businesses.
Within this segment, LTVs averaged 57.5%, and 84% of the total are below the 65% level.
Retail exposure in the C&I book is well diversified with the largest concentration of being to gas station and convenience store owner operators.
I'll refer you to page -- on Slide 18, where you could see further breakdown of the franchise portfolio, which is a fairly diverse portfolio, both by some concept in geography.
We saw over a $200 million increase in criticizing classified assets in this segment during the first quarter.
Approximately 90% of these downgrades were directly related to the COVID-19 crisis.
I'll also mention that the current environment to fitness center -- and to fit this sector, which up until now, has been really the better-performing sector in this book, is coming under stress as most of these are now closed with the social distancing guidelines.
Some of the restaurant concepts actually may fare better, particularly those with heavy drive through exposure and good digital strategies.
On Slide 19, you can see that most of the hotel book represents well-known flags and is within our footprint.
So to be clearly -- on revenues in this segment have declined dramatically with the social distancing measures and travel restrictions that are currently in place.
LTVs in this segment averaged 54% and 78% of this segment has LTVs under 65%.
And finally, referring to Slide 20, our energy exposure, particularly in the loan portfolio, remains somewhat minimal.
The majority of this exposure relates to railcars in our operating lease portfolio.
So with that, I'll go back to Leslie for a little more detail on the quarter.
I want to take a minute to discuss the unrealized losses on the securities portfolio that impacted other comprehensive income and our GAAP capital at March 31st.
I'll remind you that these unrealized losses do not impact regulatory capital, and I'll be referring to Slides 26 and 27 in the deck for this part of the discussion.
The available-for-sale securities portfolio was in a net unrealized loss position of $250 million at March 31st.
These unrealized losses were mainly attributable to market dislocation and widening spreads reflecting the reaction of the markets to the COVID crisis.
As you can see on Slide 26, 90% of the available-for-sale portfolio is in governance, agencies or is now rated AAA.
At March 31st, we stressed the entire nonagency portfolio at the individual security level, modeling collateral losses that we believe to be consistent with levels reflecting the trough of the 2008 global financial crisis.
Based on that analysis, none of the securities in this portfolio are expected to take credit losses.
The majority of the unrealized losses, as you can see, are in the private label CMBS and CLO portfolios.
On Slide 27, we show you the ratings distribution of these portfolio segments along with levels of credit enhancement compared to stress losses, illustrating the high credit quality of these bonds.
We also priced the March 31 portfolio as of April 22, and you can see that our results of that on Slide 26.
And although unrealized losses remain significant, you can see that valuations have started to come back and to recover some.
I also want to point out that none of our holdings have been downgraded since the onset of the COVID crisis.
To Provide a little more color around the NIM.
The NIM declined by 6 basis points this quarter from 2.41% to 2.35% compared to the immediately in the proceeding quarter.
To get a little bit into the components of that, the yield on interest-earning assets declined by 18 basis points.
That reflects a decline of 9 basis points in the yield on loans and a 37-basis-point decline in the yield on investment securities.
These declines related to, obviously, declines in benchmark interest rates and also reflect turnover of the portfolios at lower prevailing rates.
The decline in the yield on securities reflects the very short duration of that portfolio and to an extent, increases in prepayment speeds, which contribute about 5 basis points to the decline.
The cost of interest-bearing liabilities declined by 14 basis points quarter over quarter.
I'll remind you that reductions in deposit costs that we have done in response to the Fed-reducing rates in late March were not fully felt this quarter.
A couple of items I want to mention that impacted noninterest income and noninterest expense for the quarter.
Raj already pointed out the unrealized loss on marketable equity securities that negatively impacted noninterest income in this quarter.
Our largest contributor of the $6.8 million decline in the other noninterest income line compared to the immediately preceding quarter was a reduction in income related to our customer swap program, and this was really attributable just to lower levels of activity in that space during the quarter.
Employee compensation in benefits actually increased by $3 million compared to immediately our preceding quarter.
And as Raj pointed out, there are always seasonal items that impact comp in the first quarter.
So, a better comparison might be to the first quarter of the prior year, and compensation expense declined by $6.3 million compared to the first quarter of 2019.
We'll try and wrap this up and open this up for Q&A.
But let me say regarding guidance, we are withdrawing our guidance that we gave you at the last earnings call.
We generally have a pretty good idea of what we're seeing in the business and the economies where we operate or we can look out about 6 months or so.
But at this time, it is very hard to look at a month or two.
So to try and give you guidance at really an uncertain time, it's very hard.
What we can say is we are -- you will see a growth in PPP loans.
Like I said, -- rough, so somewhere in the $800 million number is what will people end up with.
Main Street Lending facility, we're still waiting a lot of details in that, but we hope to do some of those loans, but it's hard to tell you how much we will be able to do or what we would want to do.
And even deposit growth can be hard to predict.
But so -- our priority is the deposit side will maintain, which is grow DDA and bring down cost of funds.
We feel fairly confident of that into this quarter.
And in fact, I would even go as far to say that maybe for the full year, we'll be higher than what you saw for this quarter.
Any question that you asked about CECL, the only thing we can say about CECL is provisioning going forward in the second quarter as the rest of the year is that it will be very volatile.
Given the fact that the economic environment is extremely volatile.
And very importantly, we have not lost sight.
Once again, I will say, we've not lost sight of what we're trying to build in the long term.
We actually are fighting in this healthcare crisis in the short term, but in the medium and long term, we're still focused on building what we set out to build.
So whether it's BankUnited 2.0 or all the other things that we're working on, they continue.
Some of the initiatives around BankUnited 2.0, especially around revenue might get pushed out by a couple of months because it's new products that are being launched.
It's going to be hard to try and launch them in the next couple of months when we are going through social distancing the way we are.
But overall, the numbers don't change, and it just gets pushed out a little more.
| bankunited q1 loss per share $0.33.
q1 loss per share $0.33.
|
In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Susan Diamond, Chief Financial Officer, will discuss our second quarter 2021 results and our updated financial outlook for 2021.
Joe Ventura, our Chief Legal Officer, will also be joining Bruce and Susan for the Q&A session.
Before we begin our discussion, I need to advise call participants of our cautionary statement.
Actual results could differ materially.
Call participants should note that today's discussion includes financial measures that are not in accordance with generally accepted accounting principles or GAAP.
Finally, any references to earnings per share or earnings per share made during this conference call refer to diluted earnings per common share.
Today we reported adjusted earnings per share of $6.89 for the second quarter of 2021, in line with our previous expectations.
We continue to focus on delivering strong operating results while navigating a dynamic environment due to the ongoing COVID-19 pandemic, all while staying true to our commitment to delivering the highest quality healthcare experience for members and patients.
Well, we are maintaining our full year 2021 adjusted earnings per share guidance of approximately $21.25 to $21.75 at the midpoint, representing full year adjusted earnings per share growth of 16% above the 2020 baseline of $18.50 in excess of our long-term growth target, while acknowledging the continued uncertainty driven by COVID-19 hospitalization trends and the rate at which non-COVID cost normalized.
As Susan will describe in more detail, our full year adjusted earnings per share guidance now assumes a $600 million COVID-19-related headwinds that is expected to be largely offset by favorable operating items.
In addition, this guidance assumes no COVID costs will run -- non-COVID costs will run approximately 2.5% below baseline in the back half of the year, including an assumption of minimum COVID testing and treatment costs for the remaining of the year.
I'd like to reiterate that our core fundamentals are performing well, and 2021 is a year of COVID-19 transition with various pandemic-related financial impacts, including reduced Medicare Advantage revenue resulting from the significant temporary deferral of utilization in 2020 as well as the lingering near-term uncertainties regarding the pace and level of the return of utilization for the balance of the year.
While we continue to navigate this pandemic-related uncertainties in 2021, as Susan will lay out in detail, we expect 2022 to be a more normal year.
The healthcare system has been open for several months, and we have seen vaccination rates in the seniors reach approximately 80% nationally.
Accordingly, our members continue to engage in more routine interactions with their providers, which we anticipate will result in more normalized Medicare Advantage revenue next year as providers are able to ensure that our members are receiving appropriate care and that their conditions are being fully documented.
I would reiterate our remarks from the last quarter regarding our Medicare Advantage bids for 2022, which reflected the continued uncertainty associated with COVID-19 and our premium and claims assumption with a focus on maintaining benefit stability in 2023.
While it is still too early to provide 2022 guidance, we believe our operating discipline in 2021 combined with the depth of our planning for 2022 Medicare Advantage AEP puts us in a strong position for financial growth in 2022.
I will now turn to an operational and strategic update.
Importantly, our underlying core businesses continue to deliver strong results on solid fundamentals with individual Medicare Advantage membership growth outpacing the industry.
As we highlighted at our recent Investor Day, this growth is balanced across various product lines, including HMO, PPO and Dual Special Need Plans or D-SNPs.
Our Medicaid business continues to perform well in 2021 and our South Carolina plan is now operational.
We are diligently preparing for the Ohio contract go live date in early 2022 and are continuing to improve our operating model building off of our core Medicare Advantage capabilities.
We also experienced slightly better than expected results in our home and provider businesses and increased mail order rates in our pharmacy business.
Finally, as announced last quarter, we've entered into an agreement to acquire the remaining 60% interest in Kindred at Home, and we expect the transaction to close mid-August, which we've included in our revised estimates for the year.
Our strong operating performance this year is in part attributed to our strong partnerships with providers who are delivering high quality care to our members.
We are currently seeing 87% of our provider partners and value-based arrangements and surplus.
On the public policy front, as policymakers explore changes to Medicare, including adding dental, vision and hearing as part of the Medicare benefit, we stand ready to both innovate for the more than 12 million of our members who already have these benefits, including 7 million dental and vision policies in our MA group as well as offer ideas of public private collaboration to leverage our deep capabilities in Medicare and specialty markets so that beneficiaries could quickly see benefits go from a proposed law to a tangible benefit.
Before turning the call over to our new Chief Financial Officer, Susan Diamond, I'd like to take a moment to speak about Susan's experience at Humana over the last 15 years.
She has served in various leadership roles across the company during her tenure, spending eight years as part of the Medicare and leadership team with various financial and operational in line of business responsibilities.
She also spent two years on the finance team, leading enterprise planning and forecasting and overseeing the company's line of business, CFOs and controllers.
Most recently, she led our home business, growing it to the largest offering of its kind.
Her strong financial background and extensive knowledge of our business make her uniquely positioned to step into the CFO role.
The board and I have great confidence in our abilities and the contribution she will make in the next chapter for Humana as we execute on our strategic plan and deliver shareholder value.
In addition, during the strategic nature of the CFO role, Susan will continue to contribute in a meaningful way to our home health business.
Today we reported adjusted earnings per share of $6.89 for the second quarter, in line with our previous expectations.
Our underlying core business fundamentals remained strong, and we experienced a positive start to the year across our segments with the first quarter coming in modestly ahead of our previous expectations.
Our results moderated back to expected levels in the second quarter, albeit with variation in the way specific underlying assumptions emerged, with COVID treatment costs coming in lower than expected, offset by non-inpatient utilization continuing to bounce back faster than originally anticipated.
As I will describe in further detail in a moment, uncertainty remains for the balance of the year due to the pandemic, specifically as it respects COVID hospitalizations and the rate at which non-COVID costs normalized inclusive of both volume and unit costs.
Recognizing the majority of today's call will focus on our emerging experience and our 2021 guidance, I want to quickly touch on operating performance across our segments before diving into that detail.
Our Medicare Advantage growth remains on track and consistent with our previous expectations with individual MA growing solidly above the market at an expected 11.4% at the midpoint.
Our Medicaid business results are exceeding our initial expectations given membership increases largely attributable to the extension of the public health emergency as well as higher than expected favorable prior period development.
In our Group and Specialty segment, consistent with our commentary on our last earnings call, medical membership declines are lower than we expected coming into the year.
Our Specialty business results are exceeding expectations as utilization, particularly for dental services, has been slower to bounce back than initially expected.
Finally, within we set our healthcare services operations, pharmacy continues to see increased mail order penetration as a result of customer experience improvements and additional marketing initiatives.
The home business, CenterWell Senior Primary Care and Conviva are performing slightly ahead of expectations, and we remain on track to open 20 new clinics this year with Welsh Carson.
In addition, as Bruce indicated in his remarks, we now expect the Kindred at Home acquisition to close in mid-August subject to customary state and federal regulatory approvals.
Before I go into more detail on our 2021 guide, I want to reiterate that the uncertainty we are seeing in 2021 relates solely to the difficulty estimating the impact of the pandemic and is not expected to carry forward into 2022.
We remain comfortable with how we approach 2022 pricing, which I will expand on later in my remarks.
Turning to full year 2021 guidance.
I would remind you, our adjusted earnings per share guidance represents growth at or above the top end of our long-term target of 11% to 15%.
Our philosophy regarding 2021 guidance has been to provide transparency into the uncertainty caused by COVID-19 and the ability to deliver our targeted earnings growth with solid underlying core business performance and largely offsetting COVID-19-related headwinds and tailwinds.
We have been consistent in and remain committed to this philosophy.
There is a reasonable path to achieving adjusted earnings per share within our initial guidance range.
And accordingly, today we are maintaining our full year adjusted earnings per share guidance of $21.25 to $21.75, while acknowledging the continued uncertainty as it respects to COVID hospitalization trends as well as the pace at which non-COVID costs bounce back and at what level they ultimately normalize.
Additionally, we expect our third quarter adjusted earnings per share to reflect a low-20s percentage of our full year adjusted EPS.
As Bruce indicated, given our experience to date, together with our current estimates for the back half of 2021, we have effectively recognized a $600 million COVID-related headwind for Medicare Advantage in our full year guide, offset by favorable operating items.
These favorable items include, among others, higher than initially expected prior year development, the previously discussed better than expected specialty and Medicaid results and the expected contribution from Kindred at Home given the transaction is expected to close in the coming weeks.
Now let me provide an update on the underlying changes since our initial detailed guide in February, articulate key assumptions regarding utilization in the back half of 2021 and expand on the continued pandemic-related uncertainties I described.
I will begin with Medicare Advantage revenue.
As discussed last quarter, given our significant exposure to Medicare Advantage, we are disproportionately affected by COVID's impact on Medicare Risk Adjustment or MRA.
Recall, our risk-adjusted revenue for 2021 is determined by 2020 dates of service, medical utilization and resulting documentation, which as previously discussed, was materially depressed in 2020.
As we have indicated since the beginning of the year, the MRA headwind we are facing in 2021 is significant, and we have closely monitored it over the course of the year.
Our April guide recognized we had $300 million of additional pressure from MRA relative to our initial expectations for the full year, which was offset by the net benefit of the extension of sequester relief.
In July, we received the mid-year MRA payment, and it came in modestly lower than expected.
We are however taking operational steps now to be able to recover some of the MRA revenue in the final payment for 2021.
Accordingly, our MA premium estimates, net of capitation, remained largely in line with our initial expectations when factoring in the net sequestration benefit.
Now turning to benefit expense.
At the beginning of the year, we indicated that we expected non-COVID costs for our Medicare business to run 3.6% to 5.5% below baseline.
We define baseline and 2019 experience trended forward based on a normalized trend factor excluding the effects of COVID.
However, that was offset by COVID utilization decelerating faster than expected.
We also recognized, however, visibility into non-inpatient claims were significantly less than inpatient.
However, at that time, we could still tolerate overall utilization returning to baseline late in the year if the non-inpatient acceleration we were seeing was due to pent-up demand and leveled off in the second and third quarters.
In the first and second quarters, non-COVID costs run approximately 7% and 3% below baseline respectively with the bounce back outpacing expectations in the second quarter.
Non-inpatient utilization did not level off and instead continue to increase in the second quarter and was offset by lower than expected COVID costs and other business outperformance.
As the healthcare system has been open for several months and a high rate of the senior population has been vaccinated, our current guidance now assumes that non-COVID costs level off and run approximately 2.5% below baseline levels in the back half of the year.
Consistent with our original forecast, our current guidance assumes minimal COVID testing and treatment costs in the back half of the year.
Finally, as it respects to our 2021 guide, for our commercial business, we expect all-in utilization for COVID and non-COVID to continue to run above baseline as anticipated.
In summary, I want to emphasize that 2021 is a COVID transition year.
There is a reasonable path to deliver against our guidance expectations.
However, if non-COVID utilization or COVID treatment costs increase beyond our expectations in the back half of the year, it will present a headwind to our guide absent offsetting tailwind.
I also want to reiterate that the $21.50 midpoint of our original guide continues to be the right jumping off point for 2022 adjusted earnings per share growth.
Our members continue to engage in routine interactions with their providers, which we anticipate will result in more normalized Medicare Advantage revenue next year as providers are able to ensure that our members are receiving appropriate care and that their conditions are fully documented.
During the first half of 2021, provider interactions and documentation of clinical diagnoses that will impact 2022 revenue outpace those experienced in the first half of 2020 and are approximately 80% complete in line with the estimated completion rate for the same time period in 2019.
Lastly, I would remind you that our Medicare Advantage bids for 2022 reflected the continued uncertainty associated with COVID-19 as it relates to our premium and baseline non-COVID claims trend assumptions with a focus on maintaining benefit stability into 2023.
First, with the expected integration of Kindred at Home, our home business is growing significantly, and Amy has accepted the role of Vice President and CFO of Home Solutions.
She will be a key member of the Home Solutions leadership team, responsible for the financial oversight and planning and forecasting for the segment.
Lisa Stoner will succeed Amy, accepting the role of Vice President, Investor Relations.
Lisa has worked with Amy over the last four years and is well known and respected by our investors.
We are excited about the opportunity this affords both Amy and Lisa, and Lisa's continuity in Investor Relations will allow for a seamless transition.
In fairness to those waiting in the queue, we ask that you limit yourself to one question.
Operator, please introduce the first caller.
| sees fy adjusted earnings per share $21.25 to $21.75.
compname reports 2q21 earnings per diluted common share of $4.55 on a gaap basis, $6.89 on an adjusted basis.
maintains fy 2021 earnings per share guidance of $21.25 to $21.75 on adjusted basis.
company’s fy adjusted earnings per share guidance assumes $600 million covid related headwind expected to be largely offset by favorable operating items.
|
These statements, including those describing our beliefs, goals, expectations, forecast and assumptions, are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
We performed exceptionally well in 2021 safely navigating the second year of a global pandemic, capturing important acquisitions that extended our inventory life, and making great strides to improve our balance sheet.
Our results were quite strong, and our strategy to create future value for our shareholders is well defined and on track.
Our fourth quarter 2021 results were outstanding.
Both total and oil production are above the top end of guidance.
We generated $25 million of free cash flow and adjusted EBITDA of $182 million.
During full year 2021, first, we materially increased our runway of high return oil way to drilling locations.
We were able to identify and capture two significant acquisitions that fit as perfectly, adding more than 40,000 acres in Howard and Western Glasscock counties.
These deals were accretive to shareholders and de-leveraging.
These deals initially added about 250 locations, but importantly, recent drilling success has added an additional 125 locations across areas where we ascribe no value at the time of the acquisition.
We now have eight years of oil weighted high margin inventory in Howard and Western Glasscock counties.
Second, we grew improved oil reserves by nearly 80%, and oil now makes up nearly 40% of our total reserves.
The benefits of increased oil reserves paired with the sale of lower margin gas-weighted assets is apparent in our margins and a 260% increase in the SEC PV-10 value.
Added WTI price of $75 more reflective of the current environment, we estimate our reserve value would increase by almost $1 billion from the SEC PV-10 to approximately $4.6 billion.
Third, we significantly improved our capital structure, the reduction of leverage and increased liquidity.
We issued $400 million of senior notes at an attractive rate and raised $73 million with the issuance of common stock through our ATM program.
Our investments have been disciplined, allowing us to reduce our 4Q annualized net debt to adjusted EBITDA ratio to 1.9 times at year-end 2021, compared to a 2.4 times a year ago.
Lastly, we continue to demonstrate our commitment to ESG and issued comprehensive ESG and climate risk report with data through year-end in 2020.
We established meaningful targets to reduce greenhouse gas and methane emissions, as well as the elimination of routine flaring by 2025.
We understand shareholder expectations for our industry and our board management team and other employees are committed to leading the way.
We aligned the board oversight responsibilities for ESG, and appointed a chief sustainability officer reporting directly to me.
Additionally, we included EEO-1 data in our 2021 ESG report providing clarity into the diversity of our workforce.
Our 2021 achievements provide a strong foundation for 2022.
Yesterday, we issued our outlook for this year, which aligns with our focus on capital efficient investments, the generation of free cash flow, and the continued strengthening of our balance sheet.
Our leverage reduction is six months ahead of previous expectations of year-end 2022, benefiting from higher commodity prices.
We are quickly moving toward a time when we will be able to return significant cash to shareholders.
We are excited about 2022, and the financial and operating opportunities that we see in front of us.
We expect to generate about $300 million in free cash flow in 2022 of the current commodity prices.
Put this in perspective, that's about one quarter of our market cap today, and over the next two years, we see the opportunity to deliver free cash flow equivalent to half our current market cap.
We understand the importance of leverage reduction, $300 million of free cash flow is equivalent to about $17 per share.
We believe that paying down debt is the most shareholder friendly initiative that we can deliver today.
We expect our leverage ratio will be 1.5 times by the third quarter, and we have line of sight to 1 times by midyear 2023.
Our capital investments are disciplined and are being allocated to our best opportunities.
We are fortunate to have a strong portfolio of high return oil projects in the USS Premier Oil Basin.
We are maintaining our capital discipline, keeping activity levels flat from 2021, keeping oil production approximately flat from our Q4 '21 exit rate.
From a field to the office, our people are dedicated to delivering results that will build value for our shareholders.
Our operations teams executed extremely well in 2021, as we seamlessly integrated two acquisitions posted strong will result in Howard County and further extended our oil weighted inventory with the appraisal of two additional formations.
These achievements in 2021 underpinned our capital efficient 2022 development plan.
In Howard County, we closed the Sabalo deal in July and went to work on new wells that are today among the best performing wells of all of our Howard County packages, driving oil production above the high-end of guidance for the fourth quarter.
In Western Glasscock County, we completed the 10 well books package at the end of the fourth quarter.
Results of the 8 wells in the lower Sprayberry and Wolfcamp A and B formations are benefiting from our optimized completion design, and are outperforming the previous package we completed in Western Glasscock County by approximately 38%.
These recent acquisitions in Howard and Western Glasscock counties, and our subsequent appraisal activities have extended our all weighted inventory runway to approximately 8 years at current activity levels with a breakeven oil prices of $55 or below.
The slots in our deck have details to help you understand the quality and depth of our inventory in each of our operating areas.
As Jason said, our forward development strategy allocates our capital to our highest return projects in Howard county.
Returns and efficiencies benefit from the fact that our acreages contiguous, and in many areas we can drill extended laterals and we plan to drill 18 15,000-foot lateral wells in 2022.
Our corporate strategy continues to be focused on leverage reduction.
In order to accomplish this, we are maintaining flat activity levels this year as we keep oil production relatively flat, and generate strong free cash flows.
To optimize our capital efficiency for the year and synchronize our drilling and completion crews, we are currently operating 3 drilling rigs and 2 completions crews, and planned to release 1 rig and 1 crew by the end of the first quarter.
After that, we will maintain 2 rigs and 1 crew through the end of 2022.
Like the rest of the industry, we are impacted by service cost inflation.
From fourth quarter actuals, we have factored in an approximately 15% inflation into our 2022 capital budget, and had locked in much of our pricing for services through the first half of the year, including frac services, sand and casing cost.
We are currently working to extend our service contracts into the second half of 2022 and optimize our inventory management to further de-risk our full year capital budget from any additional inflationary pressures.
We've made exceptional progress over the last year, both financially and operationally.
These accomplishments have allowed us to enter 2022 with strong momentum and confidence in our ability to generate free cash flow, reduce leverage, and position us to return cash to shareholders in the near future.
For 2022, we expect to generate about $300 million of free cash flow at current commodity prices, and this cash flow will be directed toward leverage reduction.
Turning to our capital budget, for 2022 investment program is approximately $520 million.
This plan entails flat activity levels when compared to 2021, offset by industry wide inflationary pressures in the oilfield service cost and higher non-operated activity levels.
Our budget also includes ESG focused investments of about $10 million to work toward the company's achievement of our announced 2025 emissions targets.
Our capital is being allocated to our highest return projects and is expected to hold our production flat with fourth quarter 2021 levels.
This will generate full year oil production growth of 24% to 34%.
There's no doubt that the recent run in oil price has led to industrywide inflation and higher costs at the field level.
Our people are focused on mitigating higher costs through cost innovation and new efficiency gains.
We have locked in a significant portion of our costs for the first half of the year and, as Karen noted, are working toward extending this price certainty into the second half of 2022.
To underpin our capital budget and de-leveraging goals, we continue to focus on hedging.
We have a strong track record of mitigating risk and ensuring strong returns for our capital investments.
Our free cash flow and leverage ratio projections are supported by our current hedge positions, covering about 75% of our projected oil production in 2022.
We expect minor adjustments to our position throughout this year as we lock in near-term prices to facilitate our leverage reduction goals.
For 2023, we have begun building our oil hedge position using colors with the floors, lined to further our leverage goals and ultimately returning cash to shareholders in 2023.
The current hedge volumes for 2023 are heavily weighted toward the front half of the year, giving us more confidence in achieving our leverage goals on the timelines previously messaged.
As previously discussed, A&D has been and continues to be at focus for us.
Since 2019, we have transformed Laredo through oil-weighted high-margin acquisitions and significant production and locations with higher oil cuts.
These transactions accelerated our de-leveraging or accretive to shareholders and put us in a position to deliver capital to shareholders well ahead of what we would have otherwise been able to do.
Our strategy is well-defined, and shareholders should expect that any future acquisitions would complement our strategy to return value to shareholders made possible by continuing balance sheet improvement.
We will continue to seek opportunities to grow our inventory of high-margin wells to achieve the economies of scale necessary to drive sustainable free cash flow and to reduce volatility in our operations, and in our equity performance.
With 8 years of high-margin oil weighted inventory, we are now in a position for sustainable long-term free cash flow generation.
This means we believe that we can meet our leverage target of 1.0 times by midyear 2023 and begin to return capital to shareholders in 2023.
While we will continue to look at acquisitions, we can be patient and opportunistic in what transactions we pursue.
We have the right team, the right assets, and are excited to come to work every day and deliver on our value creation strategy.
| in q4, produced 41,080 barrels of oil per day & 85,240 barrels of oil equivalent per day, increase of 87% and 3%, respectively.
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I'm joined today by Bob Patel, our Chief Executive Officer; and Michael McMurray, our Chief Financial Officer.
The passcode for both numbers is 137-21413.
During today's call, we will focus on second quarter results, the current environment, our near-term outlook and provide an update on our growth initiatives.
Good day to all of you.
We appreciate you joining us today as we discuss our second quarter results.
Every day, we work diligently to ensure that the colleagues, the friends and most importantly, the families of our employees and contractors never have to receive the calls that went out last Tuesday evening.
Notifying them for the loss or injury of a loved one.
Our investigation is underway, and it will be some time before we reach a conclusive determination recovery for all of the injured.
Despite the increased working capital required by higher prices and volumes, we generated $1.9 billion of cash from operating activities.
These results demonstrate how LyondellBasell's disciplined investments in growth and share repurchases over the past few years have enabled us to establish new benchmarks for our company's profitability.
Second quarter EBITDA is [Technical Issues] a larger LyondellBasell is now positioned to generate stronger results and higher cash flow through business cycles.
The events of this week provide a vivid reminder of the reasons behind our company's commitment to safe and reliable operations.
As of the end of June, our year-to-date total recordable incident rate of 0.22 for employees and contractors remained in the top 10% of our industry.
As we do with all major incidents, we will investigate the root cause and contributing factors involved in this week's events and share our findings with our contractors, our employees and our industry peers.
Our aim is to learn from all incidents and achieve a goal 0 work environment that prevents such tragedies from occurring.
On slide five, I would like to highlight our most recent sustainability report that we released last month.
This report focuses on LyondellBasell's efforts to address three urgent global challenges for our business, eliminating plastic waste in the environment, addressing climate change and supporting a thriving society.
LyondellBasell is leading work to transform our industry toward more sustainable market for Circular Polymers.
On climate change, we support the ambitions of the Paris Climate Agreement and we're moving forward with investments in energy reduction, increased utilization of renewable energy and evaluation of new low-carbon technologies.
We will be sharing more details on our carbon reduction plans over the coming months.
In our work to advance the thriving society, I'm very pleased to see the enthusiasm from our employees [Technical Issues] with our emphasis on a safe work culture and community engagement, our work to capture the full potential of our diverse global workforce should further enhance the sustainability of our company's performance.
Following an exceptional second quarter, some market observers are predicting a rapid decline in prices and profitability for our industry.
On slide six, I would like to point out why we believe that markets will be stronger for longer.
COVID vaccinations have been the driving force behind the reopening of societies and the rebounding global economy.
As of July, only 14% of the global population is fully vaccinated.
While the U.S. and roughly a dozen other countries have achieved vaccination rates approaching or exceeding 50%, health experts anticipate that vaccines will be rolling out to the rest of the world throughout 2022 and into 2023.
As seen by the increased spread among unvaccinated populations and the rise of variants, we still have much work ahead of us to contain the coronavirus and realize the full economic power of global reopening.
Returning to normalcy is eagerly anticipated by consumers with considerable pent-up demand and increased disposable income.
The Bureau of Economic Analysis estimates that U.S. personal savings averaged $3.5 trillion during the first five months of 2021, nearly three times the level seen in 2019.
With fiscal stimulus continuing to flow into the economy, consumers are both motivated and well funded to [Technical Issues].
This unfulfilled demand will persist to drive strong industrial production and demand for our materials for quite some time.
One example is that the average age of an automobile in the U.S. reached an all-time high of 12 years in 2021.
Businesses and consumers will eventually need to replace this aging fleet of cars and trucks.
Despite higher prices and supply chain constraints, demand for our products serving automotive manufacturing are forecast to increase a total of 10% in 2021 and an additional 11% during 2022.
Strong U.S. household formation during the pandemic has evolved into a robust housing market.
LyondellBasell benefits from both direct demand for building and construction materials as well as demand for our products used in the myriad of furniture, appliances and other goods that complete a new home.
And as vaccinations facilitate improvements in global mobility, LyondellBasell's products will see increased demand from restocking and consumption by service, entertainment, travel and hospitality industries as well as increased demand for transportation fuels supplied by LyondellBasell's oxyfuels and refining businesses.
In short, we remain confident that persistently high demand should support strong markets for our products through 2022.
In the second quarter, LyondellBasell generated $1.9 billion of cash from operating activities that contributed toward the more than $4 billion over the past 12 months.
Our free operating cash flow yield has been 10.1% over the past four quarters and free operating cash flow for the second quarter improved by more than 80% relative to the second quarter of 2019.
We expect continued improvement of our last 12 months cash flow performance as we move forward through each quarter of 2021.
As I have mentioned during previous calls, a strong and progressive dividend plays a fundamental role in our capital deployment strategy.
In the second quarter, we expressed our confidence in our outlook by increasing the quarterly dividend by 7.6% to $1.13 per share.
We continue to invest in maintenance and growth projects during the quarter with approximately $430 million in capital expenditures.
Strong cash flow supported debt repayments of $1.3 billion, bringing our year-to-date debt reduction to $1.8 billion.
We closed the second quarter with cash and liquid investments of $1.5 billion.
Last week, S&P Global Ratings recognize the improvement in our metrics by upgrading our credit ratings and indicating a stable outlook.
We expect that robust cash generation and an anticipated tax refund will enable continued progress on our goal to reduce our net debt by up to $4 billion during 2021 and further strengthen our investment-grade balance sheet.
One modeling item of note.
Our original full year net interest expense guidance of $430 million did not include extinguishment costs associated with our accelerated debt repayment program.
As a result, our 2021 net interest expense will likely exceed this prior guidance.
In the second quarter of 2021, LyondellBasell's business portfolio delivered record EBITDA of $3 billion.
This was an improvement of more than $1.4 billion relative to the first quarter.
Our results reflect robust demand for our products driven by the recovery in global economy and our growth investments.
Markets remained tight during the second quarter as the industry returned to normal operation following first quarter disruptions from the winter storm that constrained production for LyondellBasell and nearly all of our competitors with operations in the state of Texas.
Persistent consumer and industrial demand has met tight markets, leading to seven consecutive months of North American polyethylene contract price increases totaling more than $900 per ton.
We expect market conditions to remain robust and that continued progress in global reopening, sizable order backlogs in the increasing demand for transportation fuels will all support strong margins across LyondellBasell's businesses.
Our previous quarterly EBITDA record set in the third quarter of 2015 was approximately $2.2 billion, with more than $140 million of EBITDA contributed by our Refining segment.
Today, our growth investments are helping offset a challenging refining environment and enabling us to surpass the 2015 record.
Our aim is to leverage our larger business portfolio to achieve improved results at all stages of the business cycle.
Now let's review second quarter results for each of our segments.
As mentioned, my discussion will describe our underlying business results, I will begin with our Olefins and Polyolefins Americas segment on slide 10.
Strong demand, improved margins and our growth investments drove second quarter EBITDA to a record of $1.6 billion, $709 million higher than the first quarter.
Olefins results increased by approximately $310 million compared to the first quarter due to higher margins and volumes.
LyondellBasell's cracker operating rates increased to 93% and following the first quarter Texas weather events, about five points above the second quarter industry average.
Margins improved primarily due to the absence of high cost incurred during the prior quarter's weather events.
Polyolefin results increased by about $400 million during the second quarter as robust demand in tight markets drove higher prices and margins for polyethylene and polypropylene.
We anticipate continued strength in demand and margins for our O&P and Americas businesses during the third quarter.
While consultants are predicting some margin compression for ethylene recent outages have caused prices to quickly rebound and demonstrated that markets remain relatively tight.
High demand, low downstream inventories and customer backlogs are expected to continue and provide ongoing support for strong polymer margins.
As of this week, our August order volumes for PE and PP in the Americas segment are stronger than any prior month in 2021.
Similar to the Americas, robust demand and improving margins in our EAI markets drove second quarter EBITDA to a record $708 million, $296 million higher than the first quarter.
Olefins results improved by $100 million as margins increased driven by higher ethylene and coproduct prices.
Demand was robust during the quarter, and we operated our crackers at a rate of 96%, more than 10% above industry benchmarks.
Combined polyolefin results increased approximately $180 million compared to the prior quarter.
Strong polymer demand drove spread improvements with price increases for polyethylene and polypropylene outpacing monomer prices.
Margin improvements were partially offset by a small decline in polyolefin volume.
During the third quarter, we could see modest rebalancing of tight European markets as customers take downtime for summer holidays.
Robust demand expanded our margins and increased our sales volumes following the Texas weather events and some plant maintenance during the prior quarter.
Second quarter EBITDA was $596 million, more than three times higher than the prior quarter.
Second quarter propylene oxide and derivative results increased by $170 million driven by record high margins.
Intermediate Chemicals results increased by about $170 million, primarily due to higher product prices for most of the businesses.
Oxyfuels and related products results increased by $70 million, driven by higher margins, benefiting from improved demand and higher gasoline prices.
We expect continued strength in durable goods and improving transportation fuels demand to increase third quarter volumes for our I&D segment.
Margins could slightly moderate if industry production rates remain strong.
Demand for transportation fuels are rebounding from pandemic close.
Total gasoline and distillate demand in June was within 5% of prepandemic levels.
Reduced demand in margins for refined products is mostly due to lagging demand for jet fuel associated with business and international travel.
Jet fuel demand remains stubbornly below pre-pandemic levels.
As vaccinations in global travel resumes through 2022 and 2023, we expect refining margins will improve and drive additional earnings power for LyondellBasell's Houston refinery.
The chart on the left illustrates the Northwest Europe raw material margin for MTBE, which is an industry marker for our oxyfuels products sold into gasoline blending markets around the world.
While Oxyfuels are typically a reliable performing business through the cycle, low demand for gasoline pushed this margin into breakeven or negative territory over the prior four quarters.
Since the beginning of this year, global demand for gasoline and gasoline blending components such as MTBE and ETBE has improved, increasing the margin to an average of $167 per ton during the second quarter.
This is a significant rebound and well within the historical range shown by [Technical Issues] Now let's move forward and review the results of our Advanced Polymer Solutions segment on slide 14.
The margin improvement was offset by a decline in volumes as semiconductor shortages reduced demand for our polymers serving automotive and electronic end markets.
Second quarter EBITDA was $129 million, lower than the first quarter.
Compounding & Solutions results decreased by about $25 million as volumes decline for polymers supplied to the automotive sector appliance manufacturing and other industries that were constrained by chip shortages.
Advanced Polymer results increased by approximately $10 million due to improved polymer price spreads over propylene raw materials.
In July, feedstock cost for our polypropylene compounds produced in Europe have increased and are likely to pressure margins during the third quarter.
We only expect gradual volume recovery for compound supply to automotive electronics applications as semiconductor supply constraints decrease over the coming quarters.
This resulted in second quarter EBITDA of negative $81 million, an improvement of $29 million relative to the first quarter of 2021.
In the second quarter, the Maya 2-1-1 benchmark increased by $6.14 per barrel to $21.46 per barrel.
The average crude throughput at the refinery increased to 248,000 barrels per day, an operating rate of 93%.
In July, we continue to see improvements in refined product demand and we are running the refinery at nearly full rates.
Strong demand for diesel and improving demand for gasoline is expected to improve refining margins and could enable our refinery to return to profitability before the end of 2021.
And as mentioned, full margin recovery will require a stronger rebound in jet fuel demand.
Increased licensing revenue was offset by a decline in Catalyst margin, resulting in a second EBITDA of $92 million, $2 million lower than the prior quarter.
We expect that third quarter profitability for our technology business will be similar to the same quarter last year based on the anticipated timing of licensing revenue and catalyst demand.
Let me summarize our view of current conditions and the outlook for our businesses with slide 17.
In the near to midterm, we are still in the early stages of the global economic recovery.
And despite the challenges from variants, continued progress with vaccinations and reopening should continue to support robust demand and margins for our products.
Pent-up demand is tangible and consumers have ample liquidity to drive purchases of both services and manufactured goods as reopening proceeds globally.
Low inventories due to supply constraints and logistics disruptions will only serve to extend tight market conditions, downstream customer backlogs and persistent demand bode well for continued strength in LyondellBasell's order books.
In polyethylene, strong U.S. and Latin American demand has overtaken volumes that previously flowed from the U.S. to export markets in Asia.
As logistics constraints subside, and U.S. PG exports to Asia resume, producers will need to refill a depleted supply chain of 500,000 tons or more that is not fully captured in industry statistics.
In North America, we expect markets for PE and PP will remain tight into next year.
Higher vaccination rates are expected to improve global mobility over the coming year.
The return of international travel will drive further recovery in transportation fuels markets to increase profitability for our oxyfuels and refining businesses, providing additional earnings upside for LyondellBasell.
Let me close with slide 18.
Our second quarter results provide clear evidence of LyondellBasell's progress in maximizing cash flow performance through all stages of the business cycle.
We are leveraging our leading and advantaged positions across a larger asset base to deliver results that far exceed our previous benchmarks.
In today's strong markets, our second quarter EBITDA results are 38% higher than our previous record.
By 2023, we expect that our recent growth investments will provide an additional $1.5 billion of mid-cycle EBITDA earnings capability relative to 2017.
Our value-driven growth investments should propel stronger performance in a variety of business environments.
Our prudent financial strategy remains consistent.
We have increased our quarterly dividend and remain confident in our capability to deliver on this commitment throughout business cycles.
We are prioritizing deleveraging and our rapid progress on debt repayment will serve to further strengthen our investment-grade balance sheet.
Capacity expansions are coming online in our industry during a period of extraordinary demand growth and enabling an orderly absorption of this new capacity into the market.
Further investments in petrochemicals are proceeding at a manageable rate and recent project cancellations and delays demonstrate capital discipline by market participants.
At LyondellBasell, we're focused on providing leadership for our industry to establish a more sustainable future with new circular business models.
We will increase our capacity to serve the growing market demand for circulun-branded polymers produced from recycled and renewable feedstocks as we work toward our goal of annually producing two million tons [Technical Issues] robust returns from our growing global business portfolio and look forward to updating you on our progress over the coming quarters.
| increased quarterly dividend by 7.6 percent to $1.13 per share.
expect strong integrated polyethylene margins to continue.
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In a moment, Bruce Broussard, Humana's President and Chief Executive Officer; and Susan Diamond, Chief Financial Officer, will discuss our third quarter 2021 results and our updated financial outlook for 2021.
Joe Ventura, our Chief Legal Officer will also be joining Bruce and Susan for the Q&A session.
Before we begin our discussion, I need to advise call participants of our cautionary statement.
Actual results could differ materially.
Call participants should note that today's discussion includes financial measures that are not in accordance with Generally Accepted Accounting Principles or GAAP.
Finally, any references to earnings per share or earnings per share made during this conference call refer to diluted earnings per common share.
Today, we reported adjusted earnings per share of $4.83 for the third quarter of 2021, slightly above consensus estimates.
Our year-to-date results reflect the strength of our core operations as we continue to see strong underlying fundamentals across all lines of business and have remained focused on ensuring our members receive the right care at the right time despite the continued disruption caused by the pandemic.
While our underlying fundamentals are strong, 2021 financial results have been impacted by the ongoing pandemic, which has resulted in an adjustment to our full year adjusted earnings per share guidance.
As Susan will share in more detail, this reduction of approximately $1 in adjusted earnings per share is a direct result of COVID and corresponds to our current expectation of the total Medicare Advantage utilization inclusive of COVID costs will run 1% below baseline in the fourth quarter, which is a 150 basis points less than our previous assumption of 2.5% below baseline.
This update reflects a more conservative posture going into the final months of the year and notably $21.50 remains the baseline of which to grow for 2022.
As a reminder, prior to this guidance update we had not recognized a COVID headwind in our '21 guidance as many of our peers did.
Our adjusted earnings per share guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth.
This update results in an expected adjusted earnings per share growth at the lower end of our long-term range.
And importantly, it is not reflective of any concerns with our core operations.
I will now turn to our operational and strategic update.
Our Medicare Advantage individual above market growth in 2021 of 11% can be in part contributed to our industry-leading quality and consumer satisfaction scores.
We are pleased to be recognized by CMS for having 97% of our members in 4-Star or higher rated contracts for 2022.
We also increased the number of contracts that received a 5-Star rating from one contract in 2021 to four contracts in 2022, the most in our history.
Excuse me participants, this is the operator.
Your conference will begin momentarily.
Please stay on hold until the conference begin.
Sorry for the technical glitch share.
Let me just -- just maybe just go back to our guidance update here and reinsure that investors understand the guidance and in addition how it reflects in the -- as we look at the future here.
First, the guidance reflects a much more conservative posture going into the final months of the year.
And notably $21.50 remains the baseline of which to grow for 2022.
As a reminder, prior to the guidance update we had not recognized the COVID headwind in our 2021 guidance as many of our peers did.
Our adjusted earnings per share guidance has been above our long-term growth target at the midpoint throughout the year at 16% growth.
This update results an expected adjusted earnings per share growth at the lower end of our long-term range and is importantly does not reflect any concern with our core operations.
I will now turn to our operational and strategic update.
Our Medicare Advantage individual above market growth in 2021 of 11% can be in part attributed to our industry-leading quality and consumer satisfaction scores.
We are pleased to be recognized by CMS for having 97% of our members in 4-Star or higher contract for 2022.
We also increased the number of contracts that received a 5-Star rating from one contract in 2021 to four contracts in 2022, the most in our history.
And while CMS did make adjustments to the 2022 Star Ratings due to the possible impact of the COVID-19 pandemic, these adjustments had minimal impact on our ratings.
This further demonstrates our enterprisewide focus on quality, clinical outcomes and best-in-class customer service, which has been recognized from notable organizations such as Forrester, J.D. Power, and USAA.
Importantly, the Star's bonus allows us to maintain a strong value proposition for our members and provided value for supplemental benefits that address social determinants of health and other barriers not addressed by fee-for-service Medicare.
Looking ahead to 2022, we are pleased to be able to provide stable or enhanced benefits for the majority of our Medicare Advantage members.
Operating plans that support members whole health needs while continuing to deliver the human care our members have come to expect from us.
Our strong clinical and quality programs drive improved clinical outcomes and cost savings that allow our Medicare Advantage plans to continue to expand member benefits on those covered by fee-for-service Medicare.
Our plans include highly valuable extra benefits including dental, vision, hearing and over-the-counter medication allowance, transportation support, business program memberships and home delivered meals following an inpatient hospital set.
Over the last few years, we've made great progress in addressing social determinants of health and health equity by expanding our Medicare Advantage benefits.
Examples of those impactful areas include respite care distributing 1.5 million meals during COVID, sending fans to seniors with COPD during a heat wave and providing support for financial need impacting a senior's health and well-being.
Given the increased demand for health equity across America, we have aggressively expanded our efforts to address it.
We continue to advance our consumer segmentation efforts developing plans that are tailored to the unique needs of specific member populations.
This has allowed us to provide benefits that enhance and complement an individual's existing coverage through programs like Medicaid or entities such as Veterans Affairs.
This approach leads to disproportionate growth.
As you've seen in our D-SNP plans designed for dual eligible members where we have grown our membership approximately 40% in both 2022 and 2021.
We've expanded our D-SNP offerings for 2022 to cover nearly 65% of the dual eligible population nationally.
To reduce food and security, 97% of our members enrolled in our D-SNP plans, and we'll have a healthy foods cart, which provides a monthly allowance to purchase approved food and beverages at various national chains.
New for 2022, many of our D-SNP members will have reduced Part D drug co-pays as a result of the D-SNP prescription drug savings benefit, which will help address the financial barriers some members face when assessing needed prescriptions leading to better medication adherence, an important driver of member's health -- overall health outcomes.
As previously shared, we took a more conservative approach to our 2022 bids recognizing the continued uncertainty associated with COVID-19 and potential impacts to premium and claims assumption allowing us to prioritize long-term benefit stability for our members.
While it is early in the selling season we believe we struck the right balance and are competitively positioned for our continued growth in Medicare Advantage.
Our brand promise to deliver human care resonates with seniors given our comprehensive set of offerings and focus on providing a patient-centric experience based on their specific needs.
Susan will provide more detail and 2022 commentary in our remarks, including high level earnings per share and membership guidance.
I now would like to highlight the continued progress of our strategy through the build out of our healthcare service platform starting with Primary Care business and then moving to our Growing Home Solutions offerings.
We have the largest senior-focused, value based primary care organization in the country, which by year end will include approximately 200 clinics serving 300,000 patients across 24 markets in nine states.
We are accelerating organic and inorganic growth nationally and plan to open a total of 30 de novo senior focused centers in 2022, up from 24 in 2021.
This will include launching in two new major metropolitan areas, Dallas and Phoenix next year.
This faster pace expansion comes as we continue to gain conviction in our de novo center model with panel growth in centers launched in 2021 exceeding plan and clinical performance in our more mature markets continuing to improve.
At our more mature centers hospitalizations and ER visits are down 12% year-to-date versus 2019 pre-COVID Stars performance tracking to 4.5 Stars and NPS score of 90.
We will also continue to expand through inorganic growth completing seven acquisitions through the third quarter of this year bringing 21 newly, wholly owned centers to our portfolio.
We plan to continue this pace of acquisitions, focused on the markets where we have established presence to provide more access and high quality care to our patients.
Turning to the home, we completed the acquisition of Kindred at Home in the third quarter and now the largest home health and hospice organization in the nation.
As previously shared we will be migrating Kindred at Home to Humana's payor-agnostic healthcare service brand CenterWell.
Our efforts to transform home health to a value-based model come at a pivotal time for the industry.
As seniors increasingly choose Medicare Advantage, there is a meaningful opportunity for home health organizations to engage differently with patients and Medicare Advantage payers to more holistically address patient needs and improved health outcomes reduce the total cost of care for health plans and share appropriately in this value creation.
We've made substantial progress toward our goal of scaling and maturing a risk-bearing value-based model that manages the provision of home health, durable medical equipment and home infusion services.
With the acquisition of onehome earlier in 2021, a delegated post-acute management services organization for the home, we have the capabilities to be a value-based convener providing risk-based contracting and referral management and continue to develop technology enabling us to coordinate with other adjacent services.
These services include gap in care, closure, primary or emergent care in the home as well as coordination of meals, transportation and other services to positively support social determinants of health.
We currently care for approximately 270,000 Humana members under value-based home care models in South Florida and Southeast Texas where we have seen improved outcomes including emergency room usage being 100 basis points better than Humana's national average.
We now are focused on expanding to select markets in North Carolina and Virginia, which we've chose based on multiple criteria including market density, opportunity to significantly reduce home care expense and a robust Kindred at Home footprint.
We expect to begin the rollout in the second quarter of 2022 with the goal of covering nearly 50% of Humana Medicare Advantage members under this value-based home health model within the next five years.
We are excited about the continued progress of our strategy in the home, but consistent with our home health peers we recognize that the national nursing labor shortage poses a significant risk to the industry and we are taking proactive steps to address it as part of our well-developed integration process with Kindred at Home.
In some markets the nursing shortages resulting in inadequate capacity to meet demand, negatively impacting our ability to grow the top line.
We believe that Humana's CenterWell brand supported by our patient-centric culture will bolster recruiting and retention efforts for nurses.
We've seen increased nurse satisfaction and engagement in pilot markets where we have deployed value-based concepts, with voluntary nursing turnover improving nearly 10% among home health nurses in 2021.
In addition to unlock sufficient capacity to meet our growth goals, we are implementing broader operational improvements and benefit enhancements, while also making targeted investments in capacity constrained areas to enhance nurse recruiting and retention.
With respect to hospice, our intent remains to ultimately divest the majority interest in this portion of the asset.
As our experience has demonstrated, we can deliver desired experiences and outcomes for patients transitioning from restorative care to hospice through partnership models.
Since we closed the transaction in August we have continued to explore alternatives for the long-term ownership structure for the business and have initiated steps to reorganize the hospice business for stand-alone operations, while also ensuring business continuity and monitoring underlying trends.
We do not have a further update on the specific transaction structure or expected transaction timing, but we will provide additional updates as appropriate moving forward.
Given the continued expansion of an interest in our healthcare service platform we are committed to providing additional disclosure to give further transparency into the performance of these businesses beginning with our first quarter 2022 reporting.
Before closing, I want to touch on the current regulatory and legislative landscape.
As you know, last week, the White House and congressional leaders released their plan known as, Build Back Better, which includes several proposed changes to the Medicare program including establishing a hearing benefit starting in calendar year 2024, which will be included in the Medicare Advantage benchmark.
Given that today more than 40% of Medicare beneficiaries, over 27 million seniors and those with disabilities are enrolled in Medicare Advantage, we were encouraged to see that the package did not include any payment reductions to the program.
As this legislation continues to advance and likely be modified and as we look ahead to the annual CMS call letter and rate notice period, we will continue to work with policymakers and the Biden Administration to further improve Medicare Advantage building on the program's innovation and significant progress in areas like value-based care, social determinants of health, affordability and financial protection for beneficiaries, as well as reducing the total cost of care.
These attributes, along with a deep consumer popularity of Medicare Advantage are what have enabled it to have a strong bipartisan support with hundreds of members of Congress on record supporting the program.
With Medicare Advantage serving as a leading example of a successful private-public partnership, I am optimistic we can continue to lead on important healthcare issues facing both individuals and society, including addressing health and equities, improving health outcomes and expanding value-based care.
Today we reported adjusted earnings per share of $4.83 for the third quarter and updated full year 2021 adjusted earnings per share guidance to approximately $20.50 to reflect a net unmitigated COVID headwind resulting from our current view of utilization levels for the balance of the year.
I will now walk you through this detail starting with a reminder of our previous commentary.
As of our second quarter call, full year guidance assumed non-COVID Medicare Advantage utilization was around 2.5% below baseline in the second half of the year, with a further assumption of minimal COVID testing and treatment costs for the same period.
In September 2021 as a result of the surge in COVID cases due to the Delta variant, we updated our commentary on full year guidance to indicate we expected non-COVID Medicare Advantage utilization to be 5.5% below baseline in the back half of the year, while being partially offset by 3% of COVID costs, therefore, again assuming total utilization would be 2.5% below baseline in the back half of 2021.
What we've seen develop for the third quarter is that total utilization is running 1% below baseline versus the previously anticipated 2.5%.
COVID costs have been higher than initially anticipated as the Delta Variant resulted in hospitalization levels on par with what we experienced in January of 2021 and were overwhelmingly driven by the 20% of our Medicare Advantage members believed to be unvaccinated.
These higher-than-expected COVID costs were fully offset by non-COVID utilization in the quarter.
As COVID hospitalizations increased or decreased we continue to see an approximate 1-to-1 offset in non-COVID hospitalization levels.
We also continue to see significantly reduced non-inpatient utilization when surges occur, offsetting the higher average cost of COVID admission.
However, for the third quarter, in total we saw 1% incremental reduction in utilization beyond the level needed to offset COVID costs versus the 2.5% contemplated in our previous guide.
As a result, we have adjusted our full year guide to now reflect the fourth quarter running similarly with total Medicare Advantage utilization running 1% below baseline inclusive of estimated COVID costs, consistent with what we experienced in the third quarter.
We realized higher than expected positive current period claims development in Medicare Advantage in the third quarter as well as other operating outperformance largely mitigating the lower than anticipated depressed Medicare Advantage utilization allowing us to report results that were slightly favorable to The Street estimates.
Our revised guidance does not assume that the higher levels of favorable current period development seen in the third quarter will continue.
Taken together, our updated full year 2021 adjusted earnings per share guidance takes a more conservative posture going into the final months of 2021, and it's important to note as we've consistently shared throughout the year the midpoint of our original guidance range of $21.50 remains the correct baseline for 2022 given our approach to pricing.
I will now briefly touch on operating results across our segments before sharing early thoughts on 2022 performance.
Our Medicare Advantage growth remains on track and consistent with previous expectations.
We have refined our full year individual Medicare Advantage membership guidance to up approximately 450,000 members consistent with the midpoint of our previous guidance of up 425,000 to 475,000 members.
This outlook represents above market growth with an increase of 11.4% year-over-year.
Our Medicaid results continue to exceed initial expectations due to higher than anticipated membership increases, largely attributable to the extension of the public health emergency.
We now expect to add 125,000 to 150,000 Medicaid members in 2021, up from our previous expectation of up 100,000 to 125,000 members.
Utilization trends continue to be favorable to initial expectations and the Medicaid team is working diligently toward a successful implementation in Ohio with Go Live anticipated in July.
In our Group and Specialty segment, fully insured medical results were impacted by higher than expected COVID costs in the quarter, while our Specialty business results continued to exceed expectations as utilization, particularly for dental services remained lower than previously anticipated.
Recall that our guidance as of second quarter did not contemplate significant COVID costs in the back half of the year and the Commercial business is not seeing the same level of utilization offset experienced in Medicare Advantage.
From a membership perspective, we have increased our expected Group medical membership losses from 100,00 to 125,000 reflecting the expectation of additional losses in the fourth quarter as a result of rating actions taken to account for the expected impact of COVID in 2022.
Finally, within our healthcare service of operations, the Pharmacy and Provider businesses continue to perform slightly better than expected with Pharmacy benefiting from increased mail order penetration as a result of customer experience improvements and marketing campaigns and the Provider business seeing continued operating improvement at our more mature centers, which are now aligned under the same leadership in our de novo centers.
As Bruce mentioned in his remarks, we are actively integrating the Kindred at Home operations and results post integration have largely been in line with expectations.
Similar to Home Health and Hospice peers, the business is being impacted by COVID and labor shortages.
For the third quarter, home health admissions grew low single digits year-over-year, while hospice experienced a low single-digit decline year-over-year.
We will continue to closely monitor trends as we made targeted investments to sustainably improve the recruitment and retention of nurses.
Now, let me take a few moments to share an early outlook for 2022 starting with membership.
As you're aware, the overall PDP market continues to decline as more and more beneficiaries including dual eligibles choose Medicare Advantage.
In addition, as we've discussed previously, PDP plans have become a commodity with the low price leader capturing disproportionate growth.
Consistent with 2021 the Walmart Value Plan will offer competitive benefits but will not be the low premium leader in 2022.
As a result, we expect a net decline in PDP membership of a few hundred thousand members in 2022.
We continue to focus on creating enterprise value for our PDP plans by driving increased mail order penetration and conversions to Medicare Advantage.
With respect to Group Medicare Advantage, we expect membership to be generally flat for 2022 as we do not anticipate any large accounts will be gained or lost as we continue to maintain pricing discipline in a highly competitive market.
Moving to individual Medicare Advantage; as previously shared, we took a more conservative approach to our 2020 bids, reflecting the continued uncertainty associated with the pandemic.
We expect to grow our individual Medicare Advantage membership in a range of 325,000 to 375,000 members in 2022 or approximately 8% year-over-year reflective of our prudent approach we took to pricing for 2022 and the competitive nature of the market.
It is early in our AEP selling season and the outlook we are providing today could change depending on how sales and voluntary disenrollment ultimately commence.
And consistent with prior years we have very little member disenrollment data at this point in the AEP cycle.
I will now turn to our expected 2022 financial performance.
As previously mentioned, I want to reiterate that the $21.50 midpoint of our original 2021 guide continues to be the appropriate jumping-off point for 2022 adjusted earnings per share growth given our approach to pricing.
In addition, we feel comfortable that the risk adjusted assumptions and our 2022 pricing are appropriate as providers have been actively engaging with our members to ensure their conditions are fully documented and that care plans are established to address gaps in care.
Provider interactions and documentation of clinical diagnoses that we anticipate will impact 2022 revenue are approximately 92% complete to-date, in line with both our expectations for 2021 as well as the estimated completion rate for the same time period in 2019.
We also assumed medical costs will return to baseline levels reflecting a pre-COVID historical trending.
From an earnings perspective, we believe the conservative approach we took to 2020 pricing struck the appropriate balance between membership and earnings growth.
Given the ongoing uncertainty surrounding the COVID-19 pandemic we expect to enter the year with an appropriately conservative view of our initial 2022 financial outlook.
Accordingly, we anticipate that our initial earnings per share guidance will target the low end of our long-term growth range of 11% to 15%.
We expect that COVID will be net neutral to the Medicare business in 2022 as we do not anticipate a risk adjustment headwind and expect COVID utilization to be offset by a reduction in non-COVID utilization.
However, our initial guide will allow for an explicit COVID-related headwinds that we can tolerate, should it emerge similar to the approach some of our peers took in 2021.
We believe entering the year with this more conservative approach is prudent in the current environment and sets the company up for success in 2022.
We look forward to providing more specific guidance on our fourth quarter earnings call in early February.
In fairness to those waiting in the queue we ask that you limit yourself to one question.
Operator, please introduce the first caller.
| sees fy adjusted earnings per share about $20.50.
q3 adjusted earnings per share $4.83.
confirming $21.50 as baseline for 2022 adjusted earnings per share growth.
updates fy 2021 expected individual medicare advantage membership growth to 450,000 members.
during 3q21 covid costs were higher than previously expected.
updating its fy 2021 earnings per share guidance to take a more conservative posture going into final months of 2021.
anticipating total medicare advantage utilization, net of covid costs, will run approximately 1 percent below baseline in q4.
|
This is Mike Yates, vice president and chief accounting officer for IDEX Corporation.
The format for our call today is as follows.
We will begin with Eric providing an overview of the state of IDEX's business and update on our growth investments and an overview of our order performance and outlook for our end markets.
Bill will then discuss our second-quarter 2021 financial results and provide an update on our outlook for the third quarter and full-year 2021.
Finally, Eric will conclude with updates on our sustainability and diversity, equity and inclusion programs.
Beginning with our overview on Slide 6.
The past year and a half have been one of the most dynamic and unpredictable ever experienced, but our IDEX team stepped up again in Q2 and delivered during an extremely challenging environment.
Our commercial performance is very strong as we recorded record orders and backlog in the quarter.
Order trends continue to improve sequentially, and all three segments are materially above pre-pandemic level.
Our day rates are very strong, and our OEM order patterns are robust.
Only large industrial projects, many of them in FMT, continue to lag a bit.
We're beginning to see the move into planning funnels, indicating support for continued phases of organic growth in the back half of 2021 and next year.
1 operating challenge for the quarter was supply chain and logistics disruptions.
IDEX is generally a short-cycle business with quick lead times.
We typically operate at the component level further down our customers' bill of materials.
We're also not very vertically integrated.
We depend on a tight network of supplier partners, often located close by our operating units to quick turn our solutions with a minimum of feasibility.
For these reasons, the challenging conditions of tight material supply and bottleneck logistics tend to lag other industrial companies.
Our agile model does support a quick calibration to today's reality, and it helps us exit quicker than many on the backside of the supply side constraint.
Overall, we believe these disruptions have hit a plateau.
We don't see things getting worse, and the challenges will continue to be highly variable.
At the same time, we don't anticipate these disruptions getting better soon, but most likely they will not subside until the end of this year or early next year.
We anticipated rising inflation as the global economy recovered, but like many did not imagine the sharp rate of increase.
This narrowed our spread between price capture and material costs, although we remain positive overall.
Our teams leveraged the systematic investments we made a few years ago in pricing management and aggressively deployed two, sometimes three pricing adjustments with precision.
We are on track to expand our price cost spread to typical levels as we travel through the back half of the year.
While we spend a lot of time talking about our business's ability to capture price, one area that I don't want to miss is our continued focus on operational productivity.
Our teams continue to drive margin improvement through 80/20 simplification, lean effort and through sound capex deployment.
Our robust project funnels continue to be another weapon to combat rising costs.
The one project that exemplifies the spirit deserves mention as we discuss Q2.
Our energy market now starting to show some signs of recovery off the bottom are still lagging the overall group.
Our teams are aggressively executing a facility rationalization project to consolidate our scale and focus our human resources in close working proximity.
Ultimately, this is a long-term value driver for that group.
But in the quarter, the project created headwinds for us as equipment was delayed and inventory positions were less than ideal to support production transfers.
We expect the project to be back on track and completed by the end of the third quarter.
Overall, I am confident in our path through these choppy recovery as we continue to apply relentless focus from outstanding teams to deliver solutions that matter from high-quality businesses that are very well positioned within their application steps.
Moving on to Slide 7.
We deployed just over $575 million in the first half of the year with our acquisitions of ABEL Pumps, Airtech and a small investment in a digitalization technology start-up within the fire and rescue space.
We continue to build out processes and capabilities to explore additional strategic investments we want to make across IDEX.
Our funnel for potential acquisitions is stronger than it has been in the past, and we are more aggressive in pursuing opportunities that enhance our business solutions, fit well with our style of competition and drive IDEX-like returns.
It's early days in our integration of ABEL and Airtech, but we're happy to see that each business is performing well with excellent growth prospects in the near and long term.
While we've stepped up our M&A game, we're also investing in our existing businesses with a 45% increase in capital spending through the first half of the year.
We're in the process of expanding IDEX facilities in China and India.
We project significant ongoing growth opportunities across Asia, and these investments are critical to support our local-for-local approach as we move to the next level of competitive advantage.
We're also focused on our digital strategy with our largest investments tied to our areas of higher integration and scale as we seek to drive higher impact for our customers.
Lastly, as I mentioned previously, we're focused on operational productivity as market dynamics are changing as well as investing in new technology to support growth.
This is on both the capex and opex side.
Some of these investments are targeted at new applications in high-growth areas, like components to enable new global broadband satellite networks, building batteries for electric vehicles and providing key products to support the build-out of incremental capacity in semiconductor manufacturing.
These investments are combined with targeted spend in areas to support automation and efficiencies across the shop floor.
This strategic approach to both inorganic and organic investment is already paying off and sets us up for ongoing success for years to come.
Turning to our commercial results on Slide 8.
As I mentioned, order strength continued in the second quarter both compared to prior year and sequentially, resulting in a backlog build of $65 million in the quarter.
As we look across our segments, all rebounded well from the pandemic and delivered strong organic order growth.
Sequentially, fluid and metering technologies and fire and safety diversified products saw increased orders compared to the first quarter.
Our health and science technologies segment also saw increased sequential orders if we exclude the impact of a COVID testing application debooking that occurred in Q2.
Order intake across all segments was also above second-quarter 2019 levels.
FMT lags HST and FSD due to lower levels of investment in the oil and gas market as well as concentration in the industrial market, which saw a pre-COVID pullback in the second half of 2019.
These commercial results give us confidence in our ability to deliver double-digit growth in the second half of the year and continue to highlight the resilience of our businesses and the criticality of our solutions to customers.
On Slide 9, we provide a deeper look into our primary end markets.
Our focus is shifting from recovery to growth as most of our businesses are now performing above pre-pandemic levels.
Even with pockets of concern around supply chain disruptions and COVID in certain geographies, we're optimistic about the outlook of our end markets and our ability to execute within them.
In our fluid and metering technology segment, industrial day rates were strong.
Supply chain challenges remain.
But overall, the market trajectory was at or above 2019 levels with only large projects lagging, as I mentioned earlier.
Agriculture continued to drive strong growth, driven by aging farm equipment and record crop prices.
Our water business was stable.
We continue to monitor the impact of the federal infrastructure package on U.S. municipal spending.
Energy and chemical markets continue to trail 2019 levels, primarily due to limited capital investment in the sector as well as a longer project close cycle.
One item to highlight for FMT is the impact of our FMD acquisition last year.
It's now in our organic figures.
And with its backlog burn last year and significant pullback in customers' capital investments, it impacted FMT's organic sales by 11%.
In other words, FMT's organic sales for the quarter would have been 19% instead of 8%.
Moving to the health and science technologies segment.
We're seeing recovery and pivot to growth across all our end markets.
Semiconductor, food and pharma continued to perform well, driven by strong market demand and winning share through our targeted growth initiatives.
The overall automotive market continued to face supply chain-driven challenges but we outperformed the market due to our product concentration in higher-end European vehicles.
Our AI and life science markets continue to perform well as the pandemic impact eased and investments have increased.
The industrial business within the segment saw a similar result to FMT. Finally, in our fire and safety diversified products segment, dispensing rebounded as large retailers freed up capital and worked through pent-up demand for equipment.
Our BAND-IT business was adversely affected by U.S. automotive production pullbacks due to microprocessor shortages in the second quarter.
However, we continue to achieve new platform wins and believe we're well positioned to outperform the market as supply chain constraints ease.
In fire and rescue, we have yet to see larger tenders come back and emerging markets remain slow.
We continue to closely monitor market conditions and expect some choppiness in the second half of the year.
That said, we're confident in the future trajectory of our end markets as well as our ability to execute on our strong backlog and have raised our organic growth expectations for the year.
I will start with our consolidated financial results on Slide 11.
Q2 orders of $751 million were up 44% overall and 39% organically as we built $65 million of backlog in the quarter.
Organic orders grew sequentially and year over year in each of our segments, as highlighted by Eric on the prior slide.
Second-quarter sales of $686 million were up 22% overall and 17% organically.
While we experienced a strong rebound from the pandemic across our portfolio, we were impacted by supply chain constraints and our energy site consolidation, which tempered our results.
The FMD pressure in fluid and metering Eric discussed also had an impact on overall organic sales.
Excluding FMD, organic sales would have been up 22%.
Q2 gross margin expanded by 280 basis points to 44.6%.
The year-over-year increase was primarily driven by increased volume and price capture, partly offset by inflation and supply chain impacts.
Excluding the impact of $1.8 million pre-tax fair value inventory step-up charge related to the ABEL acquisition, adjusted gross margin was 44.9% and was approximately flat sequentially.
Second-quarter operating margin was 23.1%, up 340 basis points compared to prior year.
Adjusted operating margin was 24.4%, up 330 basis points compared to prior year, largely driven by gross margin expansion and fixed cost leverage, offset by a rebound in discretionary spending and investment.
I will discuss the drivers of operating income in more detail on the next slide.
Our Q2 effective tax rate was 21.3%, which was lower than the prior-year ETR of 22.7% due to benefits from foreign sourced income in the second quarter of 2021.
This benefit also drove favorability to our guided rate for the quarter.
Q2 adjusted net income was $123 million, resulting in adjusted earnings per share of $1.61, up $0.51 or 46% over prior-year adjusted EPS.
Finally, free cash flow for the quarter was $120 million, down 25% compared to prior year and was 98% of adjusted net income.
This result was impacted by a volume-driven working capital build, higher capex and timing of tax payments, partially offset by higher earnings.
Our working capital efficiency metrics remain strong, and the teams continue to do a good job managing the significant volume changes year over year.
Moving on to Slide 12, which details the drivers of our adjusted operating income.
Adjusted operating income increased $49 million for the quarter compared to prior year.
Our 17% organic growth contributed approximately $41 million flowing through at our prior-year gross margin rate.
We maintained positive price material cost within the quarter and leveraged well on the volume increase.
Our high contribution margins helped mitigate the profit headwinds we experienced from the supply chain disruptions.
In the second quarter of 2020, discretionary spending and investment were minimal, driven by a strict cost control environment during the pandemic.
As we return to a spend level, in line with our growth and continued strategic investments, we see year-over-year pressure of about $11 million, in line with the guidance we gave at the beginning of the year.
Even with the incremental spend, supply chain and operational issues that tempered our performance, we still achieved a robust 45% organic flow-through.
Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to our reported flow-through of 39%.
As we highlighted, we expect to reinvest aggressively in the business to drive both organic and inorganic opportunities.
We expect that our level of discretionary spending as well as associated costs from growth initiatives will similarly reduce organic flow-through in subsequent quarters.
With that, I would like to provide an update on our outlook for the third quarter and full year.
Moving on to Slide 13.
For the third quarter, we are projecting earnings per share to range from $1.57 to $1.61.
We expect organic revenue growth of 14% to 16% and operating margins of approximately 24 and a half percent.
The third quarter effective tax rate is expected to be 23% and we expect a 1% top-line benefit from the impact of FX.
And corporate costs in the third quarter are expected to be around $21 million.
Turning to the full year.
We are increasing our full-year earnings per share guidance from our previous range of $6.05 to $6.20, up to $6.26 to $6.36.
This range includes Airtech, which will contribute $0.06 in the second half of 2021, roughly $0.03 a quarter.
We are also increasing our full-year organic revenue growth from 9% to 10% up to 11% to 12%.
We expect operating margins of approximately 24 and a half percent.
We expect FX to provide a 2% benefit to top-line results.
The full-year effective tax rate is expected to be around 23%.
Capital expenditures are anticipated to be around $65 million, an increase of around $10 million versus our last call as we increase our investments in growth opportunities.
Free cash flow is expected to be 110% to 115% of net income, lower versus our last guide, primarily due to the additional capital spending and higher working capital to support our increased volume.
And corporate costs are expected to be approximately $77 million for the year.
Finally, our earnings guidance excludes any costs, earnings associated with future acquisitions or restructuring charges.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 14.
Before we open the call up to questions, I'd like to share an update on our ESG journey and the evolution of our company culture.
I pledged earlier this year that we would hire a new chief diversity, equity and inclusion officer.
I'm pleased to announce that I now have Troy McIntosh in my senior leadership team.
He joined us just last week from U.S. Cellular, the fourth largest cellular communications carrier in the United States where he led significant improvements in their culture and levels of diversity in the workforce.
At IDEX, Troy will help build the global road map and success measures for DE&I.
He will help embed DE&I deeper in our culture and build inclusive leadership confidence and capabilities in all our people through training, education and coaching.
He will help us make sure our systems mitigate bias and create opportunities for everyone, no matter of their background to reach their full potential at IDEX.
I look forward to great things happening with his leadership.
I'd also like to share a nice step we're taking to improve our energy efficiencies.
Work recently began on a solar array on the roof of our manufacturing facility in Germany.
Once completed next month, this collection of solar panels will be about one-third the size of the European soccer field and provide 30% of the electricity needs for the facility.
Not only will it help reduce our carbon footprint there, we estimate it will save the business more than EUR 67,000 in just the first year alone.
We anticipate this project will serve as a pilot, leading the way for other solar installations on IDEX facilities around the world.
Lastly, I want to share that the catastrophic flooding that devastated portions of Western Europe earlier this month has impacted many IDEX employees.
About a quarter of the employees at our German fire and safety business have either had their home severely damaged or destroyed.
All of our employees are safe, living with friends and family as recovery efforts are ongoing.
And operations continued at our facility, which is not directly impacted by the flood.
Amid all this destruction and loss, we once again saw the spirit of IDEX come through.
Colleagues from other IDEX businesses in Germany came to the area to assist.
With pumping equipment from our businesses, our people work tirelessly to help draw water from flooded homes to the long road of recovery again.
The IDEX Foundation also paid $100,000 to the German Red Cross, which has thousands of people in the region assisting those impact.
While I shared this internally, I want to again express with our employees better that we stand by you through this terrible tragedy.
Your outstanding examples of what makes this company so special.
| idex raises full year guidance.
q2 adjusted earnings per share $1.61.
sees q3 adjusted earnings per share $1.57 to $1.61.
sees fy adjusted earnings per share $6.26 to $6.36.
now projecting 11 to 12 percent organic sales growth for fy.
now projecting a 14 to 16 percent organic sales increase in q3.
|
This is Allison Lausas, vice president and chief accounting officer for IDEX Corporation.
The format for today's call is as follows.
We will begin with Eric providing an overview of the state of IDEX's business and an overview of our end-market performance.
Bill will then discuss our third-quarter 2021 financial results and provide an update on our outlook for the fourth quarter and full-year 2021.
Finally, Eric will conclude with an update on the IDEX Difference.
Before we begin, a brief reminder.
It's a pleasure to have you on the team.
Mike helped lead an evolution of our finance and accounting organization and his work has had a long-lasting impact on the business.
On behalf of the entire IDEX team, I wish Mike the best in his future endeavors.
Now let's turn to our IDEX overview on Slide 6.
We continue to see supply chain challenges throughout the third quarter.
Our localized sourcing, production, and selling model helps us a bit relative to others, but this prolonged environment of poor material, labor, and logistics availability challenges us just like any other business.
Despite these obstacles, our IDEX teams around the globe have risen to the occasion.
They exhibited both resiliency and stamina as they overcame yet another quarter filled with day-to-day disruptions, all while providing a high level of support to our customers.
At this stage, we don't see any near-term signs of diminishing macroeconomic headwinds.
Rather, we expect they'll remain at a high level and persist into 2022.
We'll continue to leverage our 80/20 principles as we align around our best customers, our best prospects for growth, and our critical business priorities.
I spoke last quarter about our ability to capture price due to the differentiated mission-critical nature of our products.
Overall, the price actions that we took over the past six months were increasingly realized in the third quarter, and we saw our price/cost spread increase sequentially.
We will push price aggressively and appropriately as conditions continue to support our arguments.
Despite the many challenges out there, our organic performance remains strong.
we set another record in the third quarter for orders, sales, and backlog.
Our backlog is now $186 million higher than it was at the end of last year.
Signals around the return of industrial projects have intensified and current energy prices, if sustained, have the potential to drive investments within IDEX application areas.
Our Health Science and Technologies segment performed exceptionally well.
Over the past five or so years, we have stepped up organic investments with our focus on the longer term.
Within our sealing business, we built a new facility with the goal of capturing share in the expanding semiconductor market.
We brought three optics facilities together, and our new Optics Center of Excellence to enable future wins in life sciences by integrating multiple IDEX components to create value for our customers.
We optimized the footprint and core technology of our material processing technology platform to enable long-term repeatable growth across a series of technologies.
These investments have generated tremendous returns, and we are well-positioned to capture share and capitalize on market growth going forward.
On the inorganic side, our recent acquisitions are doing extremely well.
ABEL Pumps is fully integrated and performing ahead of expectations.
The Airtech integration is ahead of schedule, and the team is making strong progress on their growth strategy.
Both are executing well in the challenging operating environment as they come up to speed on our 80/20 playbook.
Our balance sheet remains strong, and we have ample capital available to support future acquisitions and investments in the business.
Our M&A funnel is healthy.
Our expanded team has identified a number of interesting opportunities as we look to deploy additional capital in the near and long term.
In the end, we are focused on delivering and growing within a very difficult near-term operating environment while spending a significant part of each day thinking about the best investments in teams, technologies, and business opportunities to thrive in the years to come.
I'm very confident in our team's ability to outperform in both areas.
With that, I'll turn to our market outlook on Page 7.
In our Fluid & Metering technology segment, industrial day rates were favorable versus the second quarter.
Larger industrial projects still lag, but quote activity and funnel strength have both improved.
Agriculture remains robust, delivering on record volumes.
Our water businesses continue to perform well.
Municipal spending is steady, and there is general optimism around future increased government funding.
The chemical and energy markets continue to lag primarily due to limited capital investment.
However, on the chemical side, smaller, fast-starting projects performed well.
We are cautiously optimistic on energy as increased fuel prices and concerns over energy shortages have the potential to trigger investment.
As we noted last quarter, our Flow MD business has experienced a significant pullback in customers' capital investments.
It impacted FMT's organic sales by 8%.
In other words, excluding the impact of Flow MD, FMT organic sales would have grown 15% instead of 7% as reported.
Moving to the Health & Science Technologies segment.
We continue to see strong demand across all our end markets.
Semiconductor, food and pharma, analytical instrumentation, and life sciences all performed well.
We continue to win share through our targeted growth initiatives, and our intentionality around identifying opportunities that grow faster than the broader market is paying off.
The automotive market remains affected by supply chain-driven challenges, but we continue to see growth due to our concentration in higher-end European vehicles.
The industrial businesses within the segment saw a trend similar to FMT. Finally, our Fire & Safety Diversified Products segment is our most challenged segment right now.
Price capture and volume offsets faced stronger headwinds within the segment due to higher direct OEM exposure and higher levels of material intensity due to vertical integration.
In Fire & Safety, North America Fire OEM production continues to struggle due to supply chain challenges.
Larger tender activity is slowly increasing within the global fire rescue markets, but we feel these market challenges will persist into 2022.
automotive production pullbacks due to microprocessor shortages have tempered the performance of our banded business.
We continue to achieve new platform wins and believe we're well-positioned to supply chain constraints eventually ease.
But in the third quarter, the impact of automotive shutdowns increased versus last quarter and moderated our performance.
Finally, dispensing performed well as key customers deploy capital on strong DIY market demand, and our global product offerings capture share.
We continue to closely monitor market conditions and expect rolling supply chain disruptions to continue throughout the balance of the year and into 2022.
That said, our third-quarter organic orders were flat sequentially versus second quarter, and our backlog remains at a record level.
Overall, the demand environment for IDEX products has not waned despite supply chain challenges, and we remain optimistic about the trajectory of our end markets.
I'll start with our consolidated financial results on Slide 9.
Q3 orders of 774 million were up 36% overall and up 28% organically.
We built 62 million of backlog in the quarter, and all three segments had strong organic performance versus last year as well as versus the third quarter of 2019.
Third-quarter sales of 712 million were up 23% overall and up 15% organically.
We continue to experience a strong rebound from the pandemic across our portfolio, tempered by supply chain constraints.
The Flow MD pressure and Fluid & Metering Eric discussed also had an impact on overall organic sales.
Excluding Flow MD, organic sales would have been up 18% overall.
Q3 gross margin expanded 50 basis points to 43.8%.
The increase over the prior-year quarter was primarily driven by increased volume and price capture, partly offset by inflation and supply chain impacts.
Excluding the impact of a $9.1 million pre-tax fair value inventory step-up charge related to the Airtech acquisition, adjusted gross margin was 45%, and improved sequentially.
Third-quarter operating margin was 22.6%, flat compared to prior year.
Adjusted operating margin was 24.3%, up 120 basis points compared to prior year, largely driven by our gross margin expansion and fixed cost leverage, offset with some pressure from targeted reinvestments and the dilutive impact of Airtech and ABEL acquisitions due to their intangible amortization costs.
I will discuss the drivers of operating income in more detail on the next slide.
Our Q3 effective tax rate was 23.4%, which was higher than the prior-year ETR of 14.4% due to the finalization of tax regulations enacted in the third quarter of 2020 as well as a decrease in the excess tax benefit related to share-based compensation in the current period.
Third-quarter net income was $116 million, which resulted in an earnings per share of $1.51.
Adjusted net income was $125 million, resulting in an adjusted earnings per share of $1.63, up $0.23 or 16% over prior-year adjusted EPS.
The tax rate movement I mentioned drives a $0.27 differential in earnings per share as compared to the prior-year quarter.
Said differently, our earnings per share would have expanded by $0.50 or 35% had 2021 been taxed at the 2020 rate.
Finally, free cash flow for the quarter was 142 million, up 5% compared to prior year, and was 113% of adjusted net income.
The result was impacted by higher earnings, partly offset by volume-driven working capital build.
Our working capital efficiency metrics remain strong, and the teams continue to do a good job managing significant year-over-year volume and supply chain challenges.
Moving on to Slide 10, which details the drivers of our adjusted operating profit.
Adjusted operating income increased 39 million for the quarter compared to the prior year.
Our 15% organic growth contributed approximately 29 million, flowing through at our prior-year gross margin rate.
We achieved positive price cost within the quarter and saw our price/cost spread improve sequentially.
Our teams continue to drive operational productivity as another lever to help mitigate the profit headwinds we experienced from supply chain costs and associated inefficiencies.
The positive mix is a primary result of the portfolio and business mix normalizing to pre-pandemic levels that had a negative impact on our results last year.
As Eric mentioned, we are actively investing in the resources we need to execute on future growth and productivity.
This reinvestment back into the business, higher variable compensation, and targeted increases in discretionary spending drive the year-over-year pressure of $15 million.
Despite the incremental spend, inflation, and supply chain-driven operational efficiencies, we still achieved a solid 37% organic flow-through.
Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX, getting us to a reported flow-through of 30%.
With a significant amount of focus dedicated to navigating supply chain disruptions, we did not fully execute on the level of spend we expected in the quarter.
We intend to make these investments in the fourth quarter, and they will mitigate our flow-through a bit as we close out the year.
With that, I would like to provide an update on our outlook for the fourth quarter and full year.
I'm on Slide 11.
For the fourth quarter, we are projecting adjusted earnings per share to range from $1.55 to $1.58.
We expect organic revenue growth of nine to 10% and adjusted operating margins between 23.5% and 24%.
Q4 results are slightly lower than the third quarter, driven by organic and inorganic resource investments, seasonality, and the potential for year-end logistics challenges.
The Q4 effective tax rate is expected to be approximately 23%.
We expect about 0.5% of top-line benefit from FX, and corporate costs in Q4 are expected to be around 19 million.
Turning to the full year.
We are narrowing our full-year earnings per share guidance from a range of $6.26 to $6.36 to $6.30 to $6.33.
We are also maintaining our full-year organic growth of 11 to 12%.
We expect operating margins of approximately 24%.
We expect FX to provide 1.5% benefit to top-line results.
The full-year effective tax rate is expected to be around 23%.
Capital expenditures are anticipated to be around 65 million, in line with our previous guidance.
Free cash flow is expected to be around 105% of net income, lower versus our last guide primarily due to working capital investments.
And corporate costs are expected to be approximately $73 million for the year.
Our earnings guidance excludes impacts from future acquisitions and any future restructuring charges.
Finally, beginning in 2022, IDEX will provide earnings per share guidance and report actual results, excluding the impacts of after-tax acquisition-related intangible amortization.
We believe reporting adjusted earnings per share on this basis will provide more transparency to our core operating results as well as facilitate comparisons with our peer companies as we continue on our capital deployment journey.
With that, I'll throw it back to Eric for some final thoughts.
I'm on the final slide, Slide 12.
Before we open the call up to questions, I'd like to share a few updates around our great teams.
First off, I'd like to extend my public congratulations to our non-executive chairman, Bill Cook, on being named Public Company Director of the Year by the National Association of Corporate Directors.
Bill and I both joined IDEX around the same time in 2008, and I've learned a great deal from him over the years.
His insightful perspective and critical thinking skills have been tremendously helpful for the company, and I know I speak for everyone at IDEX when I say congratulations, Bill, on this well-deserved honor.
Turning to the IDEX Foundation.
Last month, the foundation entered a national partnership with the Boys & Girls Clubs of America.
Various U.S.-based business units have supported their local boys and girls clubs over the years, but this takes our joint work to the next level, offering a clear pathway for increased engagement.
Every one of our U.S. business units is close to at least one boys and girls club location.
This agreement aligns with the foundation's equity and opportunity charitable pillar added earlier this year, seeking to create opportunities for underserved disadvantaged people of color within our community.
Finally, we attribute much of our success to our strong foundational culture.
Our annual September engagement survey just came back.
And even within this incredibly challenging environment, loaded with disruptions in unexpected turns, we held study and were scored in the top quartile of all manufacturing companies.
Our teams around the world are beginning to develop tactical plans to address feedback provided by their local teams, part of the continuous improvement that supports everything we do at IDEX.
| q3 adjusted earnings per share $1.63.
q3 sales $712 million.
sees fy adjusted earnings per share $6.30 to $6.33.
sees q4 earnings per share $1.55 to $1.58.
q3 earnings per share $1.51.
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I'm Alexis Jones, Lead Principal for Investor Relations.
In our remarks today, David and Brian will cover a number of topics, including Cigna's third quarter 2021 financial results, as well as an update on our financial outlook for 2021.
We use term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance.
Before turning the call over to David, I will cover a few items pertaining to our financial results and disclosures.
Regarding our results, in the third quarter, we recorded an after-tax special item benefit of $35 million or $0.10 per share for integration and transaction related costs.
Additionally, please note that when we make prospective comments regarding financial performance, including our full-year 2021 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2021 dividend and does not assume any impact from any business combinations or divestitures that may occur after today, such as our recently announced planned divestiture of life accident and supplemental benefits businesses outside of the U.S., which we expect to close in 2022.
So, let's jump in.
During the quarter, we delivered adjusted revenue of $44 billion and adjusted earnings per share of $5.73 per share, all while continuing to reinvest back in our business to fund growth, expansion and ongoing innovation, and we continue to return significant value to our shareholders.
These results reinforce we are delivering for our customers, our patients, clients provider partners, as well as for you, our shareholders.
With our high performing health service portfolio and sharp focus on executing our strategy, we are confident in our ability to continue driving growth and are again raising our full-year 2001 guidance for adjusted earnings per share and revenue.
Our performance is strong considering the ongoing impact of the pandemic on medical costs, as well as the higher claims we've experienced among the special enrollment period or SEP customers within our individual business.
As it relates to our MCR in the quarter, our commercial business did improve from the second quarter to the third quarter and our Medicare Advantage business also improved sequentially.
We continue to execute a series of actions in 2021 and 2022 to further improve our MCR, and Brian will walk through this in more detail in a few moments.
Separately, in early October we also announced an agreement with Chubb to sell our life, accident and supplemental benefits business in our International Markets platform in seven countries for $5.75 billion.
We expect to realize about $5.4 billion in net after-tax proceeds and complete the transaction in 2022 following regulatory approvals.
Guided by our strategy and similar to our 2020 divestiture of our Group Insurance business, this transaction unlocks the value of a best-in-class leading asset, while also enabling us to even more sharply focus our business on health and well-being services.
So overall, our performance for the quarter reflects our clear strategy and strong execution and delivering attractive results and importantly, our ongoing commitment to prioritize and support the evolving health and well-being needs of those we serve.
Now, I'll walk through some additional detail for our Evernorth in U.S. Medical businesses.
A year ago, we launched Evernorth to the marketplace as our health service platform, focused on servicing health plans, employers, government organizations and healthcare providers.
Since that time, Evernorth has established itself with unique partnerships and innovative services that are resonating with multiple buyer groups.
Our Evernorth pharmacy and our medical offerings through our U.S. medical platform are the two primary gateways through which most of our clients and customers form their base relationship with us.
Wrapping around these two exceptionally strong platforms are our additional suites of innovative health services Evernorth, including benefits management, care solutions and intelligent solutions.
These help us to expand and deepen existing relationships.
In the third quarter, Evernorth retained and expanded our relationship with the Department of Defense TRICARE pharmacy program and we did seven-year contracts.
It's our privilege to serve almost 10 million active duty service members, retirees and their families.
Evernorth will continue supporting TRICARE pharmacy operations including specialty pharmacy services, military pharmacy claims and retail network pharmacies.
The new contract also allows for expansion of specialty and care coordination services through 2029.
As we look to the balance of the year and into 2022, Evernorth will continue to grow revenue and earnings.
Turning to our U.S. medical platform.
In U.S. commercial, our teams are leveraging and deploying the innovative solutions from Evernorth to expand our service offerings and address the evolving needs of our clients and customers.
For example, in our U.S. commercial platform, we are leveraging Evernorth and the live capabilities to expand virtual care options for our customers through their employers, with primary, urgent, behavioral and dermatology care as part of these value-based arrangements during virtual visits and the live physicians are leveraging our Evernorth Intelligence capabilities, enabling them to provide more connected and coordinated experience, and we continue to expand our capabilities with MDLIVE as we recently launched a virtual first health plan for employers.
Another great example of Evernorth in U.S. commercial partnering to bring more value to our health plan clients is a new arrangement we have with University of Pittsburgh Medical Center Health plan.
We will make in network care available to UPMC customers who live, work or travel outside the network service area.
UPMC has been an Evernorth pharmacy client for 16 years and this agreement illustrates how we are collaborating across our enterprise to deliver greater affordability and differentiated value for health plan clients.
We are pleased how the market continues to recognize the value we're delivering through our broad suite of solutions and as such, we continue to grow through both our U.S. commercial and Evernorth platforms.
Within Medicare Advantage, consistent with our strategy, we continue to grow in our existing markets and are expanding into new geographies.
Our progress is further supported by our overall value of our offerings.
For 2022 calendar year, 89% of our Medicare Advantage customers will be in four star or greater plans nationally.
This is the highest level we've ever achieved and it marks the fifth year in a row we've improved our STARS performance.
And in our individual and family plan business, we've driven strong growth in this year, increasing customers by 47% through the third quarter.
A substantial portion of this growth did come from the extended special enrollment period.
And as I previously noted, some of the MCR impact in the third quarter was driven by the medical costs among those we added during the outpaced SEP growth.
We do expect this will moderate in 2022.
We are positioning ourselves to build on this momentum in the individual family plan business by expanding our addressable markets, again as we enter in three new states and 93 new counties in 2022.
These new markets offer the potential to reach an additional 1.5 million customers.
The continued strength of our results and the growth we are generating through the execution of our strategy gives us confidence we will deliver against our commitments in 2021.
We will deliver earnings per share in line with our long-term targets and revenue growth well above our long-term targets for yet another year.
We will also deliver earnings per share within our long-term target range in 2022.
Specifically for 2021, we are committed to delivering our increased guidance for full-year adjusted earnings per share of at least $20.35.
For full year 2021, we remain on track for generating at least $7.5 billion of cash flow from operations and we expect to return more than $7 billion to shareholders in 2021 through dividends and share repurchase.
Looking into 2022, we expect to grow earnings per share by at least 10% off of our increased 2021 guidance of at least $20.35 per share.
We anticipate a number of tailwinds, including core growth in our business and additional contribution from margin expansion in our U.S. medical business as we drive pricing actions, execute affordability and efficiency initiatives and benefit from the return of Medicare risk adjustment revenue to more normalized levels.
We're also expecting year-over-year headwind as we plan for net investment income to be more in line with historical levels.
And of course, the rate and pace of ongoing strategic investments will vary from year to year.
In short, 2022 will be another strong year for Cigna.
Now to briefly summarize.
As we demonstrated through the quarter and throughout 2021, we are delivering for our customers, patients, clients and provider partners as they experience the ongoing challenges of the pandemic.
We are also taking significant value-enhancing actions such as divesting a portion of our international business, returning substantial amounts of capital to our shareholders and continuing to strategically invest in our capabilities and strategic partnerships, all of which position us to continue to advance our long-term growth agenda and continue to deliver shareholder value.
Today, I will review key aspects of Cigna's third quarter results, including the ongoing impact of COVID-19 on our business and I will discuss our updated outlook for the full year.
During the quarter, total medical costs were higher than our expectations within our U.S. Medical segment, driven largely by the impact of the Delta variant in our U.S. commercial business and increased medical costs for special enrollment period customers in our U.S. individual business.
Importantly, I would remind you that approximately 80% of our revenues are from service-based businesses that are not significantly exposed to medical cost fluctuations.
Our balanced portfolio and multiple levers for value creation resulted in Cigna's overall revenue and earnings exceeding our third quarter expectations.
This strong third quarter performance coupled with capital deployment activities led to an increased outlook for full year 2021, which I will discuss shortly.
Now turning to enterprise results.
Key consolidated financial highlights in third quarter 2021 include adjusted revenue growth of 9% to $44.3 billion, adjusted earnings growth of 20% to $1.9 billion after tax, and adjusted earnings-per-share growth of 30% to $5.73.
Results in the third quarter reflect strong top and bottom line growth with contributions across all of our businesses with overall performance above our expectations.
I'll now discuss our segment level results and will then provide an update on the details of our outlook as well as our capital positioning.
Regarding our segments, I'll first comment on Evernorth.
Third quarter 2021 adjusted revenues grew 13% to $33.6 billion.
Adjusted pharmacy script volume increased 8% to 411 million scripts and adjusted pre-tax earnings grew 7% to $1.5 billion compared to third quarter 2020.
Evernorth's strong results in the quarter were driven by organic growth, including strong volumes in retail and specialty pharmacy along with ongoing efforts to improve affordability for the benefit of our clients, customers and patients and deepening of existing relationships, partially offset by significant strategic investments to support ongoing growth, including our virtual care platform and technology capabilities.
Overall, Evernorth continues to create differentiated value for clients and customers, while driving overall revenue and earnings growth that exceeded our original expectations through the first three quarters of 2021.
Turning to U.S. Medical.
Third quarter adjusted revenues were $10.5 billion and adjusted pre-tax earnings were approximately $1 billion.
Overall, our U.S. Medical earnings exceeded our expectations during the third quarter, reflecting the impact of favorable net investment income and increased specialty contributions, partially offset by higher claim costs due to the net impact of COVID-19 and increased medical costs for special enrollment period customers in our individual business.
The net effect of these claim cost impacts produced a medical care ratio of 84.4% in the third quarter.
Looking ahead, we are actively managing overall medical costs and our MCR with the range of actions, including continuing to leverage our insights from our strong data and analytics capabilities to address key drivers and identify opportunities such as guiding customers to more effective and efficient sites of care, continued disciplined in our pricing and rate actions and we're also continuing to promote preventative care and access to behavioral services to provide meaningful support to patients and moderate overall medical costs over the longer-term.
Turning to membership, w ended the quarter with 17 million total medical customers, an increase of approximately 368,000 customers year-to-date.
In U.S. Medical, the year-to-date customer growth was driven by net growth in select and new markets within U.S. commercial and continued organic growth in Medicare Advantage and Individual within U.S. government.
In our international markets business, third quarter adjusted revenues were $1.6 billion and adjusted pre-tax earnings were $250 million.
These results were in line with our expectations.
Corporate and Other operations delivered a third quarter adjusted loss of $275 million.
Overall, Cigna's broad portfolio of services continues to serve the needs of our customers and clients.
Cigna remains committed to delivering value for all of our stakeholders, leveraging our well-positioned businesses.
Now turning to our updated outlook for full year 2021.
We are raising our adjusted earnings per share guidance for full-year 2021 to at least $20.35 per share, reflecting the strength of the quarter, the favorable impact of our year-to-date share repurchase and acknowledgment of the ongoing fluidity of the broader environment.
This represents earnings per share growth of at least 10% from 2020, consistent with our long-term earnings per share growth range of 10% to 13%, even with the ongoing challenges associated with COVID-19 and while having significantly increased our dividend in 2021.
As we look forward, it is clear that COVID-19 will continue to have an impact in the fourth quarter and in 2022.
And as time progresses, COVID-related impacts and the ongoing performance of the business are becoming more intertwined.
Therefore, we no longer believe it constructive to continue to quantify the impact of COVID-19.
These dynamics are fully contemplated in our 2021 expectation for adjusted earnings per share of at least $20.35 and our 2022 expectation for earnings per share growth of at least 10% off this 2021 guidance.
We now expect full-year 2021 consolidated adjusted revenues of at least one $172 billion, representing growth of at least 11% from 2020, when adjusting for the divestiture of our Group Disability and Life business.
I would note this revenue growth rate significantly exceeds our projected long-term average annual growth goal of 6% to 8% and represents a third consecutive year of significant revenue outperformance since our combination with Express Scripts in late 2018.
I will now discuss our 2021 outlook for our segments.
For Evernorth, we continue to expect full-year 2021 adjusted earnings of at least $5.8 billion, representing growth of at least 8% over 2020, reflecting the significant value we create for our customers and clients.
For U.S. Medical, we continue to expect full-year 2021 adjusted earnings of at least $3.5 billion.
Underlying this updated outlook, we now expect the 2021 medical care ratio to be in the range of 84% to 84.5%, which includes our expectations for elevated medical costs for Individual special enrollment period customers.
Regarding total medical customers, we continue to expect 2021 growth of at least 350,000 customers.
Now, moving to our 2021 capital management position and outlook.
We expect our businesses to continue to drive strong cash flows and returns on capital even as we continue reinvesting to support long-term growth and innovation.
For full-year 2021, we continue to expect at least $7.5 billion of cash flow from operations, reflecting the strong capital efficiency of our well-performing businesses.
Year-to-date, as of November 3, 2021, we have repurchased 26.5 million shares for $6.3 billion and we now expect full-year 2021 weighted average shares of approximately 342 million shares.
This includes the impact of the $2 billion accelerated share repurchase that we announced in the third quarter.
On October 27th, we declared a $1 per share dividend payable on December 22nd to shareholders of record as of December 7th.
Our balance sheet and cash flow outlook remains, benefiting from our highly efficient service-based orientation that drives strategic flexibility, strong margins and attractive returns on capital.
So now to recap.
Results in the third quarter reflect strong top and bottom line growth with solid contributions across our businesses.
Cigna has shown the ability to deliver value through dynamic environments with our breadth of businesses and multiple earnings levers we continue to support our customers, clients and coworkers and deliver on our financial commitments.
We now expect 2021 full-year adjusted earnings of at least $20.35 per share, representing growth of at least 10% from 2020 consistent with our long-term earnings per share growth rate range of 10% to 13%, and we expect to grow 2022 adjusted earnings per share at least 10% off our raised 2021 guidance.
| cigna sees fy 2021 adjusted rev to be at least $172 bln.
qtrly earnings per share $4.80; qtrly adjusted earnings per share $5.73.
sees fy 2021 adjusted revenues to be at least $172 billion; sees fy 2021 consolidated adjusted income from operations at least $6.96 billion.
adjusted income from operations for 2021 is now projected to be at least $20.35 per share.
medical care ratio of 84.4% for q3 2021 compares to 82.6% for q3 2020.
sees fy 2021 medical care ratio of 84.0% to 84.5%.
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I'd like to begin the call with a few highlights from CMC's historic fiscal 2021, then I'll turn comments to our fourth-quarter results before providing updates on our strategic projects and current market environment.
I'm pleased to report that fiscal 2021 marks the best financial performance in our company's 106-year history.
CMC generated its highest ever earnings from continuing operations, as well as record consolidated core EBITDA.
Both the North America and Europe segments also reported record results.
I'm also pleased to discuss our newly authorized share repurchase program and increased quarterly dividend payment, which should provide meaningful cash distributions to our shareholders.
CMC's exceptional fiscal-2021 performance translated to a return on invested capital of 14%, more than double the average for the three-year period proceeding our fiscal 2019 rebar asset acquisition.
We believe this sharp increase clearly demonstrates the dramatic strategic transformation CMC has undertaken in recent years.
Not only has our bottom line grown significantly, but the returns on capital deployed have created tremendous value for our shareholders.
We believe our record performance in fiscal 2021 was also a testament to our team's ability to respond quickly to robust market conditions.
CMC shipped more product out of our mills than ever before, with six of our 10 mills setting all-time shipment records and seven achieving best-ever production levels.
Our team continues to demonstrate their ability to optimize facilities and further increase the productivity of CMC's assets.
This showed at several plants as improvements across a variety of KPIs, including optimized melt yields and energy consumption and melt shops, higher tons per hour in rolling mills, as well as shortened lead times and shipping base.
Efficiency gains at our mills, combined with strong cost management throughout the entire North America vertical value chain, enabled CMC to achieve a year-over-year reduction in control of costs on a per ton basis.
To underscore the strength of this accomplishment, particularly with an inflationary environment, I would point out that over the same time frame, the Census Bureau's producer price index increased almost 10%.
It was also a time frame in which the entire U.S. economy was challenged by supply chain disruptions and labor shortages.
Late in fiscal 2021, CMC commissioned its third rolling line in Europe.
This is an important strategic growth investment we've been discussing for some time.
I'm pleased to share that the project was completed well under budget and production was ramped up more quickly than anticipated.
Both achievements are a testament to the capabilities of our Polish team.
This new asset ran at a high rate of production during the latter part of the fourth quarter and was a meaningful contributor to Europe's segment earnings.
During the year, CMC also made significant progress on our network optimization effort.
Following the full closure of CMC's former Steel California operations, we're now capturing an annual EBITDA benefit of approximately $25 million, while continuing to serve the West Coast market effectively and efficiently with bar source from lower-cost CMC mills.
When these actions complete, we are halfway to our stated target of $50 million on an annual optimization benefits.
On the sustainability front, CMC published its latest report in June, featuring enhanced disclosures and a commitment to achieve ambitious environmental goals by the year 2030.
CMC has been sustainable since its inception 106 years ago as a single location recycling operation in Dallas, Texas, and we have carried that legacy forward into the 21st century.
Slide 6 of the supplemental posted materials provides a clear illustration of CMC's industry leadership position as an environmental steward.
Going forward, we intend to publish our sustainability report on an annual basis, reflecting our commitment to transparency and timely measurement against our stated environmental goals.
Turning to fourth-quarter performance.
CMC generated earnings from continuing operations of $152.3 million or $1.24 per diluted share.
Excluding the impact of a small one-time charge related to the write down of a recycling asset, adjusted earnings from continuing operations were $154.2 million, or $1.26 per diluted share.
This level of adjusted earnings represents a 21% sequential increase and a 62% year-over-year increase, driven by strong margins on steel products and raw materials, as well as robust demand from nearly every end market we serve.
During the quarter, CMC generated an annualized return on invested capital of 20%, which is far in excess of our cost of capital and a clear indication of the economic value we are creating for our shareholders.
I would now like to provide a quick update on the status of CMC's key strategic growth projects.
I've already mentioned strong execution to date on both our network optimization initiative and the rolling line in Europe.
We are proud of the progress made on each.
The only comment to add is that during the two months of commercial production at our new rolling line, EBITDA on an annualized basis far exceeded the $20 million target used to justify the project.
The timing of start-up could not have been better.
We have stepped into a very strong market with both demand and pricing at healthy levels.
Construction of our revolutionary third micro mill the Arizona 2 remains on schedule for an early calendar 2023 start-up.
At this point, we have completed earthwork and now are pouring foundations and beginning vertical construction.
As a reminder, this plant will be the first micro mill in the world capable of producing merchant bar, as well as rebar.
It will also be the first in North America capable to connect directly to an on-site renewable energy source.
We believe these capabilities, combined with a micro mills inherent low-cost and low-carbon footprint, will define a new level of operational and environmental excellence in long product steel making.
When CMC announced the construction of Arizona 2 in August of 2020, we also indicated that a meaningful portion of the investment costs would be funded through the sale of the land underlying our former Steel California operations.
On September 29, CMC entered into an agreement to sell that parcel for roughly $300 million.
I would note that the sale price was much higher than the figure we estimated in August 2020 when we gave an expected net investment figure of $300 million for Arizona 2.
Paul will provide more detail on this in a moment.
Now turning to market conditions, first in North America.
We are seeing strong activity levels within nearly all our end markets.
At the mill level, demand for rebar, merchant bar and wire rod is robust.
Rebar is being supported by continued construction growth, particularly in our core geographies.
People are moving in, businesses are investing and state-funded infrastructure spending is healthy, which is reflected in residential, nonresidential and public construction spend data.
These factors have also benefited our shipments of wire rod.
In addition to construction, CMC's merchant product is sold into a number of end market applications and nearly all are growing on a year-over-year basis.
As you know, construction is by far CMC's largest end market, and our best leading indicator is our volume of downstream project bids.
Activity levels have been very strong for the last two quarters, driven by a good blend of private and public sector work.
Project owners are also awarding high volumes of new work, which has allowed CMC to replenish our downstream backlog following the lull that occurred in late 2020.
In fact, we've actually built backlog over the summer months, a period that typically entails a seasonal runoff.
Picture in Europe looks very similar to North America.
Construction activity is strong with new residential construction starts increasing by double-digit percentages on a year-over-year basis.
The Central European industrial sector continues to grow, highlighted by the current 14-month trend of expansionary PMI readings for both Poland and Germany.
CMC is now even better positioned to capitalize on this growth with production from our new rolling line, which allows our Polish operations to produce each of our three major product groups simultaneously.
Supply conditions in Central Europe are tight, which has driven margins sharply upward from the historic lows of fiscal 2020 and early fiscal 2021.
The new rate of $0.14 per share of CMC common stock is payable to stockholders of record on October 27, 2021.
The dividend will be paid on November 10, 2021.
Additionally, as announced yesterday, the board of directors also authorized a new share repurchase program of $350 million.
Paul will provide additional details regarding our capital allocation strategy during his remarks.
And with that as an overview, I will now turn the discussion over to Paul Lawrence, vice president and chief financial officer, to provide some more comments on the results for the quarter.
I'm pleased to review with you our outstanding fourth-quarter results.
As Barbara noted, we reported record earnings from continuing operations of $152.3 million or $1.24 per diluted share, more than double prior-year levels of $67.8 million and $0.56, respectively.
Results this quarter include a net after-tax charge of $1.9 million related to the write-down of recycling assets.
Excluding the impact of this item, adjusted earnings from continuing operations were $154.2 million or $1.26 per diluted share.
Core EBITDA from continuing operations was $255.9 million for the fourth quarter of 2021, up 45% from a year-ago period and 11% on a sequential basis.
Both of our North America and Europe segments contributed significantly to year-over-year earnings growth, while core EBITDA per ton of finished steel reached a record level of $155 per ton.
The fourth quarter marked the tenth consecutive quarter in which CMC generated an annualized return on invested capital at or above 10%, which is above our cost of capital.
Now I will review the results by segment.
North American segment recorded adjusted EBITDA of $212 million for the quarter, an all-time high, compared to adjusted EBITDA of $174.2 million in the same period last year.
The largest drivers of this 22% improvement were significant increase in margins on steel products and raw materials, as well as solid volume growth.
Partially offsetting these benefits was an increase in controllable costs on a per ton of finished steel basis.
Prior to the fourth quarter of fiscal '21, CMC had achieved seven consecutive quarters of year-over-year reductions to our controllable costs per ton.
Selling prices for steel products from our mills increased by $300 per ton on a year-over-year basis and $106 per ton sequentially.
Margin over scrap on steel products increased by $103 per ton from a year ago and $41 per ton sequentially.
The average selling price of downstream products increased by $44 per ton from the prior year, reaching $1,014.
This increase did not keep pace with underlying scrap costs leading to a year-over-year decline in margins.
At this point, I'd like to spend a moment to discuss the pricing dynamics of our downstream backlog.
The average price per ton of our downstream shipments is a function of the volumes and price points on the hundreds of fixed price projects that comprise the total backlog at any given time.
The average price of our total backlog will move up or down over time based on the new work we are awarded and the older work that is being completed.
Currently, we are in an environment in which our backlog is repricing upward with new work coming in at much higher prices than the completed work it is replacing, reflecting a margin above current spot rebar prices.
We expect this upward pricing trend in our backlog will translate into the average shipment price increasing throughout much of fiscal '22.
CMC does not give price guidance, but we can say absent a run-up of scrap cost, the margin benefit of our backlog repricing is expected to be significant in future periods.
Shipments of finished product in the fourth quarter increased 2% from a year ago.
Demand for rebar out of our mills remains strong, but as shipments declined modestly from the prior year due to a shift in our mix toward merchant and wire rod.
Volumes of merchant and other steel products hit a record level during the quarter, increasing 29% on a year-over-year basis and were 20% higher than the trailing three-year average.
Downstream product shipments were impacted by a reduced backlog we had at the beginning of the year and resulted in a 3% volume decline from the fourth quarter of fiscal 2020.
Barbara mentioned, our backlog was replenished during the latter half of fiscal '21 and has actually grown on a year-over-year basis for the past several months.
Turning to Slide 10 of the supplemental deck.
Our Europe segment generated record adjusted EBITDA of $67.7 million for the fourth quarter of 2021, compared to adjusted EBITDA of $22.9 million in the prior-year quarter.
Improvement was driven by expanded margins over scrap, strong volumes across our range of products and contributions from our new rolling line.
I should note that the prior-year period included a roughly $11 million energy credit that the current period does not.
We expect to receive a similar sized credit during the first quarter of fiscal '22.
Margins over scrap increased by $119 per ton on a year-over-year basis and were up $27 per ton from the prior quarter.
Tight market conditions provided the backdrop to achieve the segment's highest average selling price in more than a decade, reaching $763 per ton during the fourth quarter.
This level represented an increase of $317 per ton compared to a year ago and $99 per ton sequentially.
Europe volumes increased 21% compared to the prior year and reached their highest level on record.
The strength was broad-based with shipments of rebar, merchant bar and other steel products increasing by double-digit percentages on a year-over-year basis.
Polish construction market remains robust with new residential activity growing strongly.
Consumption of our merchant and wire rod products has been supported by an expanding Central European industrial sector.
As Barbara mentioned, the ramp-up of our third rolling mill helped CMC capitalize on these strong conditions and increased volumes during the quarter.
Turning to capital allocation and our balance sheet.
The new share repurchase program equates to roughly 9% of our market capitalization and will replace the previous program enacted in 2015.
These actions highlight the confidence that CMC's board and senior leadership have in the earnings capability of CMC, as well as our future prospects.
Our intention is to target a cash distribution to shareholders that represent a meaningful portion of free cash flow and is competitive with sector peers.
We plan on executing against this target by utilizing share repurchases to supplement our dividend payments.
We believe this approach will allow CMC's strategic flexibility in our deployment of capital, as well as provide a mechanism to directly return excess cash flow with shareholders during the periods of strong performance.
CMC's rebalanced capital allocation framework with its greater emphasis on cash distribution should in no way impede on our first priority, which is pursuing value-accretive growth.
We expect to fully fund our current strategic growth projects with organic cash generation while simultaneously providing enhanced cash returns to shareholders and maintaining a high-quality balance sheet.
Our capital allocation priorities are laid out explicitly in simple terms on Slide 14.
We have proven ourselves as excellent stewards of capital and generator of economic value.
We believe our best use of capital is the execution of attractive value-creating growth.
As we look beyond the completion of the slate of strategic initiatives outlined during our investor day last year, we are encouraged by the pipeline of attractive strategic growth projects that are currently being explored.
However, we believe that given the robust and stable cash flows we expect to generate through the cycle, CMC will have the ability to both fund attractive growth and return elevated levels of cash to our shareholders.
We always look to optimize our debt costs.
However, given the current slate of our balance sheet, we do not believe delevering is in the best advantageous strategy to us at this time.
Overarching our entire capital allocation strategy is our objective to maintain a strong balance sheet that provides strategic flexibility and gives CMC the wherewithal to navigate any economic environment.
Moving to the balance sheet.
As of August 31, 2021, cash and cash equivalents totaled $498 million.
In addition, we had approximately $699 million of availability under our credit and accounts receivable programs.
During the quarter, we generated $134 million of cash from operations despite a $48 million increase in working capital.
The rise in working capital was driven by the significant increase in both scrap input costs and average selling prices.
Looking past these factors, our days of working capital have decreased from a year ago.
Our leverage metrics remain attractive, and we have improved significantly over the last two fiscal years.
As can be seen on Slide 17, our net debt-to-EBITDA ratio now sits at just 0.8%, while our net debt to capitalization is at 17%.
We believe a robust balance sheet and overall financial strength provides us the flexibility to fund our strategic growth projects, navigate economic uncertainties and pursue opportunistic M&A while returning cash to shareholders.
CMC's effective tax rate for the quarter was 21%.
For the year, our effective tax rate was 22.7%.
Absent enactment of any new corporate tax legislation, we forecast our tax rate to be between 25% and 26% in fiscal '22.
Lastly, I would like to provide CMC's fiscal '22 capital spending outlook.
We currently expect to invest between $450 million to $500 million this year with a little over half of which can be attributed to Arizona 2.
We are entering the middle phase of mill construction when investment and on-site activity is anticipated to be the highest.
As we indicated in the past, proceeds from the sale of our Rancho Cucamonga land are expected to be used to offset much of the cost of the state-of-the-art mill.
Total gross investment for Arizona 2 is forecast to be approximately $500 million.
Against which, we'll apply roughly $260 million net after-tax proceeds from the land transaction.
This nets out to be $240 million of spend for the new mill, compared to the $300 million net investment figure we had previously provided.
The difference as Barbara previously mentioned, is due to the higher-than-expected valuation on the land sale.
This concludes my remarks, and now I will turn back to Barbara for the outlook.
We entered fiscal 2022 confident about what lies ahead.
Based on our current view of the marketplace and our internal indicators, we anticipate continued strong financial performance.
Signs point to healthy demand in our key end markets, and we expect supply/demand conditions to remain favorable, supporting good margin levels.
Additionally, several of the sector trends we've discussed previously are likely to provide tailwinds in an already growing domestic construction market.
These trends include the regional population migration, which has been occurring for many years, but accelerated over the course of the pandemic, as well as supply chain hardening.
Exceptionally strong new single-family construction activity in CMC's core geographies is likely to be followed by the buildout by municipalities and private businesses of local infrastructure to support expanded or newly formed communities.
The positive tone of our outlook is mirrored by the latest cement consumption forecast from the Portland Cement Association and consensus nonresidential forecasts compiled by the American Institute of Architects.
The PCA expects growth in cement consumption of 2.2% in fiscal 2022 and 1.4% in 2023.
The AIA consensus outlook for private nonresidential spending anticipates an increase of roughly 5% in 2022.
More near term, in looking to the first quarter of fiscal '22, we expect shipments to follow a typical seasonal trend, which has historically equated to a modest decline from fourth-quarter levels.
Margins on steel products, as well as controllable cost per ton should generally -- be generally consistent on a quarter-over-quarter basis.
At this time, we will now open the call to questions.
| q4 adjusted earnings per share $1.26 from continuing operations excluding items.
q4 earnings per share $1.24 from continuing operations.
anticipate strong operating and financial performance will continue in fiscal 2022.
declared quarterly dividend $0.14 per share of cmc common stock, represents 17% increase over previous dividend.
|
We continue to be in various remote locations today.
We may have some audio quality issues and we appreciate your patience should we experience a disruption.
A replay of today's call will be available via phone and on our website.
To be fair to everyone, please limit yourself to one question, plus one follow-up.
And now, I'd like to turn the discussion over to Phil Snow.
I'm pleased to share that we delivered strong fourth quarter and full year results.
We ended the year with record organic ASV plus professional services growth of $68 million for the quarter, crossing the $100 million annual ASV threshold for the first time and soundly beating the top end of our guidance.
Our year-on-year organic ASV growth rate accelerated 200 basis points to over 7% and we delivered annual revenue of $1.6 billion and adjusted earnings per share of $11.20.
Our outperformance was driven by two years of planned accelerated investments in content and technology, which is paying dividends.
FactSet's goal to be the leading open content and analytics platform is resonating in the marketplace and increasing our wallet share with clients.
Our targeted investment in new content sets was a significant ASV driver in fiscal '21 and fueled our workstation growth.
The continued development of our deep sector coverage improved sell side retention and expansion with our largest banking clients and help secure a new business.
Content and technology were both key to our expansion with wealth management firms where we landed important wins, including with the Royal Bank of Canada and Raymond James, Canada.
These wins were due to our market leading data and the launch of FactSet's Advisor Dashboard.
We are also expanding our addressable market by increasing our content and delivery capabilities across the front, middle and back office.
Cloud delivery coupled with the strength of our DMS in concordance as a service solutions enable our clients to centralize, integrate and analyze disparate data sources for faster and more cost-effective decision making.
This has been a major driver for our CTS business.
As we look ahead to 2022 and beyond, we remain focused on three things: scaling up our content refinery to provide the most comprehensive and connected set of industry, proprietary and third-party data for the financial markets; two, enhancing the clients' experience by delivering hyper personalized solutions, so clients can discover meaningful insights faster; and third, driving next generation workflow specific solutions for asset managers, asset owners, sell side wealth management and corporate clients.
We added new data and capabilities to further these goals by acquiring differentiated assets over the past year.
The addition of Truvalue Labs has grown our ESG offering; BTU Analytics advanced our deep sector content for the energy markets; and Cabot Technologies will better support the portfolio analytics workflows of asset managers and asset owners.
The progress we have made on our investment plan along with these acquisitions and our award-winning products give us a distinct competitive advantage.
Turning now to our financial results.
We accelerated our organic ASV plus professional services growth to 7.2%.
Our strong performance was driven by stellar execution from our sales and client-facing teams throughout the entire year and especially in the fourth quarter.
Our buy side and sell side growth rates increased 100 basis points and 400 basis points respectively since the third quarter, reflecting higher sales across our key clients.
On a year-over-year basis, we saw an increase in ASV growth rates from high-single digit to double digits across banks, asset owners, hedge funds, data providers, wealth managers and corporates, including private equity and venture capital firms.
We capitalized on the strength of our end markets, particularly in banking and landed several large deals in our wealth and CTS businesses.
Turning now to our geographic segments, we saw acceleration in every region.
ASV growth in the Americas rose to 7% in the fourth quarter, driven primarily by increased sales to our banking, corporate and wealth clients.
We also had a large data partner win this quarter in CTS.
Asia-Pac had a record ASV quarter and delivered a growth rate of 12%.
We saw wins across many countries with global and regional banks as well as our research management products.
CTS and analytics also contributed to growth with wins across asset managers and data providers.
EMEA accelerated to a 6% growth rate, driven by strong performance with data providers, asset managers and banking clients and CTS had the highest contribution to this region, followed by Research.
Now turning to our businesses.
Research was the largest contributor to our ASV growth this year with a growth rate of 6% driven by very strong growth on the sell side at 12%.
We increased Research workstation users by 86% this quarter versus a year ago with growth across both sell-side and buy-side clients.
Increasing our workstation presence and footprint with our largest clients positions us very well for cross-selling opportunities in the future.
Analytics and trading accelerated in the second half in fiscal 2021 versus the first half, ending the year at a 6% growth rate.
We saw wins across performance in reportings, front office and core analytics solutions.
Within the front office solutions, we are really pleased to see larger wins with our trading platform and believe this will be a contributor to analytics going into next year.
CTS grew 16% driven by core company data and data management solutions sold through an increasing number of channels.
CTS had robust sales to data providers this year and expanded their footprints across multiple workflows within middle and back office functions at asset management and banking clients.
Additionally, while all Truvalue Labs ESG sales are excluded from our organic numbers, I'm pleased to report that ESG data sales were a contributor to CTS' overall growth this quarter.
Wealth ended the year with a 6% growth rate.
Wealth workstations grew 24% year-over-year and they alongside FactSet's Advisor Dashboard have been the biggest contributors to winning new clients.
We've seen a combination of large and medium-size wins as existing clients continue to expand their Advisory businesses and we are equally pleased with our new business wins.
We are also seeing cross-selling opportunities with analytics products as wealth managers increasingly look to advance the sophistication of their offerings.
Moving forward with fiscal '22, we will report three workflow solutions.
We are combining the desktop portion of the Wealth business with Research into one business to be known as Research and Advisory.
We believe this is the right strategy to further our goals to holistically manage our desktop solutions, accelerate the build out of differentiated front office solutions and facilitate the global expansion on the adoption of StreetAccount news in FactSet Web.
We have also taken the wealth digital business and combined it with CTS to better align our digital solutions.
In summary, we are entering fiscal '22 with strong momentum and a solid pipeline as reflected in our Annual ASV guidance.
The need for more differentiated content and analytics is at an unprecedented high and we are perfectly positioned to capture this demand and poised to deliver best in class workflows and a hyper personalized experience for our clients.
I'm proud of our Company's strong performance in fiscal '21.
We have advanced our digital platform, executed at a high level and strengthened our relationship with clients.
And I'm confident that as our Chief Revenue Officer, she will bring a disciplined growth-oriented mindset and the same rigor to the sales organization as she did leading finance, enabling us to continue our success going forward.
I'm happy to be here with you today and I hope that we will continue to engage even after I fully transition to my sales role.
Like Phil, I want to congratulate FactSetters around the world for achieving outstanding results in fiscal 2021.
While we have continued primarily to operate remotely, I am so impressed with the resilience with which our FactSet teams are able to serve our global clients.
Our 7% top line growth this year is a testament to the hard work of our teams and validates our strategy to invest in content and technology, capitalize on market trends and address client needs.
Throughout this fiscal year, we accelerated our growth rate in ASV plus professional services through consistent conversion of our pipeline, delivering over $100 million in ASV growth and surpassing our most recent guidance for the year.
Full year revenue also exceeded our target as we realize more revenue from ASV booked early in the fourth quarter.
We generated solid earnings through disciplined expense management and operating leverage.
Driving sustainable long-term growth requires continued investment back into the business, as reflected by our increased spend on differentiated content and cloud enabled technology, we executed our plan well and our operating results are in line with expectations due to higher revenue and productivity gains with higher adjusted operating income and growth in adjusted EPS.
Let me now walk you through the specifics of our fourth quarter.
Before I explain the quarterly results, I want to remind everyone that our prior year fourth quarter GAAP results were impacted by one-time non-cash charge of approximately $17 million, related to an impairment of an investment in a third-party.
Thus any year-over-year comparison of GAAP operating results for the fourth quarter of 2021 should take that into consideration.
As you saw on the previous slide, our organic ASV plus professional services growth rate was 7.2%.
This increase reflects the higher demand for our solutions as clients execute on their own digital transformation.
Our success in solving the workflow challenges has resulted in higher levels of both client retention and cross-selling activity.
For the quarter, GAAP revenue increased by 7% to $412 million.
Organic revenue, which excludes any impact from foreign exchange, acquisitions and deferred revenue amortization also increased 7% to $410 million.
Growth was driven by our Analytics, CTS and Research Solutions.
For our geographic segments, organic revenue for the Americas grew to 6%, EMEA grew to 7%, and Asia-Pacific to 12%.
All regions primarily benefited from increases in our Analytics and CTS solutions.
GAAP operating expenses grew 3% in the fourth quarter to $293 million, impacted by a higher cost of services.
Compared to the previous year, our GAAP operating margin increased by 320 basis points to 28.9% and our adjusted operating margin decreased by 150 basis points to 31.6%.
As a percentage of revenue, our cost of services was 10 basis points higher than last year on a GAAP basis and flat to last year on an adjusted basis.
The increase is primarily driven by growth in compensation comprised of higher salary expenses for existing employees, new hires to support our multiyear investment plan and higher bonus accrual in line with stronger than anticipated ASV performance.
SG&A expenses when expressed as a percentage of revenue improved year-over-year by 330 basis points on a GAAP basis, but increased 170 basis points on an adjusted basis.
The primary drivers include higher compensation costs, reflecting the same factors as noted in the cost of services.
Moving on, our tax rate for the quarter was 15% higher than the prior year's tax rate of 7% primarily due to lower tax benefits associated with stock-based compensation in the current quarter as well as a tax benefit related to finalizing the prior year's tax returns.
GAAP earnings per share increased 15% to $2.63 this quarter versus $2.29 in the prior year.
Again, this improvement is primarily a result of the impairment charge we recorded in the fourth quarter of 2020.
Adjusted diluted earnings per share remained flat year-over-year at $2.88.
Adjusted earnings per share was driven by higher revenues offset by higher operating expenses, and an increase in the tax rate.
Free cash flow which we define as cash generated from operations less capital spending was $171 million for the quarter, an increase of 18% over the same period last year.
This increase is primarily due to higher net income, improved collections and the timing of certain tax payments.
For the fourth quarter, our ASV retention remained above 95% and our client retention improved to 91%, which again speaks to the demand for our solutions and excellent execution by our sales team.
Compared to the prior year, we grew our total number of clients by 10% over 6,400, largely due to the addition of more wealth and corporate clients.
And our user count grew 14% year-over-year and crossed the total of 160,000, primarily driven by sales in our wealth and research solutions and in particular in the number of banking users.
For the quarter, we repurchased over 265,000 shares of our common stock at a total cost of $93 million, with a average share price of $348.
For the year, we repurchased $265 million of our shares and increased our dividend for the 22nd consecutive year.
With share repurchases and dividends on an annual basis, we have returned to shareholders almost 70% as a percentage of free cash flow and proceeds from employee stock option.
We remain disciplined in our buyback program and committed to returning long-term value to our shareholders.
Turning now to our outlook for fiscal year 2022, we delivered outstanding results in the back half of 2021, and believe this pace will carry into our next fiscal year.
For organic ASV plus professional services, we are guiding to an incremental $105 million to $135 million.
The midpoint of this range represents a 7% increase, which is equal to this year's organic growth rate, reflecting continued momentum in our business.
We are confident in our ability to perform at the high standard we demonstrated in fiscal '21 with underlying drivers to include disciplined execution and continued benefits from our investments.
We expect growth to be driven largely with existing clients through high retention and cross-selling.
In addition, we expect our ability to successfully sell new business in this virtual environment to continue.
Our recent investments in digital and content, are providing us with more opportunities to sell direct solutions tailored for specific workflows.
Drivers of future growth would include, first, the retention and expansion of our sell side client base through our deep sector strategy as we launch new targeted industries in addition to new private markets offerings.
Second, new wins with wealth managers who have been responding well to our web-based workstation and personalized Advisor Dashboard.
And third, growth with institutional asset management clients who benefit from our data management solutions and enhanced capabilities in front office and ESG workflows.
We are mindful about the global environment and potential future market disruptions.
But we believe we have the right offerings and strategy to maintain our high performance and growth rate into fiscal 2022.
From an operational perspective, we plan for continued labor productivity and operating leverage.
In addition to our multiyear investment plan, new investments will be made in content and front office solutions funded in part by ongoing cost discipline, including permanent savings related to the pandemic and additional efficiency actions.
As a result of higher growth in revenues and continued cost discipline, we are guiding to an expansion in our operating margins.
Combined with our consistent use of capital for share repurchases, we expect to accelerate growth in our diluted EPS, both on a GAAP and adjusted basis.
We are seeing the results of our investments take hold in both technology and content.
As we look to fiscal 2022, we are focused on delivering more value to clients, prioritizing our resources and ensuring execution excellence.
As I transition to my new role, I am seeing firsthand experience and skills of our sales team in adapting to meet the needs of the market.
Our client-centric mentality combined with our expanding data universe and digital advances provide me with the confidence that we have the people, strategy and product to build the leading open content and analytics platform in our industry, all while generating long-term value for our shareholders.
| qtrly earnings per share $2.63.
qtrly adjusted earnings per share $2.88.
|
I'll begin by sharing a few thoughts on our Company and our business performance.
As we mentioned on our last earnings call, we expected the second quarter to be our most challenging quarter this year due to the impact of COVID-19.
Operationally, all of our plants are running, though, we continue to experience challenges at our Mexico locations.
The return to the appropriate production staffing levels has been impacted by state and local regulations.
Our leadership in global teams are prioritizing the safety of our employees and adapting quickly to serve our customers' needs.
Sales were $84 million, down 30% from the second quarter of 2019.
As expected, we saw significant challenges in the transportation end market, sales in the rest of our business were stable.
Second quarter gross margins were 31.6% compared to 34.1% in the same period in 2019.
We delivered an adjusted EBITDA margin of 16.7% despite a 30% drop in sales.
Second quarter adjusted earnings per share were $0.16.
We had a promising new sensor win in transportation for application in hybrid electric vehicles, and continue to make progress with RF product wins in defense.
We added 13 new customers in the quarter.
We ended the quarter with $146 million in cash, and $141 million in debt.
We expect a prolonged recovery from the COVID-19 impact.
As a result, we are implementing a restructuring plan to realign our cost structure to the new demand environment.
This plan will be completed over the next 24 months.
Ashish Agrawal, our CFO is with me for today's call and will take us through the safe harbor statement.
To the extent that today's discussion refers to any non-GAAP measures under Regulation G, the required explanations and reconciliations are available in the Investors section of the CTS website.
I will now turn the discussion back over to our CEO, Kieran O'Sullivan.
The challenges of the COVID-19 pandemic have been unprecedented.
I want to express our appreciation to all our employees, customers and partners for their support as we work to get our factories online this past quarter.
Our people demonstrated remarkable flexibility in our operations and supply chain.
Our first focus is the safety of our employees and compliance with state and local regulations while doing everything we can to meet our customers' requirements.
The temporary expense reduction measures we discussed in our last earnings call are still in effect.
As I mentioned in my opening comments, we are announcing a restructuring plan which we expect to be completed over two year timeframe.
This plan is necessary to realign our operating cost structure to the new demand environment as we transition through the prolonged impact of COVID-19.
More details of the plan will be shared in the quarters ahead.
At a macro level, it will involve site consolidations and streamlining other operating costs to leverage economies of scale across the Company.
The plan is expected to deliver an annualized earnings per share improvement of $0.22 to $0.26 by the second half of 2022.
We remain focused on our strategic growth investments.
Growing our business and expanding our range of sensing, connectivity, and motion products is the priority.
New business awards were $105 million for the quarter, a solid performance given several OEMs continue to push out business decisions due to the COVID-19 and the resulting wide scale shutdowns in Europe and in North America in the quarter.
As I said, we added 13 new customers in the quarter, six in industrial, three in medical, three in defense and one in telecom.
In Transportation, we had an exciting win for a new high load current sensor for a premium European OEM.
This is a new hybrid vehicle application.
Since it is a customized design, we're still evaluating broader market potential.
We also secured several wins for passive safety sensors with existing customers and with a new customer, a large chassis ride height sensor award with a North American OEM, as well as accelerated module brands with several OEMs across all the regions.
In defense, we were awarded two RF programs with existing customers.
We have multiple wins for military underwater applications, secured a contract with an European OEM, and we received our first order for textured ceramic material.
Textured ceramic provides enhanced piezoelectric electric performance at a lower cost point.
Over time, we expect this new material formulations to expand our available market.
It has the potential to grow at higher single digit levels.
With temperature sensing, we secured wins in industrial, defense and medical applications and added new customers.
Our precision frequency product was selected for a design win in a 5G small cell application.
We also had design wins in pro-audio and in medical applications for encoder products.
We continue to advance product innovations.
Our focus in the transportation market is to develop sensor solutions that are agnostic to the underlying propulsion technology.
Thereby strengthening our growth in the next decade as hybrid and electric vehicle penetration grows.
We are researching new material formulations as we target growth in defense, industrial, and medical markets.
We are also developing custom ASIC solutions to strengthen our frequency product portfolio.
We made more progress in our ceramic foundry operation this past quarter, and we expect further improvements this year.
We are also using our expertise in ceramic formulations to improve yields and margins in our temperature sensing acquisition.
In our focus 2025 initiatives, we are concentrating on four areas: Number one, driving profitable growth; number two, building stronger customer relationships; number three, improving operating systems and; four, strengthening talent and culture globally.
As part of our emphasis on profitable growth, we are evaluating the product portfolio for longer-term growth and margin expansion.
Our focus on M&A is to strengthen our pipeline as we seek to expand our range of technologies, products, customers and geographic reach.
We are sharpening our go-to-market strategy by adapting our sales and application engineering setup to build stronger customer relationships.
Working more closely with our customers on next generation products and applications is more important than ever as we emerge from the COVID-19 pandemic.
To advance CTS operating systems, we have added a senior resource to lead this initiative.
We aim to build capability and drive continuous improvements.
Our goal is to eliminate waste and enhance profitability, and this will be a multi-year initiative.
Strengthening our talent pipeline and leadership bench while aligning our culture globally will enable us to achieve our vision of being a leading supplier of sensing and motion devices and connectivity components, and they bring in intelligence and seamless work.
We remained cautious on the broader economic environment in the second half of 2020.
From a light vehicle view, it is still too early to close the book on the pandemic.
Premium brands are expected to rebound faster than volume brands.
In the US, sales of used cars increased while the SAAR for 2020 is closer to 13 million, down 23% from last year.
On-hand days of supply are at 54 days, down 20% from the five-year average, which should help short-term demand.
We expect an improving sales trend in the third quarter, providing operations run normally.
European sales are forecasted to decline 26% from last year.
The China market continues to recover with volumes predicted to be down 14% in the $21 million to $22 million range for the year.
We continue to see growth in medical and defense markets.
We suspended guidance for 2020 earlier this year due to continued market uncertainty.
Our liquidity remains solid with a positive net cash position.
We aim to emerge from this crisis as a stronger Company.
Now, Ashish will walk us through the financial performance in more detail.
Our second quarter sales were $84.2 million, down 30% compared to the prior year.
Sales to transportation customers decreased by 53%, and sales to other end markets increased by 14%.
Our temperature sensing acquisition added $5.4 million and organic sales to non-transportation customers were up 1%.
We continue to get traction in the aerospace and defense, as well as medical end markets and saw a robust double-digit sales growth rates to customers in these markets.
Our gross margin was 31.6% for the second quarter, impacted substantially by lower sales.
We are making progress on various actions to improve our tax rate.
As a result, we expect to be closer to the lower end of our previously communicated range of 23% to 25% excluding discrete items.
As we complete our work on this effort, we expect some further improvements in the tax rate in 2021.
Our second quarter 2020 earnings were $0.15 per diluted share, adjusted earnings per diluted share were $0.16.
As we communicated back in April, due to lower volume expectations, we implemented measures to reduce cost through temporary payroll reduction, suspension of 401 k contributions, furloughs, plant shutdown, reduced Board compensation and control over all discretionary spending.
Revenue in the second quarter was significantly lower and conditions remain uncertain.
We will regularly evaluate market conditions to determine the extent and duration of these temporary measures.
As Kieran mentioned, we have started implementing a restructuring plan due to the prolonged impact of COVID-19.
We expect restructuring costs to be in the range of $10 million to $12 million over the next two years.
Anticipated annualized savings are in the range of $0.22 per share to $0.26 per share by the end of 2022.
Savings from the restructuring, once fully implemented will help offset the impact of the temporary cost reduction measures as those costs return.
Timing for some aspects of the restructuring project is being finalized, and we will communicate more on the timing of savings and cost in the coming quarters.
In terms of cash, we were net cash positive by approximately $5 million, which is an improvement from zero net cash at the end of first quarter.
We have access to an additional $157 million through our revolving credit facility.
In March, we borrowed $50 million from our credit facility.
We are continuing to maintain this position to ensure adequate liquidity for the next several quarters at all our sites globally.
Including this debt, we remain well within our debt covenants.
And at this time, it is our expectation that we will remain compliant.
Our controllable working capital as a percent of sales was 21.2% at the end of the second quarter.
The increase was driven primarily due to the sharp reduction in revenue in the second quarter.
In dollar terms, controllable working capital increased slightly from Q1 to Q2, and our focus remains on improvements in the coming quarters.
Our teams are maintaining emphasis on reducing inventory levels across our operations, and on receivables collection.
We generated $11.8 million in operating cash flow in the second quarter.
Capex was $2.7 million.
For the full year, we are expecting capital expenditures to be approximately 4% of sales.
We are committed to investing in programs that help us progress our strategic growth objectives.
We are continuing to implement SAP, and went live successfully at another large manufacturing location at the beginning of July.
This go-live was accomplished despite most of the implementation team working remotely due to COVID-19 related travel constraints.
This is a significant accomplishment by our team in Matamoros as well as the SAP implementation team.
With the go-live in Matamoros, we have completed the rollout to plants that provide approximately 80% of the Company's revenue.
We are on track to complete the SAP implementation around the middle of 2021.
This concludes our prepared comments.
| compname posts q2 adjusted earnings per share $0.16.
q2 adjusted earnings per share $0.16.
q2 earnings per share $0.15.
q2 sales $84.2 million versus refinitiv ibes estimate of $89 million.
not providing revenue or earnings guidance at this time.
|
Also joining me on the call today are Rick Muncrief, our president and CEO; Clay Gaspar, our chief operating officer; Jeff Ritenour, our chief financial officer and a few other members of our senior management team.
Devon's second quarter can best be defined as one of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins, growth and free cash flow and the return of significant value to our shareholders through higher dividends and the reduction of debt.
Following our transformative merger that closed earlier this year, I'm very pleased with the progress the team has made and our second-quarter results demonstrate the impressive momentum our business has quickly established.
Even today, as we celebrate Devon's 50th anniversary as a company this year, we're only getting started and our talented team is eager, energized and extremely motivated to win.
As investors seek exposure to commodity-oriented names, it is important to recognize that Devon is a premier energy company and a must-own name in this space.
We have the right mix of assets, proven management, financial strength and a shareholder-friendly business model designed to lead the energy industry in capital discipline and dividends.
Now, turning to Slide 4.
The power of Devon's portfolio was showcased by our second-quarter results as we continue to deliver on exactly what we promised to do both operationally and financially.
Efficiencies drove capital spending 9% below guidance.
Strong well productivity resulted in production volumes above our midpoint.
The capture of merger-related synergies drove sharp declines in corporate cost.
These efforts translated into a sixfold increase in free cash flow from just a quarter ago.
And with this excess cash, we increased our dividend payout by 44% and we retired $710 million of low premium debt in the quarter.
Now, Jeff will cover the return of capital to shareholders in more detail later, but investors should take note, this systematic return of value to shareholders is a clear differentiator for Devon.
Now, moving to Slide 5.
While I'm very pleased with the results our team that delivered year-to-date, the setup for the second half of the year is even better with our operations scale that generate increasing amounts of free cash flow.
This improved outlook is summarized in the white box at the top left of this slide.
With the trifecta of an improving production profile, lower capital and reduced corporate cost, Devon is positioned to deliver an annualized free cash flow yield in the second half of the year of approximately 20% at today's pricing.
I believe it is of utmost importance to reiterate that even with this outstanding free cash flow outlook, there is no change to our capital plan this year.
Turning your attention to Slide 7.
Now with this powerful stream of free cash flow, our dividend policy provides us the flexibility to return even more cash to shareholders than any company in the entire S&P 500 Index.
To demonstrate this point, we've included a simple comparison of our annualized dividend yield in the second half of 2021, assuming a 50% variable dividend payout.
Now as you can see, Devon's implied dividend yield is not only best-in-class in the E&P space, but we also possess the top rank yield in the entire S&P 500 Index by a wide margin.
In fact, at today's pricing, our yield is more than seven times higher than the average company that is represented in the S&P 500 Index.
Furthermore, our dividend is comfortably funded within free cash flow and is accompanied by a strong balance sheet that is projected to have a leverage ratio of less than one turn by year-end.
Investors need to take notice, Devon offers a truly unique investment opportunity for the near 0 interest rate world that we live in today.
Now, looking beyond Devon to the broader E&P space, I'm also encouraged this earnings season by the announcement from Pioneer on their variable dividend implementation as well as a growing number of other peers who have elected to prioritize higher dividend payouts.
These disciplined actions will further enhance the investment thesis for our industry, paving the way for higher fund flows as investors rediscover the attractive value proposition of the E&P space.
Now, moving to Slide 10.
While the remainder of 2021 is going to be outstanding for Devon, simply put, the investment thesis only gets stronger as I look ahead to next year.
We should have one of the most advantaged cash flow growth outlooks in the industry as we capture the full benefit of merger-related cost synergies, restructuring expenses roll-off and our hedge book vastly improves.
At today's prices, these structural tailwinds could result in more than $1 billion of incremental cash flow in 2022.
To put it in perspective, this incremental cash flow would represent cash flow per share growth of more than 20% year over year, if you held all other constants -- all other factors constant.
Now while it's still too early to provide formal production and capital targets for next year, there will be no shift to our strategy.
We will continue to execute on our financially driven model that prioritizes free cash flow generation.
Given the transparent framework that underpins our capital allocation, our behavior will be very predictable as we continue to limit reinvestment rates and drive per share growth through margin expansion and cost reductions.
We have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets.
The bottom line is we are unwavering in our commitment to lead the industry with disciplined capital allocation and higher dividends.
As Rick touched on from our operations perspective, Devon continues to deliver outstanding results.
Our Q2 results demonstrate the impressive operational momentum we've established in our business, the power of Devon's asset portfolio and the quality of our people delivering these results.
I want to pause and congratulate the entire Devon team for the impressive work of overcoming the challenges of the pandemic and the merger while not only keeping the wheels on but requestioning everything we do and ultimately building better processes along the way.
We've come a long way on building the go-forward strategy, execution plan and culture and I see many more significant wins on the path ahead.
Turning your attention to Slide 12.
My key message here is that we're well on our way to meeting all of our capital objectives for 2021.
At the bottom left of this slide, you can see that my confidence in the '21 program is underpinned by our strong operational accomplishments in the second quarter.
With activity focused on low-risk development, we delivered capital spending results that were 9% below plan, well productivity in the Delaware drove oil volumes above guidance and field level synergies improved operating costs.
While the operating results year-to-date have been great, the remainder of the year looks equally strong, a true test of asset quality, execution and corporate cost structure proves out in sustainably low reinvestment rates, steady production and significant free cash flow.
This is exactly what we're delivering at Devon.
We plan to continue to operate 16 rigs for the balance of the year and deliver approximately 150 new wells to production in the second half of 2021.
During the quarter, our capital program consisted of 13 operated rigs and four dedicated frac crews, resulting in 88 new wells that commenced first production.
This level of capital activity was concentrated around the border of New Mexico and Texas and accounted for roughly 80% of our total companywide capital investment in the quarter.
As a result of this investment, Delaware Basin's high-margin oil production continue to rapidly advance, growing 22% on a year-over-year basis.
While we had great results across our acreage position, a top contributor to the strong volume were several large pads within our Stateline and Cotton Draw areas that accounted for more than 30 new wells in the quarter.
This activity was weighted toward development work in the Upper Wolfcamp, but we also had success co-developing multiple targets in the Bone Spring within our Stateline area.
The initial 30-day rates from activity at Stateline and Cotton Draw average north of 3,300 BOE per day and recoveries are on track to exceed 1.5 million barrels of oil equivalent.
With drilling and completion costs coming in at nearly $1 million below predrill expectations, our rates of return at Cotton Draw and Stateline are projected to approach 200% at today's strip pricing.
While we've all grown weary of quoted well returns, this is the best way that I can provide insight to you on what we're seeing in real time and what will be flowing through the cash flow statements in the coming quarters.
While we lack precision in these early estimates, I can tell you, these are phenomenal investments and will yield significant value to the bottom line of Devon and ultimately, to the shareholders through our cash return model.
And lastly, on this slide, I want to cover the recent Bone Spring appraisal success that we had in the Potato Basin with our three well Yukon Gold project.
Historically, we focused our efforts in the Wolfcamp formation in this region and Yukon was our first operated test of the second Bone Spring interval in this area.
Given the strong results from Yukon plus additional well control from nonoperated activity, this will be a new landing zone that works its way into the Delaware Basin capital allocation mix going forward.
This is another example of how the Delaware Basin continues to give.
This new landing zone required no additional land investment, very little incremental infrastructure and as a result, the well returns have a direct path to the bottom line of Devon.
Moving to Slide 14.
Another highlight associated with the Delaware Basin activity was the improvement in operational efficiencies and the margin expansion we delivered in the quarter.
Beginning on the left-hand side, our D&C costs have improved to $543 per lateral foot in the quarter, a decline of more than 40% from just a few years ago.
To deliver on this positive rate of change, the team achieved record-setting drill times in both Bone Spring and Wolfcamp formations with spud to release times and our best wells improving to less than 12 days.
Our completions work improved to an average of nearly 2,000 feet per day in the quarter.
I want to congratulate the team and I fully expect that these improved cycle times will be a tailwind to our results for the second half of the year.
Shifting to the middle of the slide, we continue to make progress capturing operational cost synergies in the field.
With solid results we delivered in the second quarter, LOE and GP&T costs improved 7% year over year.
To achieve this positive result, we adopted the best and most economic practices from both legacy companies and leveraged our enhanced purchasing power in the Delaware to meaningfully reduce costs associated with several categories, including chemicals, water disposal, compression and contract labor.
Importantly, these results were delivered by doing business in the right way with our strong safety performance in the quarter and combined with company delivered some of the meaningful environmental improvements over a year-over-year basis.
And my final comment on this slide -- on the chart to the far right, the cumulative impact of Devon's strong operational performance resulted in significant margin expansion compared to both last quarter and on a year-over-year basis.
Importantly, our Delaware Basin operations are geared for this trend to continue over the remainder of the year and beyond.
Moving to Slide 15.
While the Delaware Basin is clearly the growth engine of our company, we have several high-quality assets in the oil fairway of the U.S. that generate substantial amounts of free cash flow.
These assets may not capture many headlines but they underpin the success of our sustainable free cash flow-generating strategy.
In the Delaware Basin, cash flow nearly doubled in the quarter on the strength of natural gas and NGLs.
Our Dow joint venture activity is progressing quite well and we're bringing on the first pad of new wells this quarter.
The Williston continues to provide phenomenal returns and at today's pricing, this asset is on track to generate nearly $700 million of free cash flow for the year.
In the Eagle Ford, we have reestablished momentum with 21 wells brought online year-to-date, resulting in second-quarter volumes advancing 20%.
And in the Powder River, we're encouraged with continued industry activity and how -- in evaluating how we create the most value from this asset.
We have a creative and commercially focused team working with this asset, many of which bring fresh set of eyes on how we approach this very substantial oil-rich acreage position.
Overall, another strong quarter of execution and each of these asset teams did a great job delivering within our diversified portfolio.
The team here at Devon takes great personal pride in delivering affordable and reliable energy that powers every other industry out there as well as the incredible quantity and quality of life we appreciate today.
We absolutely believe that in addition to meeting the world's growing energy demand, we must also deliver our products in an environmentally and commercially sustainable way.
As you can see with the goals outlined on this slide, we're committing to taking a leadership role by targeting to reduce greenhouse gas emissions by 50% by 2030 and achieving net zero emissions for Scope 1 and 2 by 2050.
A critically important component of this carbon reduction strategy is to improve our methane emissions intensity by 65% by 2030 from a baseline in 2019.
This emissions reduction target involves a range of innovations, including advanced remote leak detection technologies and breakthrough designs like our latest low-e facilities in the Delaware Basin.
We also plan to constructively engage with upstream and downstream partners to improve our environmental performance across the value chain.
While it's a journey, not a destination, environmental excellence is foundational to Devon.
My comments today will be focused on our financial results for the quarter and the next steps in the execution of our financial strategy.
A great place to start today is with a review of Devon's strong financial performance in the second quarter, where we achieved significant growth in both operating cash flow and free cash flow.
Operating cash flow reached $1.1 billion, an 85% increase compared to the first quarter of this year.
This level of cash flow generation comfortably exceeded our capital spending requirements, resulting in free cash flow of $589 million for the quarter.
As described earlier by Rick and Clay, our improving capital efficiency and cost control drove these outstanding results, along with the improved commodity prices realized in the second quarter.
Overall, it was a great quarter for Devon and these results showcased the power of our financially driven business model.
Turning your attention to Slide 6.
With the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns through our fixed plus variable dividend framework.
Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions.
With this differentiated framework, we've returned more than $400 million of cash to our shareholders in the first half of the year, which exceeds the entire payout from all of last year.
The second half of this year is shaping up to be even more impressive.
This is evidenced by the announcement last night that our dividend payable on September 30 was raised for the third consecutive quarter to $0.49 per share.
This dividend represents a 44% increase versus last quarter and is more than a fourfold increase compared to the period a year ago.
On Slide 8, in addition to higher dividends, another way we have returned value to shareholders is through our recent efforts to reduce debt and enhance our investment-grade financial strength.
In the second quarter, we retired $710 million of debt, bringing our total debt retired year-to-date to over $1.2 billion.
With this disciplined management of our balance sheet, we're well on our way to reaching our net debt-to-EBITDA leverage target of one turn or less by year-end.
Our low leverage is also complemented by a liquidity position of $4.5 billion and a debt profile with no near-term maturities.
This balance sheet strength is absolutely a competitive advantage for Devon that lowers our cost of capital and optimizes our financial flexibility through the commodity cycle.
Looking ahead to the second half of the year, with the increasing amounts of free cash flow our business is projected to generate, we'll continue to systematically return value to our shareholders through both higher dividend payouts and by further deleveraging our investment-grade balance sheet.
As always, the first call in our free cash flow is to fully fund our fixed dividend of $0.11 per share.
After funding the fixed dividend, up to 50% of the excess free cash flow in any given quarter will be allocated to our variable dividend.
The other half of our excess free cash flow will be allocated to improving our balance sheet and reducing our net debt.
Once we achieve our leverage target later this year, this tranche of excess free cash flow that was previously reserved for balance sheet improvement has the potential to be reallocated to higher dividend payouts or opportunistic share buybacks should our shares remain undervalued relative to peers in the broader market.
So in summary, our financial strategy is working well.
We have excellent liquidity and our business is generating substantial free cash flow.
The go-forward business will have an ultra-low leverage ratio of a turn or less by year-end and we're positioned to substantially grow our dividend payout over the rest of the year.
I would like to close today by reiterating a few key thoughts.
Devon is a premier energy company and we are proving this with our consistent results.
Our unique business model is designed to reward shareholders with higher dividend payouts.
This is resulting in a dividend yield that's the highest in the entire S&P 500 Index.
Our generous payout is funded entirely from free cash flow and backstopped by an investment-grade balance sheet.
And our financial outlook only improves as I look to the remainder of this year and into 2022.
With the increasing amounts of free cash flow generated, we're committed to doing exactly what we promised and that is to lead the industry in capital discipline and dividends.
We'll now open the call to Q&A.
Please limit yourself to one question and follow up.
With that, operator, we'll take our first question.
| fixed-plus-variable dividend increased by 44 percent to $0.49 per share.
|
Also joining me on the call today are Rick Muncrief, our president and CEO; Clay Gaspar, our chief operating officer; Jeff Ritenour, our chief financial officer; and a few members of our senior management team.
We appreciate everyone taking the time to join us on the call today.
Devon's third quarter results were outstanding.
Once again showcasing the power of our Delaware focused asset portfolio and then the benefits of our financially driven business model.
Our team's unwavering focus on operations excellence has established impressive momentum that has allowed us to capture efficiencies, accelerate free cash flow, reduce leverage, and return of market-leading amount of cash to shareholders.
Simply put, we are delivering on exactly what our shareholder-friendly business model was really designed for, and that is to lead the energy industry in capital discipline and cash returns.
Now moving to Slide 4.
While our strategy is a clear differentiator for Devon, the success of this approach is underpinned by our high-quality asset portfolio that is headlined by our world-class acreage position in the Delaware Basin.
So with this advantaged portfolio, we possess a multi-decade resource opportunity in the best position plays on the U.S. cost curve.
And with this sustainable resource base, we are positioned to win multiple ways with our balanced commodity exposure.
While our production is leveraged to oil, nearly half our volumes come from natural gas and NGLs, providing us with meaningful revenue exposure to these valuable products.
This balance and diversification are critically important to Devon's long-term success.
As you can see on Slide 5, the strength of our operations and the financial benefits of our strategy were on full display with our third quarter results.
This is evidenced by several noteworthy accomplishments, so including: we completed another batch of excellent wells in Delaware Basin that drove volumes 5% above our guidance.
We maintained our capital allocation in a very disciplined way by limiting our reinvestment rates to only 30% of our cash flow.
We're continuing to then the capture synergies and drive per unit cost lower.
We are also achieving a more than eightfold increase in our free cash flow.
We're increasing our fixed and variable dividend payout by 71%.
We're also improving our financial strength by reducing net debt 16% in the quarter.
Overall, it was another tremendous quarter for Devon, and I especially want to congratulate our employees and our investors for these special results.
Now moving to Slide 6.
While 2021 is wrapping up to be a great year for Devon, the investment thesis only gets stronger and as I look ahead to next year.
Although we're now still working to finalize the details of our 2022 plan, I want to emphasize that our strategic framework remains unchanged, and we will continue to prioritize free cash flow generation over the pursuit of volume growth.
As we have stated many times in the past, we have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity that's effectively absorbed by the world markets.
With this disciplined approach and to sustain our production profile in 2022, we are directionally planning on an upstream capital program in the range of $1.9 billion to $2.2 billion.
Importantly, with the operating efficiency gains and improved economies of scale, we can fund this program at a WTI breakeven price of around $30.
This low breakeven funding level is a testament to the great work the team has done over the past few years to streamline our cost structure and to really optimize capital efficiency.
Being positioned as a low-cost producer provides us with a wide margin of safety to continue to execute on all facets of our cash return model.
With our 2022 outlook, Devon will have one of the most advantaged cash flow growth outlooks in the industry.
At today's prices, with the full benefit of the merger synergies and an improved hedge book, we're positioned for cash flow growth of more than 40% compared to 2021.
And as you can see on the graph, this strong outlook translates into a free cash flow yield of 18% at an $80 WTI price.
The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders.
Now jumping ahead to Slide 8, the top priority of our free cash flow is then fund our fixed plus variable dividend.
This unique dividend policy is specifically designed for our commodity-driven business and provides us the flexibility to return more cash to shareholders than virtually any other opportunity in the markets today.
Now to demonstrate this point, so we've included a simple comparison of our estimated dividend yield in 2022 based on our preliminary guidance.
As you can see, Devon's implied dividend is not only more than double that of the energy sector, but this yield is vastly superior to us in every sector in the S&P 500 index.
In fact, at today's pricing, Devon's yield is more than seven times higher than the average company that is represented in the S&P 500 Index.
Now that's truly something to think about in the yield-starved world we currently live in.
And moving on to Slide 9.
With our improving free cash flow outlook and strong financial position, I'm excited to announce the next step in our cash return strategy with the authorization of a $1 billion share repurchase program.
This program is an equivalent to approximately 4% of Devon's current market capitalization and is authorized through year-end 2022.
Jeff will cover this topic in greater detail later in the call, but this opportunistic buyback is a great complement to our dividend strategy and provides us with another capital allocation tool to enhance per share results for the shareholders.
Beginning on the far left chart of our business is positioned to generate cash flow growth of more than 20 -- 40% in 2022, which is vastly superior to most other opportunities in the market.
As you can see in the middle chart, this strong growth translates into an 18% free cash flow yield that will be deployed to dividends, buybacks, and the continued improvement of our balance sheet.
And lastly, on the far right chart, and even with all of these outstanding financial attributes, we still trade at a very attractive valuation, especially compared to the broader market indices.
We believe this to be another catalyst for our share price appreciation as more and more of the investors discover Devon's unique investment proposition.
In summary, Devon's third quarter impressive results were the result of tremendous execution across nearly every aspect of our business.
We had wins in environmental and safety performance.
operational improvements, continued cultural alignment, strong well productivity, cost control, significant margin expansion and ultimately, excellent returns on the invested capital.
This recurring trend in our operational excellence while managing significant organizational change and macro stress has now been established over multiple quarters and is a testament to the Devon employees and strong leadership throughout the organization.
As I look forward to '22 and beyond, I believe we're positioned to continue delivering but also take our performance to an even higher level of cohesion and productivity.
Providing the energy to fuel today's modern world is critically important work.
I'm very proud of what we do and how we do it.
As I look forward to Devon's near and also long-term goals, I'm confident in our ability to deliver on society's ever-increasing expectations.
Devon's operational performance in the quarter is once again driven by our world-class Delaware Basin assets, where roughly 80% of our capital was deployed.
With this capital investment, we continue to maintain steady activity levels by running 13 operated rigs and four frac crews, bringing on 52 wells during the quarter.
As you can see in the bottom left of the slide, this is just focused development program translated into another quarter of robust volume growth, and our continued cost performance allowed us to capture the full impact of the higher commodity prices.
Turning your attention to the map on the right side, our well productivity across the basin continue to be outstanding in the quarter with the results headlined by our Boundary Raider project.
Some may recall that this is not the first time we've delivered on impressive results from this well pad.
Back in 2018, our original Boundary Raider project that's developed a good package of Bone Spring wells that set a record for the highest rate wells ever brought online in the Delaware Basin.
Fast forward to today, this addition of the Boundary Raider went further downhole to develop an overpressured section in the Upper Wolfcamp.
This project also delivered exceptionally high rates with our best well delivering an initial 30-day production rates of 7,300 BOE per day, of which more than that -- more than 60% of that was oil.
I call that pretty good for a secondary target.
Moving a bit east into Lea County, another result for this quarter was the Cobra project, where the team executed on a 3 mile Wolfcamp development.
This pad outperformed our predrill expectations by more than 10% with the top well achieving 30-day rates as high as 6,300 BOE per day.
In addition to the strong flow rates, this activity helped us prove the economics of the Wolfcamp inventory in this area to further deepening the resource-rich opportunity we hold in the Delaware.
Turning to Slide 14.
With the strong operating results we delivered this quarter, high-margin oil production in the Delaware Basin continue to expand and rapidly advance, growing 39% year over year.
Importantly, the returns on invested capital to deliver this growth were some of the highest I have seen in my career, bolstered by rising strip prices and our capital efficiency improvements we have delivered this year.
These efficiencies are evidenced on the right-hand chart, where our average D&C costs improved to $554 per lateral foot in the third quarter, a decrease of 41% from just a few years ago.
While we have likely found the bottom of this cycle earlier this year, the team continues to be able to make operational breakthroughs that have thus far fought back most of the inflationary pressure.
We continue to win from a fresh perspective, blending teams and also still relatively -- we're still working to know each other pretty early on.
These accomplishments are clearly demonstrated and the great work our team has done to drive improvements across the entire planning and execution of our resource.
To maintain this high level of performance into 2022, and we are focused on staying out ahead of the inflationary pressures that are impacting not just our industry, but all aspects of the broader society.
While our consistency and scale in the Delaware are a huge advantage, the supply chain team is working hard to anticipate issues, mitigate bottlenecks, and work with the asset teams to adjust plans to optimize our cost structure and future capital activity.
Turning to Slide 15.
Another asset I'd like to put in the spotlight today is our position in the Anadarko Basin, where we have a concentrated 300,000 net acre position in the liquids-rich window of the play.
As you may know, Rick and I both have a historical tie to this basin, and we're thrilled to get to see the great work that our teams are doing to unlock this value for investors.
A key objective for us this year in the Anadarko Basin is to reestablish operational continuity by leveraging the drilling carry from our joint venture agreement with Dow.
By way of background, in late 2019, we formed a partnership with Dow in a promoted deal, where Dow earns half of our interest on 133 undrilled locations in exchange for $100 million drilling carry.
With the benefits of this drilling carry, we're drilling around 30 wells this year, and our initial wells from this activity were brought on during the quarter.
The four-well Miller/Miller project is an up-spaced Woodford development in Canadian counter -- County and is off to a great start with both our D&C costs and well productivity outperforming pre-drill expectations.
Initial 30-day rates averaged 2,700 BOE per day, and completed well costs came in under budget at around $8 million per well.
While I'm proud of how well the team hit the ground running now as we get into our processes lined out and efficiencies dialed in, I foresee material improvements in well costs ahead.
The leverage returns from this carried activity will complete -- will compete effectively for capital with any asset in our portfolio.
In fact, the strength of natural gas and NGL pricing, the performance we're also seeing that in the Anadarko Basin will likely command relatively more capital than it did in '21.
Moving to Slide 16.
While the Delaware Basin is clearly the growth engine of our company and we're excited about the upside for the Anadarko, we also have several high-quality assets in the oil fairway of the U.S. that generates substantial free cash flow.
While these assets don't typically grab the headlines, their strong performance is central to this continued success of our strategy.
These teams are doing great work to improve our environmental footprint, drive the capital program, optimize base production, and hopefully, keeping our cost structure low.
As an example, Williston will generate over $700 million of 2021 free cash flow.
Collectively, these assets are on pace to generate nearly $1.5 billion of free cash flow this year.
Lastly, on Slide 17, with our diversified portfolio concentrated in the very best U.S. resource plays, we have a deep inventory of opportunities that underpin the long-term sustainability of our business model.
So, as you may have heard me talk about in prior quarters, we have a brutal capital allocation process in regards to the competitiveness of how we seek the best investment mix for the company.
This is the first step of this process is to make sure that all the teams are working from the same assumptions and inputs.
Since the close of our merger earlier this year, we have undertaken a very disciplined and rigorous approach to characterize risk, force rank the opportunity set across our portfolio.
This inventory disclosure is the result of our detailed subsurface work and evaluation across our portfolio that we converted into a single consolidated platform to ensure consistency.
Turning your attention to the middle bar on the chart.
At the current pace of activity, we possess more than a decade of low-risk and high-return inventory of what we believe to be in a mid-cycle price deck.
As you would expect, about 70% of our inventory resides in the Delaware Basin, providing the depth of inventory to sustain our strong capital efficiency for many years to come.
Let me be clear.
And this exercise, we are focused on compiling a very important slice of our total inventory.
This summary is not meant to convey the full extent of the possible with these incredible resources.
These are really operated, essentially all long lateral up-spaced wells that deliver competitive returns in a $55 oil environment.
Moving to the bar on the far right of the chart, we also expect inventory depth to continue to expand as we capture additional efficiencies, optimize spacing, and further delineate the rich geologic column across our very acreage footprint.
Expect -- we expect a significant portion of the upside opportunities to convert into our derisked inventory over time.
So the examples of this upside include the massive resource potential in the lower Wolfcamp intervals, continued appraisal success in the Powder River Basin and the significant liquids-rich opportunity we possess in the Anadarko Basin.
The bottom line here is that we have that in abundance of high economic opportunity to not only sustain but grow our cash flow per share for many years to come.
I'd like to spend my time today discussing the substantial progress we've made advancing our financial strategy and highlight the next steps we plan to take to increase cash returns to shareholders.
A good place to start is with the review of Devon's financial performance in the third quarter, where Devon's earnings and our cash flow per share growth rapidly expanded and comfortably exceeded consensus estimates.
Operating cash flow for the third quarter totaled $1.6 billion, an impressive increase of 46% compared to last quarter.
This level of cash flow generation comfortably funded our capital spending requirements and generated $1.1 billion of free cash flow in the quarter.
This result represents the highest amount of free cash flow generation Devon has ever delivered in a single quarter and is a powerful example of the financial results in our cash return and that the business model can deliver.
Turning your attention to Slide 7.
With this significant stream of free cash flow, a differentiating component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed plus variable dividend framework.
This dividend strategy has been uniquely designed to provide us the flexibility to optimize the return of cash to shareholders across a variety of market conditions through the cycle.
Under our framework, we pay a fixed dividend every quarter and evaluate a variable distribution of up to 50% of the remaining free cash flow.
So, with the strong financial results we delivered this quarter, the board approved a 71% increase in our dividend payout versus last quarter to $0.84 per share.
This is the fourth quarter in a row we have increased the dividend and is by far the highest quarterly dividend payout in Devon's 50-year history.
As you can see on the chart to the left, at current market prices, we expect our dividend growth story to only strengthen in 2022.
In fact, at today's pricing, we are on pace to nearly double our dividend next year.
Moving to Slide 10.
In addition to higher dividends, we've also returned value to shareholders through our efforts to reduce debt and improve our balance sheet.
So far this year, we've made significant progress toward this initiative by retiring over $1.2 billion of outstanding notes.
In conjunction with this absolute debt reduction, we've also added to our liquidity, building a $2.3 billion cash balance at quarter end.
With this substantial cash build and reduction in debt, we've reached this debt-to-EBITDA leverage target of one turn or less.
Even with this advantaged balance sheet, we're not done making improvements.
We have identified additional opportunities to improve our financial strength by retiring approximately $1.0 billion of premium -- excuse me, low-premium debt in 2022 and 2023.
Importantly, Devon has the flexibility to then execute on this debt reduction with cash already accumulated on the balance sheet.
While the top priority for free cash flow remains the funding of our market-leading dividend yield, we also believe that this buyback authorization provides us another excellent capital allocation tool to enhance per share results for shareholders.
Given the cyclical nature of our business, we'll be very disciplined with this authorization, only transacting when our equity trades at a discounted valuation to historical multiples and in multiple levels of our highest quality peers.
We believe the double-digit free cash flow yield our equity delivers, as outlined on Slide 6, represents a unique buying opportunity.
The reduction in outstanding shares further improves our impressive cash flow per share growth and adds to the variable dividend per share for our shareholders.
With these disciplined criteria, guiding our decision making, we'll look to opportunistically repurchase our equity in the open market once our corporate blackout expires later this week.
So in summary, the financial strategy is working well.
We have excellent liquidity and our business is generating substantial free cash flow.
We're positioned to significantly grow our dividend payout to over the next year.
The go-forward business will have an ultra low leverage ratio of a turn or less, and we'll look to boost per share results is really opportunistically repurchasing our shares.
In closing today, I'd like to highlight a few things.
Number one, Devon is meeting the demands of investors with our capital discipline, earnings and cash flow growth, market-leading dividend payout, debt reduction, and now a share buyback program.
Number two, Devon is also meeting the demands of our market with strong oil production results, great exposure to natural gas and NGLs, along with our consistent execution.
And number three, lastly, Devon is also meeting the demands of society by providing a reliable energy before this pandemic, during the pandemic, and as we emerge from the pandemic.
And so our people throughout the five states where we operate continue to show up for work and work safely.
We didn't overreact with our capital program during the pandemic like many others did.
We actually strengthened the company with a merger.
And finally, we're laser-focused on then achieving the stated short-term, midterm, and long-term ESG targets.
We're proud of the work we've done and look forward to continuing meeting the needs of investors, the market, and society for the foreseeable future.
Devon is a premier energy company, and we're excited about the value we'll be able to consistently provide to our important stakeholders.
We'll now open the call to Q&A.
[Operator instructions] With that, operator, we'll take our first question.
| now expects its production and capital spending to be at the high end of its 2021 guidance range.
in 2022, devon will continue to prioritize free cash flow generation over the pursuit of volume growth.
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